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Filing Taxes

Filing taxes Publication 929 - Main Content Table of Contents Part 1. Filing taxes Rules for All Dependents Filing RequirementsEarned Income Only Unearned Income Only Both Earned and Unearned Income Other Filing Requirements Should a Return Be Filed Even If Not Required? Responsibility for Child's ReturnThird party designee. Filing taxes Designated as representative. Filing taxes IRS notice. Filing taxes Standard DeductionStandard Deduction of Zero Dependent's Own Exemption Withholding From WagesExceptions. Filing taxes Part 2. Filing taxes Tax on Unearned Income of Certain ChildrenWhich Parent's Return To Use Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, Lines A–C) Step 1. Filing taxes Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Filing taxes Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Filing taxes Figuring the Child's Tax (Form 8615, Part III) Alternative Minimum Tax Illustrated Example Part 1. Filing taxes Rules for All Dependents This part of the publication discusses the filing requirements for dependents, who is responsible for a child's return, how to figure a dependent's standard deduction and exemption (if any), and whether a dependent can claim exemption from federal income tax withholding. Filing taxes Filing Requirements Whether a dependent has to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind. Filing taxes A dependent may have to file a return even if his or her income is less than the amount that would normally require a return. Filing taxes See Other Filing Requirements, later. Filing taxes The following sections apply to dependents with: Earned income only, Unearned income only, and Both earned and unearned income. Filing taxes  To find out whether a dependent must file, read the section that applies, or use Table 1. Filing taxes Earned Income Only A dependent whose gross income is only earned income must file a return if the gross income is more than the amount listed in the following table. Filing taxes Marital Status Amount Single   Under 65 and not blind $6,100 Either 65 or older or blind $7,600 65 or older and blind $9,100 Married*   Under 65 and not blind $6,100 Either 65 or older or blind $7,300 65 or older and blind $8,500 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Filing taxes Example. Filing taxes William is 16. Filing taxes His mother claims an exemption for him on her income tax return. Filing taxes He worked part time on weekends during the school year and full time during the summer. Filing taxes He earned $7,000 in wages. Filing taxes He did not have any unearned income. Filing taxes He must file a tax return because he has earned income only and his gross income is more than $6,100. Filing taxes If he is blind, he does not have to file a return because his gross income is not more than $7,600. Filing taxes Unearned Income Only A dependent whose gross income is only unearned income must file a return if the gross income is more than the amount listed in the following table. Filing taxes Marital Status Amount Single   Under 65 and not blind $1,000 Either 65 or older or blind $2,500 65 or older and blind $4,000 Married*   Under 65 and not blind $1,000 Either 65 or older or blind $2,200 65 or older and blind $3,400 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Filing taxes Example. Filing taxes Sarah is 18 and single. Filing taxes Her parents can claim an exemption for her on their income tax return. Filing taxes She received $1,970 of taxable interest and dividend income. Filing taxes She did not work during the year. Filing taxes She must file a tax return because she has unearned income only and her gross income is more than $1,000. Filing taxes If she is blind, she does not have to file a return because she has unearned income only and her gross income is not more than $2,500. Filing taxes Election to report child's unearned income on parent's return. Filing taxes   A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. Filing taxes See Parent's Election To Report Child's Interest and Dividends in Part 2. Filing taxes If the parent makes this election, the child does not have to file a return. Filing taxes Both Earned and Unearned Income A dependent who has both earned and unearned income generally must file a return if the dependent's gross income is more than line 5 of the following worksheet. Filing taxes Filing Requirement Worksheet for Most Dependents 1. Filing taxes Enter dependent's earned income plus $350     2. Filing taxes Minimum amount   $1,000 3. Filing taxes Compare lines 1 and 2. Filing taxes Enter the larger amount     4. Filing taxes Maximum amount   6,100 5. Filing taxes Compare lines 3 and 4. Filing taxes Enter the smaller amount     6. Filing taxes Enter the dependent's gross income. Filing taxes If line 6 is more than line 5, the dependent must file an income tax return. Filing taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Filing taxes       Table 1. Filing taxes 2013 Filing Requirements for Dependents If your parent (or someone else) can claim you as a dependent, use this table to see if you must file a return. Filing taxes   See the definitions of “dependent,”“earned income,”“unearned income,” and “gross income” in the Glossary. Filing taxes   Single dependents—Were you either age 65 or older or blind?     No. Filing taxes You must file a return if any of the following apply. Filing taxes       Your unearned income was over $1,000. Filing taxes Your earned income was over $6,100. Filing taxes Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Filing taxes         Yes. Filing taxes You must file a return if any of the following apply. Filing taxes     Your unearned income was over $2,500 ($4,000 if 65 or older and blind), Your earned income was over $7,600 ($9,100 if 65 or older and blind), Your gross income was more than the larger of—       $2,500 ($4,000 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,850 ($3,350 if 65 or older and blind). Filing taxes       Married dependents—Were you either age 65 or older or blind?     No. Filing taxes You must file a return if any of the following apply. Filing taxes       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Filing taxes Your unearned income was over $1,000. Filing taxes Your earned income was over $6,100. Filing taxes Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Filing taxes       Yes. Filing taxes You must file a return if any of the following apply. Filing taxes       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Filing taxes Your unearned income was over $2,200 ($3,400 if 65 or older and blind), Your earned income was over $7,300 ($8,500 if 65 or older and blind), Your gross income was more than the larger of—       $2,200 ($3,400 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,550 ($2,750 if 65 or older and blind). Filing taxes       Example 1. Filing taxes Joe is 20, single, not blind, and a full-time college student. Filing taxes He does not provide more than half of his own support, and his parents claim an exemption for him on their income tax return. Filing taxes He received $200 taxable interest income and earned $2,750 from a part-time job. Filing taxes He does not have to file a tax return because his gross income of $2,950 ($200 interest plus $2,750 in wages) is not more than $3,100, the amount on line 5 of his filled-in Filing Requirement Worksheet for Most Dependents (shown next). Filing taxes Filled-in Example 1 Filing Requirement Worksheet  for Most Dependents 1. Filing taxes Enter dependent's earned income plus $350   $ 3,100 2. Filing taxes Minimum amount   1,000 3. Filing taxes Compare lines 1 and 2. Filing taxes Enter the larger amount   3,100 4. Filing taxes Maximum amount   6,100 5. Filing taxes Compare lines 3 and 4. Filing taxes Enter the smaller amount   3,100 6. Filing taxes Enter the dependent's gross income. Filing taxes If line 6 is more than line 5, the dependent must file an income tax return. Filing taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Filing taxes   $ 2,950   Example 2. Filing taxes The facts are the same as in Example 1 except that Joe had $600 taxable interest income. Filing taxes He must file a tax return because his gross income of $3,350 ($600 interest plus $2,750 wages) is more than $3,100, the amount on line 5 of his filled-in worksheet (shown next). Filing taxes Filled-in Example 2 Filing Requirement Worksheet for Most Dependents 1. Filing taxes Enter dependent's earned income plus $350   $ 3,100 2. Filing taxes Minimum amount   1,000 3. Filing taxes Compare lines 1 and 2. Filing taxes Enter the larger amount   3,100 4. Filing taxes Maximum amount   6,100 5. Filing taxes Compare lines 3 and 4. Filing taxes Enter the smaller amount   3,100 6. Filing taxes Enter the dependent's gross income. Filing taxes If line 6 is more than line 5, the dependent must file an income tax return. Filing taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Filing taxes   $ 3,350   Age 65 or older or blind. Filing taxes A dependent who