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Free State E File

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Free State E File

Free state e file 8. Free state e file   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Free state e file Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Free state e file Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Free state e file Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Free state e file Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Free state e file This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Free state e file A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Free state e file An exchange is a transfer of property for other property or services. Free state e file Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Free state e file If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Free state e file If the adjusted basis of the property is more than the amount you realize, you will have a loss. Free state e file Basis and adjusted basis. Free state e file   The basis of property you buy is usually its cost. Free state e file The adjusted basis of property is basis plus certain additions and minus certain deductions. Free state e file See chapter 6 for more information about basis and adjusted basis. Free state e file Amount realized. Free state e file   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Free state e file The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Free state e file   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Free state e file Amount recognized. Free state e file   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Free state e file A recognized gain is a gain you must include in gross income and report on your income tax return. Free state e file A recognized loss is a loss you deduct from gross income. Free state e file However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Free state e file See Like-Kind Exchanges next. Free state e file Also, a loss from the disposition of property held for personal use is not deductible. Free state e file Like-Kind Exchanges Certain exchanges of property are not taxable. Free state e file This means any gain from the exchange is not recognized, and any loss cannot be deducted. Free state e file Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Free state e file The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free state e file To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Free state e file Qualifying property. Free state e file Like-kind property. Free state e file These two requirements are discussed later. Free state e file Multiple-party transactions. Free state e file   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Free state e file Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Free state e file Receipt of title from third party. Free state e file   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Free state e file Basis of property received. Free state e file   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Free state e file See chapter 6 for more information. Free state e file Money paid. Free state e file   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Free state e file The basis of the property received is the basis of the property given up, increased by the money paid. Free state e file Example. Free state e file You traded an old tractor with an adjusted basis of $15,000 for a new one. Free state e file The new tractor costs $300,000. Free state e file You were allowed $80,000 for the old tractor and paid $220,000 cash. Free state e file You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Free state e file If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Free state e file In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Free state e file Reporting the exchange. Free state e file   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Free state e file The Instructions for Form 8824 explain how to report the details of the exchange. Free state e file   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Free state e file You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Free state e file See chapter 9 for more information. Free state e file Qualifying property. Free state e file   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Free state e file Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Free state e file Nonqualifying property. Free state e file   The rules for like-kind exchanges do not apply to exchanges of the following property. Free state e file Property you use for personal purposes, such as your home and family car. Free state e file Stock in trade or other property held primarily for sale, such as crops and produce. Free state e file Stocks, bonds, or notes. Free state e file However, see Qualifying property above. Free state e file Other securities or evidences of indebtedness, such as accounts receivable. Free state e file Partnership interests. Free state e file However, you may have a nontaxable exchange under other rules. Free state e file See Other Nontaxable Exchanges in chapter 1 of Publication 544. Free state e file Like-kind property. Free state e file   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Free state e file Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Free state e file Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Free state e file For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Free state e file   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Free state e file An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Free state e file The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Free state e file For example, the exchange of a bull for a cow is not a like-kind exchange. Free state e file An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Free state e file    Note. Free state e file Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Free state e file Personal property. Free state e file   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Free state e file Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Free state e file Property classified in any General Asset Class may not be classified within a Product Class. Free state e file Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Free state e file General Asset Classes. Free state e file   General Asset Classes describe the types of property frequently used in many businesses. Free state e file They include, but are not limited to, the following property. Free state e file Office furniture, fixtures, and equipment (asset class 00. Free state e file 11). Free state e file Information systems, such as computers and peripheral equipment (asset class 00. Free state e file 12). Free state e file Data handling equipment except computers (asset class 00. Free state e file 13). Free state e file Automobiles and taxis (asset class 00. Free state e file 22). Free state e file Light general purpose trucks (asset class 00. Free state e file 241). Free state e file Heavy general purpose trucks (asset class 00. Free state e file 242). Free state e file Tractor units for use over-the-road (asset class 00. Free state e file 26). Free state e file Trailers and trailer-mounted containers (asset class 00. Free state e file 27). Free state e file Industrial steam and electric generation and/or distribution systems (asset class 00. Free state e file 4). Free