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File Taxes 2010

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File Taxes 2010

File taxes 2010 11. File taxes 2010   Social Security and Equivalent Railroad Retirement Benefits Table of Contents Introduction Useful Items - You may want to see: Are Any of Your Benefits Taxable? How To Report Your BenefitsHow Much Is Taxable? Examples Deductions Related to Your BenefitsRepayments More Than Gross Benefits Introduction This chapter explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. File taxes 2010 It explains the following topics. File taxes 2010 How to figure whether your benefits are taxable. File taxes 2010 How to use the social security benefits worksheet (with examples). File taxes 2010 How to report your taxable benefits. File taxes 2010 How to treat repayments that are more than the benefits you received during the year. File taxes 2010 Social security benefits include monthly retirement, survivor, and disability benefits. File taxes 2010 They do not include supplemental security income (SSI) payments, which are not taxable. File taxes 2010 Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. File taxes 2010 They are commonly called the social security equivalent benefit (SSEB) portion of tier 1 benefits. File taxes 2010 If you received these benefits during 2013, you should have received a Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board. File taxes 2010 These forms show the amounts received and repaid, and taxes withheld for the year. File taxes 2010 You may receive more than one of these forms for the same year. File taxes 2010 You should add the amounts shown on all the Forms SSA-1099 and Forms RRB-1099 you receive for the year to determine the total amounts received and repaid, and taxes withheld for that year. File taxes 2010 See the Appendix at the end of Publication 915 for more information. File taxes 2010 Note. File taxes 2010 When the term “benefits” is used in this chapter, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits. File taxes 2010 What is not covered in this chapter. File taxes 2010   This chapter does not cover the tax rules for the following railroad retirement benefits. File taxes 2010 Non-social security equivalent benefit (NSSEB) portion of tier 1 benefits. File taxes 2010 Tier 2 benefits. File taxes 2010 Vested dual benefits. File taxes 2010 Supplemental annuity benefits. File taxes 2010 For information on these benefits, see Publication 575, Pension and Annuity Income. File taxes 2010   This chapter does not cover the tax rules for social security benefits reported on Form SSA-1042S, Social Security Benefit Statement, or Form RRB-1042S, Statement for Nonresident Alien Recipients of: Payments by the Railroad Retirement Board. File taxes 2010 For information about these benefits, see Publication 519, U. File taxes 2010 S. File taxes 2010 Tax Guide for Aliens, and Publication 915, Social Security and Equivalent Railroad Retirement Benefits. File taxes 2010   This chapter also does not cover the tax rules for foreign social security benefits. File taxes 2010 These benefits are taxable as annuities, unless they are exempt from U. File taxes 2010 S. File taxes 2010 tax or treated as a U. File taxes 2010 S. File taxes 2010 social security benefit under a tax treaty. File taxes 2010 Useful Items - You may want to see: Publication 505 Tax Withholding and Estimated Tax 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 915 Social Security and Equivalent Railroad Retirement Benefits Forms (and Instructions) 1040-ES Estimated Tax for Individuals SSA-1099 Social Security Benefit Statement RRB-1099 Payments by the Railroad Retirement Board W-4V Voluntary Withholding Request Are Any of Your Benefits Taxable? To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of: One-half of your benefits, plus All your other income, including tax-exempt interest. File taxes 2010 When making this comparison, do not reduce your other income by any exclusions for: Interest from qualified U. File taxes 2010 S. File taxes 2010 savings bonds, Employer-provided adoption benefits, Foreign earned income or foreign housing, or Income earned by bona fide residents of American Samoa or Puerto Rico. File taxes 2010 Children's benefits. File taxes 2010   The rules in this chapter apply to benefits received by children. File taxes 2010 See Who is taxed , later. File taxes 2010 Figuring total income. File taxes 2010   To figure the total of one-half of your benefits plus your other income, use Worksheet 11-1 later in this discussion. File taxes 2010 If the total is more than your base amount, part of your benefits may be taxable. File taxes 2010    If you are married and file a joint return for 2013, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. File taxes 2010 Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable. File taxes 2010    If the only income you received during 2013 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. File taxes 2010 If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. File taxes 2010 Base amount. File taxes 2010   Your base amount is: $25,000 if you are single, head of household, or qualifying widow(er), $25,000 if you are married filing separately and lived apart from your spouse for all of 2013, $32,000 if you are married filing jointly, or $-0- if you are married filing separately and lived with your spouse at any time during 2013. File taxes 2010 Worksheet 11-1. File taxes 2010   You can use Worksheet 11-1 to figure the amount of income to compare with your base amount. File taxes 2010 This is a quick way to check whether some of your benefits may be taxable. File taxes 2010 Worksheet 11-1. File taxes 2010 A Quick Way To Check if Your Benefits May Be Taxable A. File taxes 2010 Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. File taxes 2010 Include the full amount of any lump-sum benefit payments received in 2013, for 2013 and earlier years. File taxes 2010 (If you received more than one form, combine the amounts from box 5 and enter the total. File taxes 2010 ) A. File taxes 2010   Note. File taxes 2010 If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. File taxes 2010 B. File taxes 2010 Enter one-half of the amount on line A B. File taxes 2010   C. File taxes 2010 Enter your taxable pensions, wages, interest, dividends, and other taxable income C. File taxes 2010   D. File taxes 2010 Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income (listed earlier) D. File taxes 2010   E. File taxes 2010 Add lines B, C, and D E. File taxes 2010   Note. File taxes 2010 Compare the amount on line E to your base amount for your filing status. File taxes 2010 If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. File taxes 2010 If the amount on line E is more than your base amount, some of your benefits may be taxable. File taxes 2010 You need to complete Worksheet 1 in Publication 915 (or the Social Security Benefits Worksheet in your tax form instructions). File taxes 2010 If none of your benefits are taxable, but you otherwise must file a tax return, see Benefits not taxable , later, under How To Report Your Benefits. File taxes 2010 Example. File taxes 2010 You and your spouse (both over 65) are filing a joint return for 2013 and you both received social security benefits during the year. File taxes 2010 In January 2014, you received a Form SSA-1099 showing net benefits of $7,500 in box 5. File taxes 2010 Your spouse received a Form SSA-1099 showing net benefits of $3,500 in box 5. File taxes 2010 You also received a taxable pension of $22,800 and interest income of $500. File taxes 2010 You did not have any tax-exempt interest income. File taxes 2010 Your benefits are not taxable for 2013 because your income, as figured in Worksheet 11-1, is not more than your base amount ($32,000) for married filing jointly. File taxes 2010 Even though none of your benefits are taxable, you must file a return for 2013 because your taxable gross income ($23,300) exceeds the minimum filing requirement amount for your filing status. File taxes 2010 Filled-in Worksheet 11-1. File taxes 2010 A Quick Way To Check if Your Benefits May Be Taxable A. File taxes 2010 Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. File taxes 2010 Include the full amount of any lump-sum