is age 65 or older or blind must file a return if his or her gross income is more than line 7 of the following worksheet. Filing taxes Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Filing taxes Enter dependent's earned income plus $350     2. Filing taxes Minimum amount   $1,000 3. Filing taxes Compare lines 1 and 2. Filing taxes Enter the larger amount     4. Filing taxes Maximum amount   6,100 5. Filing taxes Compare lines 3 and 4. Filing taxes Enter the smaller amount     6. Filing taxes Enter the amount from the following table that applies to the dependent       Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Filing taxes Add lines 5 and 6. Filing taxes Enter the total     8. Filing taxes Enter the dependent's gross income. Filing taxes If line 8 is more than line 7, the dependent must file an income tax return. Filing taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more     Example 3. Filing taxes The facts are the same as in Example 2 except that Joe is also blind. Filing taxes He does not have to file a return because his gross income of $3,350 is not more than $4,600, the amount on line 7 of his filled-in Filing Requirement Worksheet for Dependents Who Are Age 65 or Older or Blind (shown next). Filing taxes   Filled-in Example 3 Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Filing taxes Enter dependent's earned income plus $350   $3,100 2. Filing taxes Minimum amount   1,000 3. Filing taxes Compare lines 1 and 2. Filing taxes Enter the larger amount   3,100 4. Filing taxes Maximum amount   6,100 5. Filing taxes Compare lines 3 and 4. Filing taxes Enter the smaller amount   3,100 6. Filing taxes Enter the amount from the following table that applies to the dependent   1,500   Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Filing taxes Add lines 5 and 6. Filing taxes Enter the total   4,600 8. Filing taxes Enter the dependent's gross income. Filing taxes If line 8 is more than line 7, the dependent must file an income tax return. Filing taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more   $3,350 Other Filing Requirements Some dependents may have to file a tax return even if their income is less than the amount that would normally require them to file a return. Filing taxes A dependent must file a tax return if he or she owes any other taxes, such as: Social security and Medicare taxes on tips not reported to his or her employer or on wages received from an employer who did not withhold these taxes, Uncollected social security and Medicare or railroad retirement taxes on tips reported to his or her employer or on group-term life insurance, Alternative minimum tax, Additional tax on a health savings account from Form 8889, Part III, Recapture taxes, such as the tax from recapture of an education credit, or Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. Filing taxes But if the dependent is filing a return only because of this tax, the dependent can file Form 5329 by itself. Filing taxes A dependent must also file a tax return if he or she: Had wages of $108. Filing taxes 28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes, or Had net earnings from self-employment of at least $400. Filing taxes Spouse itemizes. Filing taxes   A dependent must file a return if the dependent's spouse itemizes deductions on a separate return and the dependent has $5 or more of gross income (earned and/or unearned). Filing taxes Should a Return Be Filed Even If Not Required? Even if a dependent does not meet any of the filing requirements discussed earlier, he or she should file a tax return if either of the following applies. Filing taxes Income tax was withheld from his or her income. Filing taxes He or she qualifies for the earned income credit, additional child tax credit, health coverage tax credit, or refundable American opportunity education credit. Filing taxes See the tax return instructions to find out who qualifies for these credits. Filing taxes  By filing a return, the dependent can get a refund. Filing taxes Responsibility for Child's Return Generally, a child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return. Filing taxes If a child cannot file his or her own return for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. Filing taxes Signing the child's return. Filing taxes   If the child cannot sign his or her return, a parent or guardian must sign the child's name followed by the words “By (signature), parent (or guardian) for minor child. Filing taxes ” Authority of parent or guardian. Filing taxes   A parent or guardian who signs a return on a child's behalf can deal with the IRS on all matters connected with the return. Filing taxes   In general, a parent or guardian who does not sign the child's return can only provide information concerning the child's return and pay the child's tax. Filing taxes That parent or guardian is not entitled to receive information from the IRS or legally bind the child to a tax liability arising from the return. Filing taxes Third party designee. Filing taxes   A child's parent or guardian who does not sign the child's return may be authorized, as a third party designee, to discuss the processing of the return with the IRS as well as provide information concerning the return. Filing taxes The child or the person signing the return on the child's behalf must check the “Yes” box in the “Third Party Designee” area of the return and name the parent or guardian as the designee. Filing taxes   If designated, a parent or guardian can respond to certain IRS notices and receive information about the processing of the return and the status of a refund or payment. Filing taxes This designation does not authorize the parent or guardian to receive any refund check, bind the child to any tax liability, or otherwise represent the child before the IRS. Filing taxes See the return instructions for more information. Filing taxes Designated as representative. Filing taxes   A parent or guardian who does not sign the child's return may be designated as the child's representative by the child or the person signing the return on the child's behalf. Filing taxes Form 2848, Power of Attorney and Declaration of Representative, is used to designate a child's representative. Filing taxes See Publication 947, Practice Before the IRS and Power of Attorney, for more information. Filing taxes   If designated, a parent or guardian can receive information about the child's return but cannot legally bind the child to a tax liability unless authorized to do so by the law of the state in which the child lives. Filing taxes IRS notice. Filing taxes   If you or the child receives a notice from the IRS concerning the child's return or tax liability, you should immediately inform the IRS that the notice concerns a child. Filing taxes The notice will show who to contact. Filing taxes The IRS will try to resolve the matter with the parent(s) or guardian(s) of the child consistent with their authority. Filing taxes Child's earnings. Filing taxes   For federal income tax purposes, amounts a child earns by performing services are included in the gross income of the child and not the gross income of the parent. Filing taxes This is true even if, under state law, the parent has the right to the earnings and may actually have received them. Filing taxes If the child does not pay the tax due on this income, the parent may be liable for the tax. Filing taxes Child's expenses. Filing taxes   Deductions for payments that are made out of a child's earnings are the child's, even if the payments are made by the parent. Filing taxes Example. Filing taxes You made payments on your child's behalf that are deductible as a business expense and a charitable contribution. Filing taxes You made the payments out of your child's earnings. Filing taxes These items can be deducted only on the child's return. Filing taxes Standard Deduction The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the larger of: $1,000, or The individual's earned income plus $350, but not more than the regular standard deduction (generally $6,100). Filing taxes However, the standard deduction may be higher for a dependent who: Is 65 or older, or Is blind. Filing taxes Certain dependents cannot claim any standard deduction. Filing taxes See Standard Deduction of Zero , later. Filing taxes Worksheet 1. Filing taxes   Use Worksheet 1 to figure the dependent's standard deduction. Filing taxes Worksheet 1. Filing taxes Standard Deduction Worksheet for Dependents Use this worksheet only if someone else can claim you (or your spouse, if filing jointly) as a dependent. Filing taxes If you were 65 or older and/or blind, check the correct number of boxes below. Filing taxes Put the total number of boxes checked in box c and go to line 1. Filing taxes a. Filing taxes You 65 or older   Blind   b. Filing taxes Your spouse, if claiming  spouse's exemption 65 or older   Blind   c. Filing taxes Total boxes checked         1. Filing taxes Enter your earned income (defined below) plus $350. Filing taxes If none, enter -0-. Filing taxes 1. Filing