state e file Product Classes. Free state e file   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Free state e file The latest version of the manual can be accessed at www. Free state e file census. Free state e file gov/eos/www/naics/. Free state e file Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Free state e file ntis. Free state e file gov/products/naics. Free state e file aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Free state e file A CD-ROM version with search and retrieval software is also available from NTIS. Free state e file    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Free state e file Partially nontaxable exchange. Free state e file   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Free state e file You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Free state e file A loss is not deductible. Free state e file Example 1. Free state e file You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Free state e file You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Free state e file However, only $10,000, the cash received, is recognized (included in income). Free state e file Example 2. Free state e file Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Free state e file Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Free state e file Example 3. Free state e file Assume in Example 1 that the FMV of the land you received was only $15,000. Free state e file Your $5,000 loss is not recognized. Free state e file Unlike property given up. Free state e file   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Free state e file The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Free state e file Like-kind exchanges between related persons. Free state e file   Special rules apply to like-kind exchanges between related persons. Free state e file These rules affect both direct and indirect exchanges. Free state e file Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Free state e file The gain or loss on the original exchange must be recognized as of the date of the later disposition. Free state e file The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Free state e file Related persons. Free state e file   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Free state e file ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Free state e file   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Free state e file Example. Free state e file You used a grey pickup truck in your farming business. Free state e file Your sister used a red pickup truck in her landscaping business. Free state e file In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Free state e file At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Free state e file The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Free state e file You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Free state e file Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Free state e file However, because this was a like-kind exchange, you recognized no gain. Free state e file Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Free state e file She recognized gain only to the extent of the money she received, $200. Free state e file Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Free state e file In 2013, you sold the red pickup truck to a third party for $7,000. Free state e file Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Free state e file On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Free state e file You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Free state e file In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Free state e file Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Free state e file Exceptions to the rules for related persons. Free state e file   The following property dispositions are excluded from these rules. Free state e file Dispositions due to the death of either related person. Free state e file Involuntary conversions. Free state e file Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Free state e file Multiple property exchanges. Free state e file   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Free state e file However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Free state e file Transfer and receive properties in two or more exchange groups. Free state e file Transfer or receive more than one property within a single exchange group. Free state e file   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Free state e file Deferred exchange. Free state e file   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Free state e file A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Free state e file The property you receive is replacement property. Free state e file The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Free state e file In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Free state e file   For more information see Deferred Exchanges in chapter 1 of Publication 544. Free state e file Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Free state e file This rule does not apply if the recipient is a nonresident alien. Free state e file Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Free state e file Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Free state e file The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Free state e file This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Free state e file This rule applies for determining loss as well as gain. Free state e file Any gain recognized on a transfer in trust increases the basis. Free state e file For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Free state e file Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Free state e file You may also have a capital gain if your section 1231 transactions result in a net gain. Free state e file See Section 1231 Gains and Losses in  chapter 9. Free state e file To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Free state e file Your net capital gains may be taxed at a lower tax rate than ordinary income. Free state e file See Capital Gains Tax Rates , later. Free state e file Your deduction for a net capital loss may be limited. Free state e file See Treatment of Capital Losses , later. Free state e file Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Free state e file The following items are examples of capital assets. Free state e file A home owned and occupied by you and your family. Free state e file Household furnishings. Free state e file A car used for pleasure. Free state e file If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Free state e file Stocks and bonds. Free state e file However, there are special rules for gains on qualified small business stock. Free state e file For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Free state e file Personal-use property. Free state e file   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Free state e file Loss from the sale or exchange of personal-use property is not deductible. Free state e file You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Free state e file For information on casualties and thefts, see chapter 11. Free state e file Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Free state e file The time you own an asset before disposing of it is the holding period. Free state e file If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Free state e file Report it in Part I of Schedule