benefit payments received in 2013, for 2013 and earlier years. File taxes 2010 (If you received more than one form, combine the amounts from box 5 and enter the total. File taxes 2010 ) A. File taxes 2010 $11,000 Note. File taxes 2010 If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. File taxes 2010 B. File taxes 2010 Enter one-half of the amount on line A B. File taxes 2010 5,500 C. File taxes 2010 Enter your taxable pensions, wages, interest, dividends, and other taxable income C. File taxes 2010 23,300 D. File taxes 2010 Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income (listed earlier) D. File taxes 2010 -0- E. File taxes 2010 Add lines B, C, and D E. File taxes 2010 $28,800 Note. File taxes 2010 Compare the amount on line E to your base amount for your filing status. File taxes 2010 If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. File taxes 2010 If the amount on line E is more than your base amount, some of your benefits may be taxable. File taxes 2010 You need to complete Worksheet 1 in Publication 915 (or the Social Security Benefits Worksheet in your tax form instructions). File taxes 2010 If none of your benefits are taxable, but you otherwise must file a tax return, see Benefits not taxable , later, under How To Report Your Benefits. File taxes 2010 Who is taxed. File taxes 2010   Benefits are included in the taxable income (to the extent they are taxable) of the person who has the legal right to receive the benefits. File taxes 2010 For example, if you and your child receive benefits, but the check for your child is made out in your name, you must use only your part of the benefits to see whether any benefits are taxable to you. File taxes 2010 One-half of the part that belongs to your child must be added to your child's other income to see whether any of those benefits are taxable to your child. File taxes 2010 Repayment of benefits. File taxes 2010   Any repayment of benefits you made during 2013 must be subtracted from the gross benefits you received in 2013. File taxes 2010 It does not matter whether the repayment was for a benefit you received in 2013 or in an earlier year. File taxes 2010 If you repaid more than the gross benefits you received in 2013, see Repayments More Than Gross Benefits , later. File taxes 2010   Your gross benefits are shown in box 3 of Form SSA-1099 or RRB-1099. File taxes 2010 Your repayments are shown in box 4. File taxes 2010 The amount in box 5 shows your net benefits for 2013 (box 3 minus box 4). File taxes 2010 Use the amount in box 5 to figure whether any of your benefits are taxable. File taxes 2010 Tax withholding and estimated tax. File taxes 2010   You can choose to have federal income tax withheld from your social security benefits and/or the SSEB portion of your tier 1 railroad retirement benefits. File taxes 2010 If you choose to do this, you must complete a Form W-4V. File taxes 2010   If you do not choose to have income tax withheld, you may have to request additional withholding from other income or pay estimated tax during the year. File taxes 2010 For details, see Publication 505 or the instructions for Form 1040-ES. File taxes 2010 How To Report Your Benefits If part of your benefits are taxable, you must use Form 1040 or Form 1040A. File taxes 2010 You cannot use Form 1040EZ. File taxes 2010 Reporting on Form 1040. File taxes 2010   Report your net benefits (the total amount from box 5 of all your Forms SSA-1099 and Forms RRB-1099) on line 20a and the taxable part on line 20b. File taxes 2010 If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 20a. File taxes 2010 Reporting on Form 1040A. File taxes 2010   Report your net benefits (the total amount from box 5 of all your Forms SSA-1099 and Forms RRB-1099) on line 14a and the taxable part on line 14b. File taxes 2010 If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 14a. File taxes 2010 Benefits not taxable. File taxes 2010   If you are filing Form 1040EZ, do not report any benefits on your tax return. File taxes 2010 If you are filing Form 1040 or Form 1040A, report your net benefits (the total amount from box 5 of all your Forms SSA-1099 and Forms RRB-1099) on Form 1040, line 20a, or Form 1040A, line 14a. File taxes 2010 Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. File taxes 2010 If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. File taxes 2010 How Much Is Taxable? If part of your benefits are taxable, how much is taxable depends on the total amount of your benefits and other income. File taxes 2010 Generally, the higher that total amount, the greater the taxable part of your benefits. File taxes 2010 Maximum taxable part. File taxes 2010   Generally, up to 50% of your benefits will be taxable. File taxes 2010 However, up to 85% of your benefits can be taxable if either of the following situations applies to you. File taxes 2010 The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly). File taxes 2010 You are married filing separately and lived with your spouse at any time during 2013. File taxes 2010 Which worksheet to use. File taxes 2010   A worksheet you can use to figure your taxable benefits is in the instructions for your Form 1040 or Form 1040A. File taxes 2010 You can use either that worksheet or Worksheet 1 in Publication 915, unless any of the following situations applies to you. File taxes 2010 You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse is covered by a retirement plan at work. File taxes 2010 In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits. File taxes 2010 Situation (1) does not apply and you take an exclusion for interest from qualified U. File taxes 2010 S. File taxes 2010 savings bonds (Form 8815), for adoption benefits (Form 8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or for income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. File taxes 2010 In this situation, you must use Worksheet 1 in Publication 915 to figure your taxable benefits. File taxes 2010 You received a lump-sum payment for an earlier year. File taxes 2010 In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. File taxes 2010 See Lump-sum election next. File taxes 2010 Lump-sum election. File taxes 2010   You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2013 in your 2013 income, even if the payment includes benefits for an earlier year. File taxes 2010    This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. File taxes 2010 No part of the lump-sum death benefit is subject to tax. File taxes 2010   Generally, you use your 2013 income to figure the taxable part of the total benefits received in 2013. File taxes 2010 However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. File taxes 2010 You can elect this method if it lowers your taxable benefits. File taxes 2010 Making the election. File taxes 2010   If you received a lump-sum benefit payment in 2013 that includes benefits for one or more earlier years, follow the instructions in Publication 915 under Lump-Sum Election to see whether making the election will lower your taxable benefits. File taxes 2010 That discussion also explains how to make the election. File taxes 2010    Because the earlier year's taxable benefits are included in your 2013 income, no adjustment is made to the earlier year's return. File taxes 2010 Do not file an amended return for the earlier year. File taxes 2010 Examples The following are a few examples you can use as a guide to figure the taxable part of your benefits. File taxes 2010 Example 1. File taxes 2010 George White is single and files Form 1040 for 2013. File taxes 2010 He received the following income in 2013: Fully taxable pension $18,600 Wages from part-time job 9,400 Taxable interest income 990 Total $28,990 George also received social security benefits during 2013. File taxes 2010 The Form SSA-1099 he received in January 2014 shows $5,980 in box 5. File taxes 2010 To figure his taxable benefits, George completes the worksheet shown here. File taxes 2010 Filled-in Worksheet 1. File taxes 2010 Figuring Your Taxable Benefits 1. File taxes 2010 Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. File taxes 2010 Also enter this amount on Form 1040, line 20a, or Form 1040A, line 14a $5,980 2. File taxes 2010 Enter one-half of line 1 2,990 3. File taxes 2010 Combine the amounts from:     Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21. File taxes 2010     Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13 28,990 4. File taxes 2010 Enter the amount, if any, from Form 1040 or 1040A, line 8b -0-       5. File taxes 2010 Enter the total of any exclusions/adjustments for: Adoption benefits (Form 8839, line 28), Foreign earned income or housing (Form 2555, lines 45 and 50, or Form 2555-EZ, line 18), and Certain income of bona fide residents of American Samoa (Form 4563, line 15) or Puerto Rico -0-       6. File taxes 2010 Combine lines 2, 3, 4, and 5 31,980 7. File taxes 2010 Form 1040 filers: Enter the amount from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36. File taxes 2010     Form 1040A filers: Enter the amount from Form 1040A, lines 16 and 17 -0- 8. File taxes 2010 Is the amount on line 7 less than the amount on line 6?     