taxes     2. Filing taxes Minimum amount. Filing taxes   2. Filing taxes $1,000   3. Filing taxes Compare lines 1 and 2. Filing taxes Enter the larger of the two amounts here. Filing taxes 3. Filing taxes     4. Filing taxes Enter on line 4 the amount shown below for your filing status. Filing taxes       Single or Married filing separately—$6,100 Married filing jointly—$12,200 Head of household—$8,950 4. Filing taxes     5. Filing taxes Standard deduction. Filing taxes         a. Filing taxes Compare lines 3 and 4. Filing taxes Enter the smaller amount here. Filing taxes If under 65 and not blind, stop here. Filing taxes This is your standard deduction. Filing taxes Otherwise, go on to line 5b. Filing taxes 5a. Filing taxes     b. Filing taxes If 65 or older or blind, multiply $1,500 ($1,200 if married) by the number in box c above. Filing taxes Enter the result here. Filing taxes 5b. Filing taxes     c. Filing taxes Add lines 5a and 5b. Filing taxes This is your standard deduction for 2013. Filing taxes 5c. Filing taxes     Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Filing taxes It also includes any amount received as a scholarship that you must include in income. Filing taxes   Example 1. Filing taxes Michael is single, age 15, and not blind. Filing taxes His parents can claim him as a dependent on their tax return. Filing taxes He has taxable interest income of $800 and wages of $150. Filing taxes He enters $500 (his earned income plus $350) on line 1 of Worksheet 1. Filing taxes On line 3, he enters $1,000, the larger of $500 or $1,000. Filing taxes Michael enters $6,100 on line 4. Filing taxes On line 5a, he enters $1,000, the smaller of $1,000 or $6,100. Filing taxes His standard deduction is $1,000. Filing taxes Example 2. Filing taxes Judy, a full-time student, is single, age 22, and not blind. Filing taxes Her parents can claim her as a dependent on their tax return. Filing taxes She has dividend income of $275 and wages of $2,500. Filing taxes She enters $2,850 (her earned income plus $350) on line 1 of Worksheet 1. Filing taxes On line 3, she enters $2,850, the larger of $2,850 or $1,000. Filing taxes She enters $6,100 on line 4. Filing taxes On line 5a, she enters $2,850 (the smaller of $2,850 or $6,100) as her standard deduction. Filing taxes Example 3. Filing taxes Amy, who is single, is claimed as a dependent on her parents' tax return. Filing taxes She is 18 years old and blind. Filing taxes She has taxable interest income of $1,000 and wages of $2,000. Filing taxes She enters $2,350 (her earned income plus $350) on line 1 of Worksheet 1. Filing taxes She enters $2,350 (the larger of $2,350 or $1,000) on line 3, $6,100 on line 4, and $2,350 (the smaller of $2,350 or $6,100) on line 5a. Filing taxes Because Amy is blind, she checks the box for blindness and enters “1” in box c at the top of Worksheet 1. Filing taxes She enters $1,500 (the number in box c times $1,500) on line 5b. Filing taxes Her standard deduction on line 5c is $3,850 ($2,350 + $1,500). Filing taxes Standard Deduction of Zero The standard deduction for the following dependents is zero. Filing taxes A married dependent filing a separate return whose spouse itemizes deductions. Filing taxes A dependent who files a return for a period of less than 12 months due to a change in his or her annual accounting period. Filing taxes A nonresident or dual-status alien dependent, unless the dependent is married to a U. Filing taxes S. Filing taxes citizen or resident alien at the end of the year and chooses to be treated as a U. Filing taxes S. Filing taxes resident for the year. Filing taxes See Publication 519, U. Filing taxes S. Filing taxes Tax Guide for Aliens, for information on making this choice. Filing taxes Example. Filing taxes Jennifer, who is a dependent of her parents, is entitled to file a joint return with her husband. Filing taxes However, her husband elects to file a separate return and itemize his deductions. Filing taxes Because he itemizes, Jennifer's standard deduction on her return is zero. Filing taxes She can, however, itemize any of her allowable deductions. Filing taxes Dependent's Own Exemption A person who can be claimed as a dependent on another taxpayer's return cannot claim his or her own exemption. Filing taxes This is true even if the other taxpayer does not actually claim the exemption. Filing taxes Example. Filing taxes James and Barbara can claim their child, Ben, as a dependent on their return. Filing taxes Ben is a college student who works during the summer and must file a tax return. Filing taxes Ben cannot claim his own exemption on his return. Filing taxes This is true even if James and Barbara do not claim him as a dependent on their return. Filing taxes Withholding From Wages Employers generally withhold federal income tax, social security tax, and Medicare tax from an employee's wages. Filing taxes If the employee claims exemption from withholding on Form W-4, the employer will not withhold federal income tax. Filing taxes The exemption from withholding does not apply to social security and Medicare taxes. Filing taxes Conditions for exemption from withholding. Filing taxes   An employee can claim exemption from withholding for 2014 only if he or she meets both of the following conditions. Filing taxes For 2013, the employee had a right to a refund of all federal income tax withheld because he or she had no tax liability. Filing taxes For 2014, the employee expects a refund of all federal income tax withheld because he or she expects to have no tax liability. Filing taxes Dependents. Filing taxes   An employee who is a dependent ordinarily cannot claim exemption from withholding if both of the following are true. Filing taxes The employee's gross income will be more than $1,000, the minimum standard deduction for 2014. Filing taxes The employee's unearned income will be more than $350. Filing taxes Exceptions. Filing taxes   An employee may be able to claim exemption from withholding even if the employee is a dependent, if the employee: Is age 65 or older, Is blind, or Will claim on his or her 2014 tax return: Adjustments to income, Tax credits, or Itemized deductions. Filing taxes The above exceptions do not apply to supplemental wages greater than $1,000,000. Filing taxes For more information, see Exemption From Withholding in chapter 1 of Publication 505. Filing taxes Example. Filing taxes Guy is 17 and a student. Filing taxes During the summer he works part time at a grocery store. Filing taxes He expects to earn about $1,200 this year. Filing taxes He also worked at the store last summer and received a refund of all his withheld income tax because he did not have a tax liability. Filing taxes The only other income he expects during the year is $375 interest on a savings account. Filing taxes He expects that his parents will be able to claim him as a dependent on their tax return. Filing taxes He is not blind and will not claim adjustments to income, itemized deductions, a higher standard deduction, or tax credits on his return. Filing taxes Guy cannot claim exemption from withholding when he fills out Form W-4 because his parents will be able to claim him as a dependent, his gross income will be more than $1,000 (the minimum standard deduction amount) and his unearned income will be more than $350. Filing taxes Claiming exemption from withholding. Filing taxes    To claim exemption from withholding, an employee must enter “Exempt” in the space provided on Form W-4, line 7. Filing taxes The employee must complete the rest of the form, as explained in the form instructions, and give it to his or her employer. Filing taxes Renewing an exemption from withholding. Filing taxes   An exemption from withholding is good for only one year. Filing taxes An employee must file a new Form W-4 by February 15 each year to continue the exemption. Filing taxes Part 2. Filing taxes Tax on Unearned Income of Certain Children The two rules that follow may affect the tax on the unearned income of certain children. Filing taxes If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Filing taxes (See Parent's Election To Report Child's Interest and Dividends , later. Filing taxes ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Filing taxes (See Tax for Certain Children Who Have Unearned Income , later. Filing taxes ) For these rules, the term “child” includes a legally adopted child and a stepchild. Filing taxes These rules apply whether or not the child is a dependent. Filing taxes These rules do not apply if neither of the child's parents were living at the end of the year. Filing taxes Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Filing taxes The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Filing taxes Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Filing taxes Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Filing taxes Parents are married. Filing taxes   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Filing taxes Parents not living together. Filing taxes   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Filing