D (Form 1040). Free state e file If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Free state e file Report it in Part II of Schedule D (Form 1040). Free state e file Holding period. Free state e file   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Free state e file The day you disposed of the property is part of your holding period. Free state e file Example. Free state e file If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Free state e file If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Free state e file Inherited property. Free state e file   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Free state e file This rule does not apply to livestock used in a farm business. Free state e file See Holding period under Livestock , later. Free state e file Nonbusiness bad debt. Free state e file   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Free state e file See chapter 4 of Publication 550. Free state e file Nontaxable exchange. Free state e file   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Free state e file That is, it begins on the same day as your holding period for the old property. Free state e file Gift. Free state e file   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Free state e file Real property. Free state e file   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Free state e file   However, taking possession of real property under an option agreement is not enough to start the holding period. Free state e file The holding period cannot start until there is an actual contract of sale. Free state e file The holding period of the seller cannot end before that time. Free state e file Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Free state e file Net short-term capital gain or loss. Free state e file   Combine your short-term capital gains and losses. Free state e file Do this by adding all of your short-term capital gains. Free state e file Then add all of your short-term capital losses. Free state e file Subtract the lesser total from the greater. Free state e file The difference is your net short-term capital gain or loss. Free state e file Net long-term capital gain or loss. Free state e file   Follow the same steps to combine your long-term capital gains and losses. Free state e file The result is your net long-term capital gain or loss. Free state e file Net gain. Free state e file   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Free state e file However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Free state e file See Capital Gains Tax Rates , later. Free state e file Net loss. Free state e file   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Free state e file But there are limits on how much loss you can deduct and when you can deduct it. Free state e file See Treatment of Capital Losses next. Free state e file Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Free state e file For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Free state e file If your other income is low, you may not be able to use the full $3,000. Free state e file The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Free state e file Capital loss carryover. Free state e file   Generally, you have a capital loss carryover if either of the following situations applies to you. Free state e file Your net loss on Schedule D (Form 1040), is more than the yearly limit. Free state e file Your taxable income without your deduction for exemptions is less than zero. Free state e file If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Free state e file    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Free state e file Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Free state e file These lower rates are called the maximum capital gains rates. Free state e file The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Free state e file See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Free state e file Also see Publication 550. Free state e file Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Free state e file A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Free state e file Property held for sale in the ordinary course of your farm business. Free state e file   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Free state e file Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Free state e file The treatment of this property is discussed in chapter 3. Free state e file Land and depreciable properties. Free state e file   Land and depreciable property you use in farming are not capital assets. Free state e file Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Free state e file However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Free state e file The sales of these business assets are reported on Form 4797. Free state e file See chapter 9 for more information. Free state e file Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Free state e file Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Free state e file A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Free state e file The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Free state e file A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Free state e file Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Free state e file Hedging transactions. Free state e file Transactions that are not hedging transactions. Free state e file Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Free state e file There is a limit on the amount of capital losses you can deduct each year. Free state e file Hedging transactions are not subject to the mark-to-market rules. Free state e file If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Free state e file They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Free state e file The gain or loss on the termination of these hedges is generally ordinary gain or loss. Free state e file Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Free state e file Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Free state e file Examples include fuel and feed. Free state e file If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Free state e file Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Free state e file It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Free state e file Retain the identification of each hedging transaction with your books and records. Free state e file Also, identify the item(s) or aggregate risk that is being hedged in your records. Free state e file Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Free state e file For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Free state e file Accounting methods for hedging transactions. Free state e file   The accounting method you use for a hedging transaction must clearly reflect income. Free state e file This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Free state e file There are requirements and limits on the method you can use for certain hedging transactions. Free state e file See Regulations section 1. Free state e file 446-4(e) for those requirements and limits. Free state e file   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Free state e file Cash method. Free state e file Farm-price method. Free state e file Unit-livestock-price method. Free state e file   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Free state e file   Your books and records must describe the accounting method used for each type of hedging