No. File taxes 2010 None of your social security benefits are taxable. File taxes 2010 Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. File taxes 2010   Yes. File taxes 2010 Subtract line 7 from line 6 31,980 9. File taxes 2010 If you are: Married filing jointly, enter $32,000 Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2013, enter $25,000 25,000   Note. File taxes 2010 If you are married filing separately and you lived with your spouse at any time in 2013, skip lines 9 through 16; multiply line 8 by 85% (. File taxes 2010 85) and enter the result on line 17. File taxes 2010 Then go to line 18. File taxes 2010   10. File taxes 2010 Is the amount on line 9 less than the amount on line 8?     No. File taxes 2010 None of your benefits are taxable. File taxes 2010 Enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. File taxes 2010 If you are married filing separately and you lived apart from your spouse for all of 2013, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a, or on Form 1040A, line 14a. File taxes 2010     Yes. File taxes 2010 Subtract line 9 from line 8 6,980 11. File taxes 2010 Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2013 9,000 12. File taxes 2010 Subtract line 11 from line 10. File taxes 2010 If zero or less, enter -0- -0- 13. File taxes 2010 Enter the smaller of line 10 or line 11 6,980 14. File taxes 2010 Enter one-half of line 13 3,490 15. File taxes 2010 Enter the smaller of line 2 or line 14 2,990 16. File taxes 2010 Multiply line 12 by 85% (. File taxes 2010 85). File taxes 2010 If line 12 is zero, enter -0- -0- 17. File taxes 2010 Add lines 15 and 16 2,990 18. File taxes 2010 Multiply line 1 by 85% (. File taxes 2010 85) 5,083 19. File taxes 2010 Taxable benefits. File taxes 2010 Enter the smaller of line 17 or line 18. File taxes 2010 Also enter this amount on Form 1040, line 20b, or Form 1040A, line 14b $2,990 The amount on line 19 of George's worksheet shows that $2,990 of his social security benefits is taxable. File taxes 2010 On line 20a of his Form 1040, George enters his net benefits of $5,980. File taxes 2010 On line 20b, he enters his taxable benefits of $2,990. File taxes 2010 Example 2. File taxes 2010 Ray and Alice Hopkins file a joint return on Form 1040A for 2013. File taxes 2010 Ray is retired and received a fully taxable pension of $15,500. File taxes 2010 He also received social security benefits, and his Form SSA-1099 for 2013 shows net benefits of $5,600 in box 5. File taxes 2010 Alice worked during the year and had wages of $14,000. File taxes 2010 She made a deductible payment to her IRA account of $1,000. File taxes 2010 Ray and Alice have two savings accounts with a total of $250 in taxable interest income. File taxes 2010 They complete Worksheet 1, entering $29,750 ($15,500 + $14,000 + $250) on line 3. File taxes 2010 They find none of Ray's social security benefits are taxable. File taxes 2010 On Form 1040A, they enter $5,600 on line 14a and -0- on line 14b. File taxes 2010 Filled-in Worksheet 1. File taxes 2010 Figuring Your Taxable Benefits 1. File taxes 2010 Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. File taxes 2010 Also enter this amount on Form 1040, line 20a, or Form 1040A, line 14a $5,600 2. File taxes 2010 Enter one-half of line 1 2,800 3. File taxes 2010 Combine the amounts from:     Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21. File taxes 2010     Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13 29,750 4. File taxes 2010 Enter the amount, if any, from Form 1040 or 1040A, line 8b -0-       5. File taxes 2010 Enter the total of any exclusions/adjustments for: Adoption benefits (Form 8839, line 28), Foreign earned income or housing (Form 2555, lines 45 and 50, or Form 2555-EZ, line 18), and Certain income of bona fide residents of American Samoa (Form 4563, line 15) or Puerto Rico -0-       6. File taxes 2010 Combine lines 2, 3, 4, and 5 32,550 7. File taxes 2010 Form 1040 filers: Enter the amount from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36. File taxes 2010     Form 1040A filers: Enter the amount from Form 1040A, lines 16 and 17 1,000 8. File taxes 2010 Is the amount on line 7 less than the amount on line 6?     No. File taxes 2010 None of your social security benefits are taxable. File taxes 2010 Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. File taxes 2010   Yes. File taxes 2010 Subtract line 7 from line 6 31,550 9. File taxes 2010 If you are: Married filing jointly, enter $32,000 Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2013, enter $25,000 32,000   Note. File taxes 2010 If you are married filing separately and you lived with your spouse at any time in 2013, skip lines 9 through 16; multiply line 8 by 85% (. File taxes 2010 85) and enter the result on line 17. File taxes 2010 Then go to line 18. File taxes 2010   10. File taxes 2010 Is the amount on line 9 less than the amount on line 8?     No. File taxes 2010 None of your benefits are taxable. File taxes 2010 Enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. File taxes 2010 If you are married filing separately and you lived apart from your spouse for all of 2013, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a, or on Form 1040A, line 14a. File taxes 2010     Yes. File taxes 2010 Subtract line 9 from line 8   11. File taxes 2010 Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2013   12. File taxes 2010 Subtract line 11 from line 10. File taxes 2010 If zero or less, enter -0-   13. File taxes 2010 Enter the smaller of line 10 or line 11   14. File taxes 2010 Enter one-half of line 13   15. File taxes 2010 Enter the smaller of line 2 or line 14   16. File taxes 2010 Multiply line 12 by 85% (. File taxes 2010 85). File taxes 2010 If line 12 is zero, enter -0-   17. File taxes 2010 Add lines 15 and 16   18. File taxes 2010 Multiply line 1 by 85% (. File taxes 2010 85)   19. File taxes 2010 Taxable benefits. File taxes 2010 Enter the smaller of line 17 or line 18. File taxes 2010 Also enter this amount on Form 1040, line 20b, or Form 1040A, line 14b   Example 3. File taxes 2010 Joe and Betty Johnson file a joint return on Form 1040 for 2013. File taxes 2010 Joe is a retired railroad worker and in 2013 received the social security equivalent benefit (SSEB) portion of tier 1 railroad retirement benefits. File taxes 2010 Joe's Form RRB-1099 shows $10,000 in box 5. File taxes 2010 Betty is a retired government worker and receives a fully taxable pension of $38,000. File taxes 2010 They had $2,300 in taxable interest income plus interest of $200 on a qualified U. File taxes 2010 S. File taxes 2010 savings bond. File taxes 2010 The savings bond interest qualified for the exclusion. File taxes 2010 They figure their taxable benefits by completing Worksheet 1. File taxes 2010 Because they have qualified U. File taxes 2010 S. File taxes 2010 savings bond interest, they follow the note at the beginning of the worksheet and use the amount from line 2 of their Schedule B (Form 1040A or 1040) on line 3 of the worksheet instead of the amount from line 8a of their Form 1040. File taxes 2010 On line 3 of the worksheet, they enter $40,500 ($38,000 + $2,500). File taxes 2010 Filled-in Worksheet 1. File taxes 2010 Figuring Your Taxable Benefits Before you begin: • If you are married filing separately and you lived apart from your spouse for all of 2013, enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. File taxes 2010 • Do not use this worksheet if you repaid benefits in 2013 and your total repayments (box 4 of Forms SSA-1099 and RRB-1099) were more than your gross benefits for 2013 (box 3 of Forms SSA-1099 and RRB-1099). File taxes 2010 None of your benefits are taxable for 2013. File taxes 2010 For more information, see Repayments More Than Gross Benefits. File taxes 2010 • If you are filing Form 8815, Exclusion of Interest From Series EE and I U. File taxes 2010 S. File taxes 2010 Savings Bonds Issued After 1989, do not include the amount from line 8a of Form 1040 or Form 1040A on line 3 of this worksheet. File taxes 2010 Instead, include the amount from Schedule B (Form 1040A or 1040), line 2. File taxes 2010 1. File taxes 2010 Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. File taxes 2010 Also enter this amount on Form 1040, line 20a, or Form 1040A, line 14a $10,000 2. File taxes 2010 Enter one-half of line 1 5,000 3. File taxes 2010 Combine the amounts from:     Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21. File taxes 2010     Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13 40,500 4. File taxes 2010 Enter the amount, if any, from Form 1040 or 1040A, line 8b -0-       5. File taxes 2010 Enter the total of any exclusions/adjustments for: Adoption benefits (Form 8839, line 28), Foreign earned income or housing (Form 2555, lines 45 and 50, or Form 2555-EZ, line 18), and Certain income of bona fide residents of American Samoa (Form 4563, line 15) or Puerto Rico -0-       6. File taxes 2010 Combine lines 2, 3, 4, and 5 45,500 7. File taxes 2010 Form 1040 filers: Enter the amount from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36. File taxes 2010     Form 1040A filers: Enter the amount from Form 1040A, lines 16 and 17 -0- 8. File taxes 2010 Is the amount on line 7 less than the amount on line 6?     No. File taxes 2010 None of your social security benefits are taxable. File taxes 2010 Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. File taxes 2010   Yes. File taxes 2010 Subtract line 7 from line 6 45,500 9. File taxes 2010 If you are: Married filing jointly, enter $32,000 Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2013, enter $25,000 32,000   Note. File taxes 2010 If you are married filing separately and you lived with your spouse at any time in 2013, skip lines 9 through 16; multiply line 8 by 85% (. File taxes 2010 85) and enter the result on line 17. File taxes 2010 Then go to line 18. File taxes 2010   10. File taxes 2010 Is the amount on line 9 less than the amount on line 8?     No. File taxes 2010 None of your benefits are taxable. File taxes 2010 Enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. File taxes 2010 If you are married filing separately and you lived apart from your spouse for all of 2013, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a, or on Form 1040A, line 14a. File taxes 2010     Yes. File taxes 2010 Subtract line 9 from line 8 13,500 11. File taxes 2010 Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2013 12,000 12. File taxes 2010 Subtract line 11 from line 10. File taxes 2010 If zero or less, enter -0- 1,500 13. File taxes 2010 Enter the smaller of line 10 or line 11 12,000 14. File taxes 2010 Enter one-half of line 13 6,000 15. File taxes 2010 Enter the smaller of line 2 or line 14 5,000 16. File taxes 2010 Multiply line 12 by 85% (. File taxes 2010 85). File taxes 2010 If line 12 is zero, enter -0- 1,275 17. File taxes 2010 Add lines 15 and 16 6,275 18. File taxes 2010 Multiply line 1 by 85% (. File taxes 2010 85) 8,500 19. File taxes 2010 Taxable benefits. File taxes 2010 Enter the smaller of line 17 or line 18. File taxes 2010 Also enter this amount on Form 1040, line 20b, or Form 1040A, line 14b $6,275 More than 50% of Joe's net benefits are taxable because the income on line 8 of the worksheet ($45,500) is more than $44,000. File taxes 2010 Joe and Betty enter $10,000 on Form 1040, line 20a, and $6,275 on Form 1040, line 20b. File taxes 2010 Deductions Related to Your Benefits You may be entitled to deduct certain amounts related to the benefits you receive. File taxes 2010 Disability payments. File taxes 2010   You may have received disability payments from your employer or an insurance company that you included as income on your tax return in an earlier year. File taxes 2010 If you received a lump-sum payment from SSA or RRB, and you had to repay the employer or insurance company for the disability payments, you can take an itemized deduction for the part of the payments you included in gross income in the earlier year. File taxes 2010 If the amount you repay is more than $3,000, you may be able to claim a tax credit instead. File taxes 2010 Claim the deduction or credit in the same way explained under Repayments More Than Gross Benefits , later. File taxes 2010 Legal expenses. File taxes 2010   You can usually deduct legal expenses that you pay or incur to produce or collect taxable income or in connection with the determination, collection, or refund of any tax. File taxes 2010   Legal expenses for collecting the taxable part of your benefits are deductible as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. File taxes 2010 Repayments More Than Gross Benefits In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. File taxes 2010 If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. File taxes 2010 Do not use a worksheet in this case. File taxes 2010 If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year. File taxes 2010 If you have any questions about this negative figure, contact your local SSA office or your local RRB field office. File taxes 2010 Joint return. File taxes 2010   If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5, but your spouse's does not, subtract the amount in box 5 of your form from the amount in box 5 of your spouse's form. File taxes 2010 You do this to get your net benefits when figuring if your combined benefits are taxable. File taxes 2010 Example. File taxes 2010 John and Mary file a joint return for 2013. File taxes 2010 John received Form SSA-1099 showing $3,000 in box 5. File taxes 2010 Mary also received Form SSA-1099 and the amount in box 5 was ($500). File taxes 2010 John and Mary will use $2,500 ($3,000 minus $500) as the amount of their net benefits when figuring if any of their combined benefits are taxable. File taxes 2010 Repayment of benefits received in an earlier year. File taxes 2010   If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year. File taxes 2010 Deduction $3,000 or less. File taxes 2010   If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. File taxes 2010 Claim it on Schedule A (Form 1040), line 23. File taxes 2010 Deduction more than $3,000. File taxes 2010    If this deduction is more than $3,000, you should figure your tax two ways: Figure your tax for 2013 with the itemized deduction included on Schedule A, line 28. File taxes 2010 Figure your tax for 2013 in the following steps. File taxes 2010 Figure the tax without the itemized deduction included on Schedule A, line 28. File taxes 2010 For each year after 1983 for which part of the negative figure represents a repayment of benefits, refigure your taxable benefits as if your total benefits for the year were reduced by that part of the negative figure. File taxes 2010 Then refigure the tax for that year. File taxes 2010 Subtract the total of the refigured tax amounts in (b) from the total of your actual tax amounts. File taxes 2010 Subtract the result in (c) from the result in (a). File taxes 2010 Compare the tax figured in methods (1) and (2). File taxes 2010 Your tax for 2013 is the smaller of the two amounts. File taxes 2010 If method (1) results in less tax, take the itemized deduction on Schedule A (Form 1040), line 28. File taxes 2010 If method (2) results in less tax, claim a credit for the amount from step 2(c) above on Form 1040, line 71. File taxes 2010 Check box d and enter “I. File taxes 2010 R. File taxes 2010 C. File taxes 2010 1341” in the space next to that box. File taxes 2010 If both methods produce the same tax, deduct the repayment on Schedule A (Form 1040), line 28. File taxes 2010 Prev  Up  Next   Home   More Online Publications
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Tax Law Changes Related to National Disaster Relief