taxes If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Filing taxes   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in Publication 501. Filing taxes Parents are divorced. Filing taxes   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Filing taxes Custodial parent remarried. Filing taxes   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Filing taxes Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Filing taxes Do not use the return of the noncustodial parent. Filing taxes   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Filing taxes If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Filing taxes Parents never married. Filing taxes   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Filing taxes If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Filing taxes Widowed parent remarried. Filing taxes   If a widow or widower remarries, the new spouse is treated as the child's other parent. Filing taxes The rules explained earlier under Custodial parent remarried apply. Filing taxes Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Filing taxes If you do, your child will not have to file a return. Filing taxes You can make this election only if all the following conditions are met. Filing taxes Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Filing taxes Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Filing taxes The child's gross income was less than $10,000. Filing taxes The child is required to file a return unless you make this election. Filing taxes The child does not file a joint return for the year. Filing taxes No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Filing taxes No federal income tax was withheld from your child's income under the backup withholding rules. Filing taxes You are the parent whose return must be used when applying the special tax rules for children. Filing taxes (See Which Parent's Return To Use , earlier. Filing taxes ) These conditions are also shown in Figure 1. Filing taxes Certain January 1 birthdays. Filing taxes   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Filing taxes You cannot make this election for such a child unless the child was a full-time student. Filing taxes   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Filing taxes You cannot make this election for such a child. Filing taxes How to make the election. Filing taxes    Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. Filing taxes (If you make this election, you cannot file Form 1040A or Form 1040EZ. Filing taxes ) Attach a separate Form 8814 for each child for whom you make the election. Filing taxes You can make the election for one or more children and not for others. Filing taxes Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Filing taxes Rate may be higher. Filing taxes   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Filing taxes This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Filing taxes However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Filing taxes Deductions you cannot take. Filing taxes   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Filing taxes The additional standard deduction if the child is blind. Filing taxes The deduction for a penalty on an early withdrawal of your child's savings. Filing taxes Itemized deductions (such as your child's investment expenses or charitable contributions). Filing taxes Figure 1. Filing taxes Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Filing taxes Figure 1. Filing taxes Can You Include Your Child's Income On Your Tax Return? Deductible investment interest. Filing taxes   If you use Form 8814, your child's unearned income is considered your unearned income. Filing taxes To figure the limit on your deductible investment interest, add the child's unearned income to yours. Filing taxes However, if your child received qualified dividends, capital gain distributions, or Alaska Permanent Fund dividends, see chapter 3 of Publication 550 for information about how to figure the limit. Filing taxes Alternative minimum tax. Filing taxes    If your child received tax-exempt interest (or exempt-interest dividends paid by a regulated investment company) from certain private activity bonds, you must determine if that interest is a tax preference item for alternative minimum tax (AMT) purposes. Filing taxes If it is, you must include it with your own tax preference items when figuring your AMT. Filing taxes See Form 6251, Alternative Minimum Tax—Individuals, and its instructions for details. Filing taxes Reduced deductions or credits. Filing taxes   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following. Filing taxes Deduction for contributions to a traditional individual retirement arrangement (IRA). Filing taxes Deduction for student loan interest. Filing taxes Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Filing taxes Credit for child and dependent care expenses. Filing taxes Child tax credit. Filing taxes Education tax credits. Filing taxes Earned income credit. Filing taxes Penalty for underpayment of estimated tax. Filing taxes   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Filing taxes If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Filing taxes Get Publication 505 for more information. Filing taxes Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Filing taxes Only the amount over $2,000 is added to your income. Filing taxes The amount over $2,000 is shown on Form 8814, line 6. Filing taxes Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Filing taxes Include the amount from Form 8814, line 12, on Form 1040 or Form 1040NR, line 21. Filing taxes If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040 or Form 1040NR, line 21. Filing taxes On the dotted line next to line 21, enter “Form 8814” and the total of the Form 8814, line 12 amounts. Filing taxes Note. Filing taxes The tax on the first $2,000 is figured on Form 8814, Part II. Filing taxes See Figuring Additional Tax , later. Filing taxes Qualified dividends. Filing taxes   Enter on Form 8814, line 2a, any ordinary dividends your child received. Filing taxes This amount may include qualified dividends. Filing taxes Qualified dividends are those dividends reported on Form 1040, line 9b, or Form 1040NR, line 10b, and are eligible for lower tax rates that apply to a net capital gain. Filing taxes For detailed information about qualified dividends, see Publication 550. Filing taxes   If your child received qualified dividends, the amount of these dividends that is added to your income must be reported on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Filing taxes You do not include these dividends on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Filing taxes   Enter the child's qualified dividends on Form 8814, line 2b. Filing taxes But do not include this amount on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Filing taxes Instead, include the amount from Form 8814, line 9, on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Filing taxes (The amount on Form 8814, line 9, may be less than the amount on Form 8814, line 2b, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Filing taxes ) Capital gain distributions. Filing taxes   Enter on Form 8814, line 3, any capital gain distributions your child received. Filing taxes The amount of these distributions that is added to your income must be reported on Schedule D (Form 1040), line 13, or, if you are not required to file Schedule D, on Form 1040, line 13, or Form 1040NR, line 14. Filing taxes You do not include it on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Filing taxes   Include the amount from Form 8814, line 10, on Schedule D, line 13; Form 1040, line 13; or Form 1040NR, line 14, whichever applies. Filing taxes (The amount on Form 8814, line 10, may be less than the amount on Form 8814, line 3, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Filing taxes ) Collectibles (28% rate) gain. Filing taxes    If any of the child's capital gain distributions are reported on Form 1099-DIV as collectibles (28% rate) gain, you must determine how much to also include on line 4 of the 28% Rate Gain Worksheet, in the instructions for Schedule D, line 18. Filing taxes Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Filing taxes The numerator is the part of the child's total capital gain distribution that is collectibles (28% rate) gain. Filing taxes The denominator is the child's total capital gain distribution. Filing taxes Enter the result on line 4 of the 28% Rate Gain Worksheet. Filing taxes Unrecaptured section 1250 gain. Filing taxes   If any of the child's capital gain distributions are reported on Form 1099-DIV as unrecaptured section 1250 gain, you must determine how much to include on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D, line 19. Filing taxes Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Filing taxes The numerator is the part of the child's total capital gain distribution that is unrecaptured section 1250 gain. Filing taxes The denominator is the child's total capital gain