transaction. Free state e file They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Free state e file You must make the additional identification no more than 35 days after entering into the hedging transaction. Free state e file Example of a hedging transaction. Free state e file   You file your income tax returns on the cash method. Free state e file On July 2 you anticipate a yield of 50,000 bushels of corn this year. Free state e file The December futures price is $5. Free state e file 75 a bushel, but there are indications that by harvest time the price will drop. Free state e file To protect yourself against a drop in the price, you enter into the following hedging transaction. Free state e file You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Free state e file 75 a bushel. Free state e file   The price did not drop as anticipated but rose to $6 a bushel. Free state e file In November, you sell your crop at a local elevator for $6 a bushel. Free state e file You also close out your futures position by buying ten December contracts for $6 a bushel. Free state e file You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Free state e file   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Free state e file Your loss on the hedge is 25 cents a bushel. Free state e file In effect, the net selling price of your corn is $5. Free state e file 75 a bushel. Free state e file   Report the results of your futures transactions and your sale of corn separately on Schedule F. Free state e file See the instructions for the 2013 Schedule F (Form 1040). Free state e file   The loss on your futures transactions is $13,900, figured as follows. Free state e file July 2 - Sold December corn futures (50,000 bu. Free state e file @$5. Free state e file 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Free state e file @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Free state e file   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Free state e file × $6). Free state e file Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Free state e file   Assume you were right and the price went down 25 cents a bushel. Free state e file In effect, you would still net $5. Free state e file 75 a bushel, figured as follows. Free state e file Sold cash corn, per bushel $5. Free state e file 50 Gain on hedge, per bushel . Free state e file 25 Net price, per bushel $5. Free state e file 75       The gain on your futures transactions would have been $11,100, figured as follows. Free state e file July 2 - Sold December corn futures (50,000 bu. Free state e file @$5. Free state e file 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Free state e file @$5. Free state e file 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Free state e file   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Free state e file Livestock This part discusses the sale or exchange of livestock used in your farm business. Free state e file Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Free state e file However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Free state e file See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Free state e file The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Free state e file The sale of this livestock is reported on Schedule F. Free state e file See chapter 3. Free state e file Also, special rules apply to sales or exchanges caused by weather-related conditions. Free state e file See chapter 3. Free state e file Holding period. Free state e file   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Free state e file Livestock. Free state e file   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Free state e file Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Free state e file Livestock used in farm business. Free state e file   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Free state e file The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Free state e file An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Free state e file However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Free state e file Example 1. Free state e file You discover an animal that you intend to use for breeding purposes is sterile. Free state e file You dispose of it within a reasonable time. Free state e file This animal was held for breeding purposes. Free state e file Example 2. Free state e file You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Free state e file These young animals were held for breeding or dairy purposes. Free state e file Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Free state e file See Sales Caused by Weather-Related Conditions in chapter 3. Free state e file Example 3. Free state e file You are in the business of raising hogs for slaughter. Free state e file Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Free state e file You sell the brood sows after obtaining the litter. Free state e file Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Free state e file Example 4. Free state e file You are in the business of raising registered cattle for sale to others for use as breeding cattle. Free state e file The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Free state e file Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Free state e file Such use does not demonstrate that you are holding the cattle for breeding purposes. Free state e file However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Free state e file The same applies to hog and sheep breeders. Free state e file Example 5. Free state e file You breed, raise, and train horses for racing purposes. Free state e file Every year you cull horses from your racing stable. Free state e file In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Free state e file These horses are all considered held for sporting purposes. Free state e file Figuring gain or loss on the cash method. Free state e file   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Free state e file Raised livestock. Free state e file   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Free state e file Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Free state e file The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Free state e file However, see Uniform Capitalization Rules in chapter 6. Free state e file Purchased livestock. Free state e file   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Free state e file Example. Free state e file A farmer sold a breeding cow on January 8, 2013, for $1,250. Free state e file Expenses of the sale were $125. Free state e file The cow was bought July 2, 2009, for $1,300. Free state e file Depreciation (not less than the amount allowable) was $867. Free state e file Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Free state e file Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Free state e file Any loss on the disposition of such property is treated as a long-term capital loss. Free state e file Converted wetland. Free state e file   This is generally land that was drained or filled to make the production of agricultural commodities possible. Free state e file It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Free state e file   A wetland (before conversion) is land that meets all the following conditions. Free state e file It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Free state e file It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Free state e file