FS-2009-8, January 2009

(Updated June 21, 2010 — For information regarding the filing of 2009 income tax returns, refer to the last section of this document, "Reporting Losses from a Federally Declared Disaster Occurring in 2010.")

The National Disaster Relief Act of 2008, Subtitle B or Title VII of the Emergency Economic Stabilization Act of 2008, signed into law on Oct. 3, 2008, as Public Law 110-343, provides tax relief for victims of federally declared disasters occurring after
Dec. 31, 2007, and before Jan. 1, 2010.

Prior to enactment of the National Disaster Relief Act, when a major disaster struck, Congress would draft legislation providing targeted tax benefits for taxpayers affected by the disaster that were specific to that particular disaster.

The National Disaster Relief Act, which provides a broad package of tax benefits that may be used by anyone who is affected by a federally declared disaster, effectively replaces the strategy of providing targeted benefits for disaster victims in the weeks or months following the incident. Certain provisions of the National Disaster Relief Act of 2008 do not apply to the Midwestern disaster areas –– disasters affecting the Midwest that were declared from May 20, 2008 through July 31, 2008 –– because the Heartland and Hurricane Ike Disaster Relief Act, part of the same legislation that resulted in the National Disaster Relief Act, provides other tax benefits. See Publication 4492-B for detailed information on the tax benefits that apply to the Midwestern disaster areas. 

The National Disaster Relief Act provides the following tax benefits: 

  • Allows all taxpayers, not just those who itemize, to claim the casualty loss deduction regardless of the taxpayer’s adjusted gross income level;
  • Increases the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500 for taxable years beginning after Dec. 31, 2008. The reduction amount returns to $100 for taxable years beginning after Dec. 31, 2009;   
  • Removes the requirement that the net casualty loss deduction be allowed only if the casualty loss exceeds 10 percent of the taxpayer’s adjusted gross income;
  • Provides a five-year net operating loss (NOL) carryback for qualified natural disaster losses.
  • Waives certain mortgage revenue bond requirements for affected taxpayers and allows the bond proceeds to be used for rebuilding.

For business taxpayers, the Act also:   

  • Allows an affected business taxpayer to deduct certain qualified disaster cleanup expenses;
  • Allows an affected business taxpayer to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available; and
  • Increases the limits that an affected business taxpayer can expense for qualifying section 179 property.

Major portions of the National Disaster Relief Act are highlighted below.

See Publication 547, Casualties, Disasters, and Thefts, for information necessary in preparing 2008 tax returns. 

Section 706: Losses Attributable to Federally Declared Disasters

Section 706 of the National Disaster Relief Act provides relief to individual taxpayers whose personal-use property was damaged or destroyed by a casualty in a federally declared disaster area. 