distribution. Filing taxes Enter the result on the Unrecaptured Section 1250 Gain Worksheet, line 11. Filing taxes Section 1202 gain. Filing taxes   If any of the child's capital gain distributions are reported as section 1202 gain (gain on qualified small business stock) on Form 1099-DIV, part or all of that gain may be eligible for the section 1202 exclusion. Filing taxes (For information about the exclusion, see chapter 4 of Publication 550. Filing taxes ) To figure that part, multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Filing taxes The numerator is the part of the child's total capital gain distribution that is section 1202 gain. Filing taxes The denominator is the child's total capital gain distribution. Filing taxes Your section 1202 exclusion is generally 50% of the result, but may be subject to a limit. Filing taxes In some cases, the exclusion is more than 50%. Filing taxes See the instructions for Schedule D for details and information on how to report the exclusion amount. Filing taxes Example. Filing taxes Fred is 6 years old. Filing taxes In 2013, he received dividend income of $2,100, which included $1,575 of ordinary dividends and a $525 capital gain distribution from a mutual fund. Filing taxes (None of the distributions were reported on Form 1099-DIV as unrecaptured section 1250 gain, section 1202 gain, or collectibles (28% rate) gain. Filing taxes ) All of the ordinary dividends are qualified dividends. Filing taxes He has no other income and is not subject to backup withholding. Filing taxes No estimated tax payments were made under his name and social security number. Filing taxes Fred's parents elect to include Fred's income on their tax return instead of filing a return for him. Filing taxes They figure the amount to report on Form 1040, lines 9a and 9b, the amount to report on their Schedule D, line 13, and the amount to report on Form 1040, line 21, as follows. Filing taxes They leave lines 1a and 1b of Form 8814 blank because Fred does not have any interest income. Filing taxes They enter his ordinary dividends of $1,575 on lines 2a and 2b because all of Fred's ordinary dividends are qualified dividends. Filing taxes They enter the amount of Fred's capital gain distributions, $525, on line 3. Filing taxes Next, they add the amounts on lines 1a, 2a, and 3 and enter the result, $2,100, on line 4. Filing taxes They subtract the base amount on line 5, $2,000, from the amount on line 4, $2,100, and enter the result, $100, on line 6. Filing taxes This is the total amount from Form 8814 to be reported on their return. Filing taxes Next, they figure how much of this amount is qualified dividends and how much is capital gain distributions. Filing taxes They divide the amount on line 2b, $1,575, by the amount on line 4, $2,100. Filing taxes They enter the result, . Filing taxes 75, on line 7. Filing taxes They divide the amount on line 3, $525, by the amount on line 4, $2,100. Filing taxes They enter the result, . Filing taxes 25, on line 8. Filing taxes They multiply the amount on line 6, $100, by the decimal on line 7, . Filing taxes 75, and enter the result, $75, on line 9. Filing taxes They multiply the amount on line 6, $100, by the decimal on line 8, . Filing taxes 25, and enter the result, $25, on line 10. Filing taxes They include the amount from line 9, $75, on lines 9a and 9b of their Form 1040 and enter “Form 8814 – $75” on the dotted lines next to lines 9a and 9b. Filing taxes They include the amount from line 10, $25, on line 13 of their Schedule D (Form 1040) and enter “Form 8814 – $25” on the dotted line next to Schedule D, line 13. Filing taxes They enter $100 ($75 + $25) on line 11 and -0- ($100 – $100) on line 12. Filing taxes Because the amount on line 12 is -0-, they do not include any amount from Form 8814 on their Form 1040, line 21. Filing taxes Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Filing taxes This tax is added to the tax figured on your income. Filing taxes This additional tax is the smaller of: 10% x (your child's gross income − $1,000), or $100. Filing taxes Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44, or Form 1040NR, line 42. Filing taxes Check box a on Form 1040, line 44, or Form 1040NR, line 42. Filing taxes Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Filing taxes If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Filing taxes Attach the completed form to the child's Form 1040, Form 1040A, or Form 1040NR. Filing taxes When Form 8615 must be filed. Filing taxes   Form 8615 must be filed for a child if all of the following statements are true. Filing taxes The child's unearned income was more than $2,000. Filing taxes The child is required to file a return for 2013. Filing taxes The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Filing taxes At least one of the child's parents was alive at the end of 2013. Filing taxes The child does not file a joint return for 2013. Filing taxes These conditions are also shown in Figure 2. Filing taxes Certain January 1 birthdays. Filing taxes   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Filing taxes IF a child was born on. Filing taxes . Filing taxes . Filing taxes THEN, at the end of 2013, the child is considered to be. Filing taxes . Filing taxes . Filing taxes January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Filing taxes The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Filing taxes  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Filing taxes  ***Do not use Form 8615 for this child. Filing taxes Figure 2. Filing taxes Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Filing taxes Figure 2. Filing taxes Do You Have To Use Form 8615 To Figure Your Child's Tax? Providing Parental Information (Form 8615, Lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Filing taxes (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Filing taxes ) On line C, check the box for the parent's filing status. Filing taxes See Which Parent's Return To Use, earlier, for information on which parent's return information must be used on Form 8615. Filing taxes Parent with different tax year. Filing taxes   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Filing taxes Example. Filing taxes Kimberly must use her mother's tax and taxable income to complete her Form 8615 for calendar year 2013 (January 1 – December 31). Filing taxes Kimberly's mother files her tax return on a fiscal year basis (July 1 – June 30). Filing taxes Kimberly must use the information on her mother's return for the tax year ending June 30, 2013, to complete her 2013 Form 8615. Filing taxes Parent's return information not known timely. Filing taxes   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Filing taxes   You can use any reasonable estimate. Filing taxes This includes using information from last year's return. Filing taxes If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Filing taxes   When you get the correct information, file an amended return on Form 1040X, Amended U. Filing taxes S. Filing taxes Individual Income Tax Return. Filing taxes Extension of time to file. Filing taxes   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Filing taxes S. Filing taxes Individual Income Tax Return. Filing taxes See the instructions for Form 4868 for details. Filing taxes    An extension of time to file is not an extension of time to pay. Filing taxes You must make an accurate estimate of the tax for 2013. Filing taxes If you do not pay the full amount due by the regular due date, the child will owe interest and may also be charged penalties. Filing taxes See Form 4868 and its instructions. Filing taxes Parent's return information not available. Filing taxes   If a child cannot get the required information about his or her parent's tax return, the child (or the child's legal representative) can request the necessary information from the Internal Revenue Service (IRS). Filing taxes How to request. Filing taxes   After the end of the tax year, send a signed, written request for the information to the Internal Revenue Service Center where the parent's return will be filed. Filing taxes (The IRS cannot process a request received before the end of the tax year. Filing taxes )    You should also consider getting an extension of time to file the child's return, because there may be a delay in getting the requested information. Filing taxes   The request must contain all of the following. Filing taxes A statement that you are making the request to comply with section 1(g) of the Internal Revenue Code and that you have tried to get the information from the parent. Filing taxes Proof of the child's age (for example, a copy of the child's birth certificate). Filing taxes Evidence the child has more than $2,000 of unearned income (for example, a copy of the child's prior year tax return or copies of Forms 1099 for the current year). Filing taxes The name, address, social security number (if known), and filing status (if known) of the parent whose information is to be shown on Form 8615. Filing taxes    A child's legal