Under prior law, individuals who suffered casualty losses as a result of a Presidentially-declared disaster –– the term was redefined as “federally declared disaster” in the legislation –– were required to reduce the loss from each casualty event by $100 and reduce the total of their casualty losses for the tax year by 10 percent of their adjusted gross income. In addition, these individuals were required to claim their casualty losses as an itemized deduction. 

The new law removes the 10 percent of adjusted gross income limitation for net disaster losses and allows individuals to claim the net disaster losses even if they do not itemize their deductions. 

To qualify, a loss must be attributable to a federally declared disaster and occur in an area determined by the President to warrant federal assistance. A federally declared disaster is any disaster subsequently determined by the President to warrant assistance by the federal government under the Stafford Act. The deduction is limited to the “net disaster loss” which consists of the excess of personal casualty losses attributable to a federally declared disaster over personal casualty gains. The new law is effective for disasters declared in taxable years beginning after Dec. 31, 2007, and occurring before Jan. 1, 2010. Information on disaster declarations and the areas they encompass may be found at the Federal Emergency Management Agency (FEMA) Web site.

The new law also changes the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500. This change is effective for taxable years beginning after Dec. 31, 2008. The reduction amount returns to $100 for taxable years beginning after Dec. 31, 2009.   

For more information on these tax law changes, see Publication 547, Casualties, Disasters, and Thefts.

Section 712 provides that these changes to the law do not apply to the casualty losses in the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008. See Publication 4492-B for more information on the Midwestern disaster areas.

Section 707: Expensing of Qualified Disaster Expenses

Section 707 of the National Disaster Relief Act allows taxpayers to elect to currently deduct qualified disaster expenses in the tax year paid or incurred. Qualified disaster expenses consist of expenditures paid or incurred in connection with a trade or business or with business-related property that otherwise must be capitalized and that are:

  • For the abatement or control of hazardous substances that were released on account of a federally declared disaster;
  • Debris removal or demolition of structures on real property damaged or destroyed by a federally declared disaster; or
  • For the repair of business-related property damaged by a federally declared disaster. 

As previously explained, a federally declared disaster is any disaster subsequently determined by the President to warrant assistance by the federal government under the Stafford Act. This provision is effective for amounts paid or incurred after Dec. 31, 2007, in connection with disasters declared after that date and federally declared disasters occurring before Jan. 1, 2010. 

Section 712 provides that these changes to the law do not apply to the casualty losses in the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008

Section 708: Net Operating Losses Attributable to Federally Declared Disasters

In general, a net operating loss is carried back two years and carried forward 20. Section 708 of the National Disaster Relief Act allows taxpayers to carry back a qualified disaster loss five years. A qualified disaster loss is the lesser of the taxpayer’s net operating loss for the taxable year or the sum of the following:

  • The taxpayer’s losses allowable under section 165 of the Internal Revenue Code for the taxable year attributable to a federally declared disaster occurring before Jan. 1, 2010, and occurring in a disaster area; and
  • The taxpayer’s deduction for the taxable year for qualified disaster expenses allowable under section 198A(a) of the Internal Revenue Code (or the amount that would have been allowable if the taxpayer deducted qualified disaster expenses). 

A qualified disaster loss is treated a net operating loss that is separate from the taxpayer’s regular NOL. 

Section 708 also includes a provision that allows taxpayers to elect to disregard the five-year carryback rule for their qualified disaster loss. . 

Finally, Section 708 provides an exception to the general rule that a taxpayer may use an alternative minimum tax (AMT) net operating loss deduction to offset only 90 percent of the taxpayer’s alternative minimum taxable income. Section 708 provides that the 90-percent limit does not apply to the portion of the AMT net operating loss deduction attributable to a qualified disaster loss. 

These rules apply to disasters declared in taxable years beginning after Dec. 31, 2007.  

Section 712 provides that these changes to the law do not apply to the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008.

Section 709: Waiver of Certain Mortgage Revenue Bond Requirements Following Federally Declared Disasters

Section 709 of the National Disaster Relief Act adds new paragraph 12 to section 143(k) of the Internal Revenue Code, which waives certain mortgage revenue bond requirements otherwise applicable where an affected taxpayer’s principal residence is destroyed or damaged as a result of a federally declared disaster. An earlier law, the Housing Assistance Tax Act of 2008 enacted on June 30, 2008, also added a different §143(k)(12) to the Code. So currently there are two §143(k)(12)s in the Code.

New Code section 143(k)(12)(A) provides that, at the election of the taxpayer, if a person’s principal residence is destroyed –– the home is rendered unsafe for use as a result of a federally declared disaster occurring between Dec. 31, 2007 and Jan. 1, 2010, or the home is demolished or relocated because of an order issued as a result of such federally declared disaster occurring during such timeframe –– then for two years following the date of such disaster, the three-year requirement of section 143(d)(1) does not apply and the purchase price requirement is relaxed. Accordingly, such person may receive a mortgage loan financed with the proceeds of tax exempt qualified mortgage bonds regardless of whether he owned his principal residence within three years of receiving such mortgage loan, and such mortgage loan may be for the acquisition of a home which costs 110 percent of the average area purchase price. 

New Code section 143(k)(12)(B) provides that, at the election of the taxpayer, if a person’s principal residence is damaged as a result of a federally declared disaster occurring after Dec. 31, 2007, and before Jan. 1, 2010, any loan taken by such person to repair or reconstruct such residence in an amount equal to the lesser of the cost of such repair or reconstruction or $150,000 may be treated as a qualified rehabilitation loan and thus may be financed using the proceeds of tax-exempt qualified mortgage bonds. An election, once made, cannot be revoked unless permission is granted by the Secretary. 

Section 709 further provides that a taxpayer who makes a section 143(k)(12) election  may not also elect to apply the special rules for residences located in disaster areas found in Code section 143(k)(11). The special rules found in Code section 143(k)(11) allow taxpayers to use the proceeds of tax exempt qualified mortgage bonds issued between May 1, 2008, and Jan. 1, 2010, to finance mortgage loans for residences located in disaster areas for two years from the date of the applicable disaster declaration without regard to the three-year requirement by treating the residence as if it were a targeted area residence for purposes of the purchase price requirement and the income requirements. This provision, unlike § 143(k)(12), does not limit the financing only to those taxpayers whose homes were damaged by the disaster.

Section 712 provides that these changes to the law do not apply to the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008.

Section 710: Special Depreciation Allowance for Qualified Disaster Property

Section 710 of the National Disaster Relief Act provides a special 50 percent depreciation allowance for purchases of qualified disaster assistance property. It allows taxpayers to deduct 50 percent of the cost of qualified disaster assistance property in addition to the regular depreciation allowance that is normally available.

This new special “bonus depreciation” allowance applies to most types of tangible personal property and computer software acquired on or after the date on which the federally declared disaster occurs, and placed in service on or before Dec. 31 of the third year following the date on which the federally declared disaster occurs. In addition, the new bonus depreciation allowance applies to most nonresidential real property and residential rental property acquired on or after the date on which the federally declared disaster occurs, and placed in service on or before Dec. 31 of the fourth year following the date on which the federally declared disaster occurs.

To qualify for the new bonus depreciation allowance, 80 percent or more of the use of the property must be in the disaster area and in the active conduct of a trade or business by the taxpayer in that disaster area. Also, the property owner must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the federally declared disaster and must be similar in nature to, and located in the same county as, the property being rehabilitated or replaced.

Section 711: Increased Expensing for Qualified Disaster Assistance Property

In general, a taxpayer may elect to expense up to a certain amount or dollar limit of section 179 property placed in service during the tax year. However, this dollar limit is reduced, but not below zero, if the cost of section 179 property placed in service during that year exceeds a certain amount, or reduced dollar limit. For 2008, the dollar limit is $250,000 and the reduced dollar limit is $800,000.

Section 711 of the National Disaster Relief Act increases the limits that businesses can expense for qualified section 179 disaster assistance property. Generally, the new law increases the dollar limit that is normally available for a particular tax year by the lesser of $100,000, or the cost of qualified section 179 disaster assistance property placed in service during that year. Also, the new law generally increases the reduced dollar limit that is normally available for a particular year by the lesser of $600,000, or the cost of qualified section 179 disaster assistance property placed in service during that year.    

Qualified section 179 disaster assistance property is section 179 property that is qualified disaster assistance property for purposes of the new bonus depreciation allowance provided under section 710 of the National Disaster Relief Act. Section 179 property is most types of tangible personal property and off-the-shelf computer software.

The new law did not change the amount that a taxpayer can elect to expense for certain sport utility vehicles and certain other vehicles placed in service during the tax year.  Accordingly, a taxpayer cannot elect to expense more than $25,000 of the cost of these types of vehicles.

Section 712: Coordination with Heartland Disaster Relief

Section 712 of the National Disaster Relief Act explains that certain provisions contained in the National Disaster Relief Act do not apply to the Midwestern Disaster Areas. For information specific to the Midwestern Disaster Areas, see Publication 4492-B.

Reporting Losses from a Federally Declared Disaster Occurring in 2010

The National Disaster Relief Act of 2008, Subtitle B or Title VII of the Emergency Economic Stabilization Act of 2008, provided enhanced tax relief for victims of federally declared disasters occurring after Dec. 31, 2007, and before Jan. 1, 2010. Those provisions are not effective for disasters occurring after Dec. 31, 2009. Legislation extending the provisions to disasters occurring before Jan. 1, 2011, has been proposed but has not yet been signed into law.

Because the enhanced casualty loss provisions are not effective for federally declared disasters occurring after Dec. 31, 2009, taxpayers affected by federally declared disasters in 2010 may take the loss into account for tax year 2009. See Page 12 of the 2009 version of Publication 547 for information on elections to deduct disaster losses in the year preceding the disaster year, including the time limits on making such elections.

This means, if you are an affected taxpayer with respect to a federally declared disaster occurring after Dec. 31, 2009, you may claim the loss on your 2009 income tax return. Claiming a loss on your 2009 return will allow you to take advantage of the National Disaster Relief Act provisions effective for tax year 2009. 