representative making the request should include a copy of his or her Power of Attorney, such as Form 2848, or proof of legal guardianship. Filing taxes Step 1. Filing taxes Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Filing taxes To do that, use Form 8615, Part I. Filing taxes Line 1 (Unearned Income) If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Filing taxes Adjusted gross income is shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. Filing taxes Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615 must be filed. Filing taxes If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Filing taxes However, use the following worksheet if: the child has excluded any foreign earned income, deducted a loss from self-employment, or has a net operating loss from another year. Filing taxes Alternate Worksheet for Form 8615, Line 1 A. Filing taxes Enter the amount from the child's Form 1040, line 22, or Form 1040NR, line 23   B. Filing taxes Enter the total of any net loss  from self-employment, any net operating loss deduction, any foreign earned income exclusion, and any foreign housing exclusion from the child's Form 1040 or Form 1040NR. Filing taxes Enter this total as a positive number (greater than zero)   C. Filing taxes Add line A and line B and  enter the total   D. Filing taxes Enter the child's earned income plus any amount from the child's Form 1040, line 30, or the child's Form 1040NR, line 30     Generally, the child's earned income is the total of the amounts reported on Form 1040, lines 7, 12, and 18 (if line 12 or 18 is a loss, use zero) or Form 1040NR, lines 8, 13, and 19 (if line 13 or 19 is a loss, use zero)   E. Filing taxes Subtract line D from line C. Filing taxes Enter the result here and on Form 8615, line 1   Unearned income defined. Filing taxes   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed. Filing taxes It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, certain distributions from trusts, and unemployment compensation. Filing taxes Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Filing taxes Nontaxable income. Filing taxes   For this purpose, unearned income includes only amounts the child must include in gross income. Filing taxes Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Filing taxes Capital loss. Filing taxes   A child's capital losses are taken into account in figuring the child's unearned income. Filing taxes Capital losses are first applied against capital gains. Filing taxes If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other unearned income. Filing taxes Any difference over $3,000 is carried to the next year. Filing taxes Income from property received as a gift. Filing taxes   A child's unearned income includes all income produced by property belonging to the child. Filing taxes This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Filing taxes   A child's unearned income includes income produced by property given as a gift to the child. Filing taxes This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Filing taxes Example. Filing taxes Amanda Black, age 13, received the following income. Filing taxes Dividends—$800 Wages—$2,100 Taxable interest—$1,200 Tax-exempt interest—$100 Capital gains—$300 Capital losses—($200) The dividends were qualified dividends on stock given to her by her grandparents. Filing taxes Amanda's unearned income is $2,100. Filing taxes This is the total of the dividends ($800), taxable interest ($1,200), and capital gains reduced by capital losses ($300 − $200 = $100). Filing taxes Her wages are earned (not unearned) income because they are received for work actually performed. Filing taxes Her tax-exempt interest is not included because it is nontaxable. Filing taxes Trust income. Filing taxes   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Filing taxes   However, taxable distributions from a qualified disability trust are considered earned income for the purposes of completing Form 8615. Filing taxes See the Form 8615 instructions for details. Filing taxes Adjustment to income. Filing taxes   In figuring the amount to enter on line 1, the child's unearned income is reduced by any penalty on the early withdrawal of savings. Filing taxes Line 2 (Deductions) If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $2,000 on line 2. Filing taxes If the child itemizes deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29 (or Schedule A (Form 1040NR), line 15), that are directly connected with the production of the unearned income entered on line 1, or $2,000. Filing taxes Directly connected. Filing taxes   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Filing taxes These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Filing taxes    These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Filing taxes Only the amount greater than 2% of the child's adjusted gross income can be deducted. Filing taxes See Publication 529, Miscellaneous Deductions, for more information. Filing taxes Example 1. Filing taxes Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with his unearned income. Filing taxes His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Filing taxes Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly-connected itemized deductions of $300. Filing taxes Example 2. Filing taxes Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Filing taxes She has no other income. Filing taxes She has itemized deductions of $1,050 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with the production of her unearned income. Filing taxes Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Filing taxes The amount on line 2 is $2,050. Filing taxes This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Filing taxes Line 3 Subtract line 2 from line 1 and enter the result on this line. Filing taxes If zero or less, do not complete the rest of the form. Filing taxes However, you must still attach Form 8615 to the child's tax return. Filing taxes Figure the tax on the child's taxable income in the normal manner. Filing taxes Line 4 (Child's Taxable Income) Enter on line 4 the child's taxable income from Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Filing taxes Child files Form 2555 or 2555-EZ. Filing taxes   If the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) is used to figure the child's tax. Filing taxes Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the child's taxable income on Form 8615, line 4. Filing taxes Line 5 (Net Unearned Income) A child's net unearned income cannot be more than his or her taxable income. Filing taxes Enter on Form 8615, line 5, the smaller of line 3 or line 4. Filing taxes This is the child's net unearned income. Filing taxes If zero or less, do not complete the rest of the form. Filing taxes However, you must still attach Form 8615 to the child's tax return. Filing taxes Figure the tax on the child's taxable income in the normal manner. Filing taxes Step 2. Filing taxes Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Filing taxes The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Filing taxes When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Filing taxes For example, do not refigure the medical expense deduction. Filing taxes Figure the tentative tax on Form 8615, lines 6 through 13. Filing taxes Line 6 (Parent's Taxable Income) Enter on line 6 the amount from the parent's Form 1040, line 43; Form 1040A, line 27; Form 1040EZ, line 6; Form 1040NR, line 41; or Form 1040NR-EZ, line 14. Filing taxes If the parent's taxable income is zero or less, enter zero on line 6. Filing taxes Parent files Form 2555 or 2555-EZ. Filing taxes   If the parent files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet in the Form 1040 instructions is used to figure the parent's tax. Filing taxes Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the parent's taxable income, on line 6 of Form 8615. Filing taxes Line 7 (Net Unearned Income of Other Children) If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Filing taxes Do not include the amount from line 5 of the Form 8615 being completed. Filing taxes (The term “other child” means any other child whose Form 8615 uses the tax information of the parent identified on Lines A and B of Form 8615. Filing taxes ) Example. Filing taxes Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Filing taxes The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon—$800 Jerry—$600 Mike—$1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Filing taxes Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Filing taxes Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Filing taxes Other children's information not available. Filing taxes   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Filing taxes Estimates and extensions are discussed earlier under Providing Parental Information (Form 8615, Lines A–C) . Filing taxes Line 8 (Parent's Taxable Income Plus Children's Net Unearned Income) Enter on this line the total of lines 5, 6, and 7. Filing taxes You must determine the amount of net capital gain and qualified dividends included on this line before completing Form 8615, line 9. Filing taxes Net capital gain. Filing taxes   Net capital gain is the smaller of the gain, if any, on Schedule D (Form 1040), line 15, or the gain, if any, on Schedule D, line 16. Filing taxes If Schedule D is not required, it is the amount on Form 1040, line 13; Form 1040A, line 10; or Form 1040NR, line 14. Filing taxes Qualified dividends. Filing taxes   Qualified dividends are those dividends reported on line 9b of Form 1040 or Form 1040A, or line 10b of Form 1040NR. Filing taxes Net capital gain and qualified dividends on line 8. Filing taxes   If neither the child, nor the parent, nor any other child has net capital gain, the net capital gain on line 8 is zero. Filing taxes   If neither the child, nor the parent, nor any other child has qualified dividends, the amount of qualified dividends on line 8 is zero. Filing taxes   If the child, parent, or any other child has net capital gain, figure the amount of net capital gain included on line 8 by adding together the net capital gain amounts included on lines 5, 6, and 7 of Form 8615. Filing taxes   If the child, parent, or any other child has qualified dividends, figure the amount of qualified dividends included on line 8 by adding together the qualified dividend amounts included on lines 5, 6, and 7. Filing taxes   Use the instructions for Form 8615, line 8, including the appropriate Line 5 Worksheet, to find these amounts. Filing taxes See the instructions for Form 8615 for more details. Filing taxes Note. Filing taxes The amount of any net capital gain or qualified dividends is not separately reported on line 8. Filing taxes It is  needed, however, when figuring the tax on line 9. Filing taxes Line 9 (Tax on Parent's Taxable Income Plus Children's Net Unearned Income) Figure the tax on the amount on line 8 using the Tax Table, the Tax Computation Worksheet, the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040, 1040A, or 1040NR instructions), the Schedule D Tax Worksheet (in the Schedule D instructions), or Schedule J (Form 1040), as follows. Filing taxes If line 8 does not include any net capital gain or qualified dividends, use the Tax Table or Tax Computation Worksheet to figure this tax. Filing taxes But if Schedule J, Income Averaging for Farmers and Fishermen, is used to figure the tax on the parent's return, use it to figure this tax. Filing taxes If line 8 includes any net capital gain or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet to figure this tax. Filing taxes For details, see the instructions for Form 8615, line 9. Filing taxes However, if the child, parent, or any other child has 28% rate gain or unrecaptured section 1250 gain, use the Schedule D Tax Worksheet. Filing taxes But if Schedule J is used to figure the tax on the parent's return, use it to figure this tax. Filing taxes Child files Form 2555 or 2555-EZ. Filing taxes   If line 8 includes any net capital gain or qualified dividends and the child, or any other child filing Form 8615, also files Form 2555 or 2555-EZ, use Using the Schedule D Tax Worksheet for line 9 tax, next, to figure the line 9 tax. Filing taxes Using the Schedule D Tax Worksheet for line 9 tax. Filing taxes    Use the Schedule D Tax Worksheet (in the Schedule D instructions) to figure the line 9 tax on Form 8615 if the child, parent, or any other child has unrecaptured section 1250 gain or 28% rate gain. Filing taxes If you must use the Schedule D Tax Worksheet, first complete any Schedule D and any actual Schedule D Tax Worksheet required for the child, parent, or any other child. Filing taxes Then figure the line 9 tax using another Schedule D Tax Worksheet. Filing taxes (Do not attach this Schedule D Tax Worksheet to the child's return. Filing taxes )   Complete this Schedule D Tax Worksheet as follows. Filing taxes On line 1, enter the amount from Form 8615, line 8. Filing taxes On line 2, enter the qualified dividends included on Form 8615, line 8. Filing taxes (See the earlier discussion for line 8. Filing taxes ) On line 3, enter the total of the amounts, if any, on line 4g of all Forms 4952 filed by the child, parent, or any other child. Filing taxes On line 4, enter the total of the amounts, if any, on line 4e of all Forms 4952 filed by the child, parent, or any other child. Filing taxes If applicable, include instead the smaller amount entered on the dotted line next to line 4e. Filing taxes On lines 5 and 6, follow the worksheet instructions. Filing taxes On line 7, enter the net capital gain included on Form 8615, line 8. Filing taxes (See the earlier discussion for line 8. Filing taxes ) On lines 8 through 10, follow the worksheet instructions. Filing taxes On line 11, enter zero if neither the child, nor the parent, nor any other child has unrecaptured section 1250 gain (Schedule D, line 19) or 28% rate gain (Schedule D, line 18). Filing taxes Otherwise, enter the amount of unrecaptured section 1250 gain and 28% rate gain included in the net capital gain on line 8 of Form 8615. Filing taxes Figure these amounts as explained later under Figuring unrecaptured section 1250 gain (line 11) and Figuring 28% rate gain (line 11). Filing taxes If the Foreign Earned Income Tax Worksheet was used to figure the parent's tax or the tax of any child, go to step 10 below. Filing taxes Otherwise, skip steps 10, 11, and 12 below, and go to step 13. Filing taxes Determine whether there is a line 8 capital gain excess as follows. Filing taxes Add the amounts on line 2 of all Foreign Earned Income Tax Worksheets completed by the parent or any child for whom Form 8615 is filed. Filing taxes (But for each child do not add more than the excess, if any, of the amount on line 5 of the child's Form 8615 over the child's taxable income on Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Filing taxes ) Subtract (a) from the amount on line 1 of this Schedule D Tax Worksheet. Filing taxes Subtract (b) from the amount on line 10 of this Schedule D Tax Worksheet. Filing taxes If the result is more than zero, that amount is the line 8 capital gain excess. Filing taxes If the result is zero or less, there is no line 8 capital gain excess. Filing taxes If there is no line 8 capital gain excess, skip step 12 below and go to step 13. Filing taxes If there is a line 8 capital gain excess, complete a second Schedule D Tax Worksheet as instructed above and in step 13, but in its entirety and with the following additional modifications. Filing taxes (These modifications are to be made only for purposes of filling out this additional Schedule D Tax Worksheet. Filing taxes ) Reduce the amount you would otherwise enter on line 9 (but not below zero) by the line 8 capital gain excess. Filing taxes Reduce the amount you would otherwise enter on line 6 (but not below zero) by any of the line 8 capital gain excess not used in (a) above. Filing taxes If the child, parent, or any other child has 28% rate gain, reduce the amount you would otherwise enter on line 8 of Worksheet 1 for Line 11 of the Schedule D Tax Worksheet – 28% Rate Gain (Line 9 Tax), shown later, (but not below zero) by the line 8 capital gain excess, and refigure the amount on line 11 of this Schedule D Tax Worksheet. Filing taxes If the child, parent, or any other child has unrecaptured section 1250 gain, reduce the amount you would otherwise enter on line 8 of Worksheet 2 for Line 11 of the Schedule D Tax Worksheet – Unrecaptured Section 1250 Gain (Line 9 Tax) (but not below zero) by the line 8 capital gain excess not used in 12(c), and refigure the amount on line 11 of this Schedule D Tax Worksheet. Filing taxes Complete lines 12 through 45 following the worksheet instructions. Filing taxes Use the parent's filing status to complete lines 15, 42, and 44. Filing taxes Enter the amount from line 45 of this Schedule D Tax Worksheet on Form 8615, line 9, and check the box on that line
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Non-filer Investigations - Criminal Investigation (CI)

Overview
Taxpayers who fail to file income tax returns and pay taxes pose a serious threat to tax administration and the American economy.

Who Must File
All citizens must comply with the requirements of the tax law to file returns and pay taxes.

Facts & Fiction of Frivolous Arguments
The 16th Amendment was ratified on February 3, 1913 giving Congress the power "to lay and collect taxes."

IRS Warns of Frivolous Tax Arguments
IRS issued Press Releases that summarize several cases where the taxpayer was fined or penalized for frivolous contentions.

Department of Justice Issues Injunction
The Department of Justice has issued several injunctions against promoters of illegal tax plans or shelters that urge taxpayer to violate the tax laws.

Statistical Data
Enforcement statistics on investigations initiated, prosecutions recommended, indictments, sentenced investigations and months to serve in prison.

Examples of Non-filer Investigations
Examples are written from public record documents filed in the district courts where the case was prosecuted.