Page Last Reviewed or Updated: 20-Mar-2014

The File Taxes 2010

File taxes 2010 2. File taxes 2010   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. File taxes 2010 ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. File taxes 2010 In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. File taxes 2010 Those cases are called “abusive tax shelters. File taxes 2010 ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. File taxes 2010 Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . File taxes 2010 Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. File taxes 2010 Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. File taxes 2010 They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. File taxes 2010 Despite appearances to the contrary, the taxpayer generally risks little. File taxes 2010 Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. File taxes 2010 Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. File taxes 2010 (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. File taxes 2010 ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. File taxes 2010 This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. File taxes 2010 Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. File taxes 2010 However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. File taxes 2010 Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. File taxes 2010 These provisions include the following. File taxes 2010 Disclosure of reportable transactions. File taxes 2010   You must disclose information for each reportable transaction in which you participate. File taxes 2010 See Reportable Transaction Disclosure Statement , later. File taxes 2010   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. File taxes 2010 To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. File taxes 2010   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. File taxes 2010 They must provide this number to all persons to whom they acted as a material advisor. File taxes 2010 They must provide the number at the time the transaction is entered into. File taxes 2010 If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. File taxes 2010 For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. File taxes 2010 Requirement to maintain list. File taxes 2010   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. File taxes 2010 The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. File taxes 2010 See Regulations section 301. File taxes 2010 6112-1 for more information (including what information is required to be included on the list). File taxes 2010 Confidentiality privilege. File taxes 2010   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. File taxes 2010 Appraisal requirement for donated property. File taxes 2010   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. File taxes 2010 If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. File taxes 2010 If you file electronically, see Form 8453, U. File taxes 2010 S. File taxes 2010 Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. File taxes 2010 For more information about appraisals, including exceptions, see Publication 561. File taxes 2010 Passive activity loss and credit limits. File taxes 2010   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. File taxes 2010 For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. File taxes 2010 Interest on penalties. File taxes 2010   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. File taxes 2010 Accounting method restriction. File taxes 2010   Tax shelters generally cannot use the cash method of accounting. File taxes 2010 Uniform capitalization rules. File taxes 2010   The uniform capitalization rules generally apply to producing property or acquiring it for resale. File taxes 2010 Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. File taxes 2010 For more information, see Publication 538. File taxes 2010 Denial of deduction for interest on an underpayment due to a reportable transaction. File taxes 2010   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. File taxes 2010 This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. File taxes 2010 Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. File taxes 2010 The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. File taxes 2010 Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. File taxes 2010 So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. File taxes 2010 In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. File taxes 2010 The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. File taxes 2010 Investor Reporting You may be required to file a reportable transaction disclosure statement. File taxes 2010 Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. File taxes 2010 Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. File taxes 2010 Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). File taxes 2010 In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. File taxes 2010  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. File taxes 2010 If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. File taxes 2010 If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. File taxes 2010 See Penalty for failure to disclose a reportable transaction , later under Penalties. File taxes 2010 The following discussion briefly describes reportable transactions. File taxes 2010 For more details, see the Instructions for Form 8886. File taxes 2010 Reportable transaction. File taxes 2010   A reportable transaction is any of the following. File taxes 2010 A listed transaction. File taxes 2010 A confidential transaction. File taxes 2010 A transaction with contractual protection. File taxes 2010 A loss transaction. File taxes 2010 A transaction of interest entered into after November 1, 2006. File taxes 2010 Note. File taxes 2010 Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. File taxes 2010 Listed transaction. File taxes 2010   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. File taxes 2010 These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. File taxes 2010 For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2009-31_IRB/ar07. File taxes 2010 html. File taxes 2010 Confidential transaction. File taxes 2010   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. File taxes 2010 A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. File taxes 2010 The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. File taxes 2010 Transaction with contractual protection. File taxes 2010   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. File taxes 2010 For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2007-07_IRB/ar15. File taxes 2010 html. File taxes 2010 Loss transaction. File taxes 2010   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. File taxes 2010 A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. File taxes 2010   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. File taxes 2010 For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2004-50_IRB/ar11. File taxes 2010 html. File taxes 2010 Transaction of interest. File taxes 2010   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. File taxes 2010 The IRS has identified the following transactions of interest. File taxes 2010 “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. File taxes 2010 R. File taxes 2010 B. File taxes 2010 545, available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2007-36_IRB/ar20. File taxes 2010 html. File taxes 2010 Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. File taxes 2010 R. File taxes 2010 B. File taxes 2010 544, available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2007-36_IRB/ar19. File taxes 2010 html. File taxes 2010 Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. File taxes 2010 R. File taxes 2010 B. File taxes 2010 1194, available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2008-47_IRB/ar11. File taxes 2010 html. File taxes 2010 Certain transactions involving a U. File taxes 2010 S. File taxes 2010 taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. File taxes 2010 R. File taxes 2010 B. File taxes 2010 312, available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2009-03_IRB/ar10. File taxes 2010 html. File taxes 2010   For updates to this list, go to www. File taxes 2010 irs. File taxes 2010 gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. File taxes 2010 Penalties Investing in an abusive tax shelter may lead to substantial expenses. File taxes 2010 First, the promoter generally charges a substantial fee. File taxes 2010 If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. File taxes 2010 You may also be subject to the penalty for failure to pay tax. File taxes 2010 These penalties are explained in the following paragraphs. File taxes 2010 Accuracy-related penalties. File taxes 2010   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). File taxes 2010 Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. File taxes 2010 Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. File taxes 2010   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. File taxes 2010   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). File taxes 2010 Negligence or disregard of rules or regulations. File taxes 2010   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. File taxes 2010 The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. File taxes 2010    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. File taxes 2010 It also includes any failure to keep adequate books and records. File taxes 2010 A return position that has a reasonable basis is not negligence. File taxes 2010   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. File taxes 2010   The penalty for disregard of rules and regulations can be avoided if all the following are true. File taxes 2010 You keep adequate books and records. File taxes 2010 You have a reasonable basis for your position on the tax issue. File taxes 2010 You make an adequate disclosure of your position. File taxes 2010 Use Form 8275 to make your disclosure and attach it to your return. File taxes 2010 To disclose a position contrary to a regulation, use Form 8275-R. File taxes 2010 Use Form 8886 to disclose a reportable transaction (discussed earlier). File taxes 2010 Substantial understatement of tax. File taxes 2010   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. File taxes 2010 An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. File taxes 2010 The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. File taxes 2010   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. File taxes 2010 In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. File taxes 2010 Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. File taxes 2010   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. File taxes 2010 An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. File taxes 2010 Substantial valuation misstatement. File taxes 2010   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. File taxes 2010 The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. File taxes 2010 You underpaid your tax by more than $5,000 because of the misstatement. File taxes 2010 You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. File taxes 2010   You may be assessed a penalty of 40% for a gross valuation misstatement. File taxes 2010 If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. File taxes 2010 The penalty rate is also 40% if the property's correct value or adjusted basis is zero. File taxes 2010 Transaction lacking economic substance. File taxes 2010   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. File taxes 2010 For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. File taxes 2010   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. File taxes 2010   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. File taxes 2010   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. File taxes 2010 Relevant facts include any facts affecting the tax treatment of the transaction. File taxes 2010    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. File taxes 2010 Undisclosed foreign financial asset understatement. File taxes 2010   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. File taxes 2010 An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. File taxes 2010 The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. File taxes 2010 Any foreign business you control, reportable on Form 5471, Information Return of U. File taxes 2010 S. File taxes 2010 Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. File taxes 2010 S. File taxes 2010 Persons With Respect to Certain Foreign Partnerships. File taxes 2010 Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. File taxes 2010 S. File taxes 2010 Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. File taxes 2010 Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. File taxes 2010    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. File taxes 2010 See the Instructions for Form 8938 for details. File taxes 2010    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. File taxes 2010 Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. File taxes 2010 Penalty for incorrect appraisals. File taxes 2010   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. File taxes 2010 For details on the penalty amount and exceptions, see Publication 561. File taxes 2010 Penalty for failure to disclose a reportable transaction. File taxes 2010   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). File taxes 2010 For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). File taxes 2010 This penalty is in addition to any other penalty that may be imposed. File taxes 2010   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. File taxes 2010 For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. File taxes 2010 irs. File taxes 2010 gov/irb/2007-09_IRB/ar12. File taxes 2010 html. File taxes 2010 Accuracy-related penalty for a reportable transaction understatement. File taxes 2010   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. File taxes 2010 This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. File taxes 2010 The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. File taxes 2010 You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. File taxes 2010 The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. File taxes 2010   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. File taxes 2010 Civil fraud penalty. File taxes 2010   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. File taxes 2010 Joint return. File taxes 2010   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. File taxes 2010 Failure to pay tax. File taxes 2010   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. File taxes 2010 Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. File taxes 2010 Prev  Up  Next   Home   More Online Publications