 


Criminal Enforcement Home Page

How to Report Suspected Tax Fraud Activities

Page Last Reviewed or Updated: 30-Oct-2013

The Filing Taxes

Filing taxes 2. Filing taxes   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Filing taxes 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Filing taxes Deduction may depend on your type of business. Filing taxes Exception for events that benefit charitable organizations. Filing taxes Food and beverages in skybox seats. Filing taxes What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Filing taxes You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Filing taxes The rules and definitions are summarized in Table 2-1 . Filing taxes You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Filing taxes Directly-related test. Filing taxes Associated test. Filing taxes Both of these tests are explained later. Filing taxes An ordinary expense is one that is common and accepted in your trade or business. Filing taxes A necessary expense is one that is helpful and appropriate for your business. Filing taxes An expense does not have to be required to be considered necessary. Filing taxes The amount you can deduct for entertainment expenses may be limited. Filing taxes Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Filing taxes This limit is discussed later under 50% Limit. Filing taxes Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. Filing taxes Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Filing taxes Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Filing taxes See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Filing taxes You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Filing taxes It is not necessary to devote more time to business than to entertainment. Filing taxes However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Filing taxes Table 2-1. Filing taxes When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Filing taxes Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Filing taxes An ordinary expense is one that is common and accepted in your trade or business. Filing taxes A necessary expense is one that is helpful and appropriate. Filing taxes Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Filing taxes   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Filing taxes Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Filing taxes You cannot deduct expenses that are lavish or extravagant under the circumstances. Filing taxes You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Filing taxes You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Filing taxes Clear business setting. Filing taxes   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. Filing taxes The following situations are examples of entertainment in a clear business setting. Filing taxes Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Filing taxes Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). Filing taxes Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. Filing taxes An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. Filing taxes Expenses not considered directly related. Filing taxes   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. Filing taxes The following are examples of situations where there are substantial distractions. Filing taxes A meeting or discussion at a nightclub, theater, or sporting event. Filing taxes A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Filing taxes A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. Filing taxes Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Filing taxes To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). Filing taxes Associated with trade or business. Filing taxes   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. Filing taxes The purpose may be to get new business or to encourage the continuation of an existing business relationship. Filing taxes Substantial business discussion. Filing taxes   Whether a business discussion is substantial depends on the facts of each case. Filing taxes A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. Filing taxes   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. Filing taxes It is not necessary that you devote more time to business than to entertainment. Filing taxes You do not have to discuss business during the meal or entertainment. Filing taxes Meetings at conventions. Filing taxes   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. Filing taxes However, your reason for attending the convention or meeting must be to further your trade or business. Filing taxes The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. Filing taxes Directly before or after business discussion. Filing taxes   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. Filing taxes   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Filing taxes Among the facts to consider are the place, date, and duration of the business discussion. Filing taxes If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. Filing taxes Example. Filing taxes A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Filing taxes If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. Filing taxes The expense meets the associated test. Filing taxes 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Filing taxes (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Filing taxes See Individuals subject to “hours of service” limits , later. Filing taxes ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Filing taxes Figure A summarizes the general rules explained in this section. Filing taxes The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Filing taxes Included expenses. Filing taxes   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Filing taxes However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Filing taxes Figure A. Filing taxes Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Filing taxes See Exceptions to the 50% Limit . Filing taxes Please click here for the text description of the image. Filing taxes Figure A. Filing taxes Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Filing taxes   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. Filing taxes   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Filing taxes It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Filing taxes It also applies to the cost of meals included in deductible educational expenses. Filing taxes When to apply the 50% limit. Filing taxes   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Filing taxes You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. Filing taxes Example 1. Filing taxes You spend $200 for a business-related meal. Filing taxes If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Filing taxes Your deduction cannot be more than $45 (50% × $90). Filing taxes Example 2. Filing taxes You purchase two tickets to a concert and give them to a client. Filing taxes You purchased the tickets through a ticket agent. Filing taxes You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Filing taxes Your deduction cannot be more than $80 (50% × $160). Filing taxes Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Filing taxes Figure A can help you determine if the 50% limit applies to you. Filing taxes Expenses not subject to 50% limit. Filing taxes   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Filing taxes 1 - Employee's reimbursed expenses. Filing taxes   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Filing taxes Accountable plans are discussed in chapter 6. Filing taxes 2 - Self-employed. Filing taxes   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. Filing taxes You have these expenses as an independent contractor. Filing taxes Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Filing taxes You provide adequate records of these expenses to your customer or client. Filing taxes (See chapter 5 . Filing taxes )   In this case, your client or customer is subject to the 50% limit on the expenses. Filing taxes Example. Filing taxes You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Filing taxes You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Filing taxes If the client can deduct the expenses, the client is subject to the 50% limit. Filing taxes If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. Filing taxes 3 - Advertising expenses. Filing taxes   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Filing taxes For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. Filing taxes 4 - Sale of meals or entertainment. Filing taxes   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. Filing taxes For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. Filing taxes 5 - Charitable sports event. Filing taxes   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. Filing taxes For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Filing taxes Individuals subject to “hours of service” limits. Filing taxes   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Filing taxes The percentage is 80%. Filing taxes   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Filing taxes Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Filing taxes Interstate truck operators and bus drivers who are under Department of Transportation regulations. Filing taxes Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Filing taxes Certain merchant mariners who are under Coast Guard regulations. Filing taxes What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Filing taxes Entertainment. Filing taxes   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Filing taxes Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Filing taxes   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. Filing taxes A meal as a form of entertainment. Filing taxes   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Filing taxes A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Filing taxes To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Filing taxes    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Filing taxes    Meals sold in the normal course of your business are not considered entertainment. Filing taxes Deduction may depend on your type of business. Filing taxes   Your kind of business may determine if a particular activity is considered entertainment. Filing taxes For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. Filing taxes This is because fashion shows are typical in your business. Filing taxes But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. Filing taxes Separating costs. Filing taxes   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Filing taxes You must have a reasonable basis for making this allocation. Filing taxes For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Filing taxes Taking turns paying for meals or entertainment. Filing taxes   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Filing taxes Lavish or extravagant expenses. Filing taxes   You cannot deduct expenses for entertainment that are lavish or extravagant. Filing taxes An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Filing taxes Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Filing taxes Allocating between business and nonbusiness. Filing taxes   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Filing taxes You can deduct only the business part. Filing taxes If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. Filing taxes Example. Filing taxes You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Filing taxes Only 4/11 of the expense qualifies as a business entertainment expense. Filing taxes You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Filing taxes Trade association meetings. Filing taxes   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Filing taxes These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Filing taxes Entertainment tickets. Filing taxes   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Filing taxes For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Filing taxes Exception for events that benefit charitable organizations. Filing taxes   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Filing taxes You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. Filing taxes The event's main purpose is to benefit a qualified charitable organization. Filing taxes The entire net proceeds go to the charity. Filing taxes The event uses volunteers to perform substantially all the event's work. Filing taxes    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. Filing taxes Example 1. Filing taxes You purchase tickets to a golf tournament organized by the local volunteer fire company. Filing taxes All net proceeds will be used to buy new fire equipment. Filing taxes The volunteers will run the tournament. Filing taxes You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Filing taxes Example 2. Filing taxes You purchase tickets to a college football game through a ticket broker. Filing taxes After having a business discussion, you take a client to the game. Filing taxes Net proceeds from the game go to colleges that qualify as charitable organizations. Filing taxes However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. Filing taxes Skyboxes and other private luxury boxes. Filing taxes   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. Filing taxes   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Filing taxes For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Filing taxes All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Filing taxes   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. Filing taxes Example. Filing taxes You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Filing taxes The cost of regular nonluxury box seats at each event is $30 a seat. Filing taxes You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Filing taxes Food and beverages in skybox seats. Filing taxes   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. Filing taxes The amounts separately stated for food and beverages must be reasonable. Filing taxes You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Filing taxes What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Filing taxes Club dues and membership fees. Filing taxes   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Filing taxes This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. Filing taxes   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Filing taxes You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Filing taxes Entertainment facilities. Filing taxes   Generally, you cannot deduct any expense for the use of an entertainment facility. Filing taxes This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Filing taxes   An entertainment facility is any property you own, rent, or use for entertainment. Filing taxes Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Filing taxes Out-of-pocket expenses. Filing taxes   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Filing taxes These are not expenses for the use of an entertainment facility. Filing taxes However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Filing taxes Expenses for spouses. Filing taxes   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Filing taxes However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. Filing taxes Example. Filing taxes You entertain a customer. Filing taxes The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Filing taxes The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Filing taxes You can deduct the cost of entertaining the customer's spouse. Filing taxes If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. Filing taxes Gift or entertainment. Filing taxes   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Filing taxes However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. Filing taxes   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Filing taxes You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Filing taxes   You can change your treatment of the tickets at a later date by filing an amended return. Filing taxes Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Filing taxes   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Filing taxes You cannot choose, in this case, to treat the tickets as a gift. Filing taxes Prev  Up  Next   Home   More Online Publications