It supports, under normal circumstances, mostly plants that grow in saturated soil. Free state e file Highly erodible cropland. Free state e file   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Free state e file Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Free state e file Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Free state e file Successor. Free state e file   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Free state e file Timber Standing timber you held as investment property is a capital asset. Free state e file Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Free state e file If you held the timber primarily for sale to customers, it is not a capital asset. Free state e file Gain or loss on its sale is ordinary business income or loss. Free state e file It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Free state e file See the Instructions for Schedule F (Form 1040). Free state e file Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Free state e file Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Free state e file , are ordinary farm income and expenses reported on Schedule F. Free state e file Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Free state e file Timber considered cut. Free state e file   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Free state e file This is true whether the timber is cut under contract or whether you cut it yourself. Free state e file Christmas trees. Free state e file   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Free state e file They qualify for both rules discussed below. Free state e file Election to treat cutting as a sale or exchange. Free state e file   Under the general rule, the cutting of timber results in no gain or loss. Free state e file It is not until a sale or exchange occurs that gain or loss is realized. Free state e file But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Free state e file Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Free state e file Any later sale results in ordinary business income or loss. Free state e file See the example below. Free state e file   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Free state e file Making the election. Free state e file   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Free state e file You do not have to make the election in the first year you cut the timber. Free state e file You can make it in any year to which the election would apply. Free state e file If the timber is partnership property, the election is made on the partnership return. Free state e file This election cannot be made on an amended return. Free state e file   Once you have made the election, it remains in effect for all later years unless you revoke it. Free state e file Election under section 631(a) may be revoked. Free state e file   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Free state e file The prior election (and revocation) is disregarded for purposes of making a subsequent election. Free state e file See Form T (Timber), Forest Activities Schedule, for more information. Free state e file Gain or loss. Free state e file   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Free state e file   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Free state e file Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Free state e file 611-3. Free state e file   Depletion of timber is discussed in chapter 7. Free state e file Example. Free state e file   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Free state e file It had an adjusted basis for depletion of $40 per MBF. Free state e file You are a calendar year taxpayer. Free state e file On January 1, 2013, the timber had a FMV of $350 per MBF. Free state e file It was cut in April for sale. Free state e file On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Free state e file You report the difference between the FMV and your adjusted basis for depletion as a gain. Free state e file This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Free state e file You figure your gain as follows. Free state e file FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Free state e file Outright sales of timber. Free state e file   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Free state e file However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Free state e file Cutting contract. Free state e file   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Free state e file You are the owner of the timber. Free state e file You held the timber longer than 1 year before its disposal. Free state e file You kept an economic interest in the timber. Free state e file   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Free state e file   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Free state e file Include this amount on Form 4797 along with your other section 1231 gains or losses. Free state e file Date of disposal. Free state e file   The date of disposal is the date the timber is cut. Free state e file However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Free state e file   This election applies only to figure the holding period of the timber. Free state e file It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Free state e file   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Free state e file The statement must identify the advance payments subject to the election and the contract under which they were made. Free state e file   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Free state e file Attach the statement to the amended return and write “Filed pursuant to section 301. Free state e file 9100-2” at the top of the statement. Free state e file File the amended return at the same address the original return was filed. Free state e file Owner. Free state e file   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Free state e file You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Free state e file Tree stumps. Free state e file   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Free state e file Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Free state e file However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Free state e file Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Free state e file   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Free state e file Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Free state e file If you have a gain from the sale, you may be allowed to exclude the gain on your home. Free state e file For more information, see Publication 523, Selling Your Home. Free state e file The gain on the sale of your business property is taxable. Free state e file A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Free state e file Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Free state e file See chapter 9. Free state e file Losses from personal-use property, other than casualty or theft losses, are not deductible. Free state e file If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Free state e file See chapter 10 for information about installment sales. Free state e file When you sell your farm, the gain or loss on each asset is figured separately. Free state e file The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Free state e file Each of the assets sold must be classified as one of the following. Free state e file Capital asset held 1 year or less. Free state e file Capital asset held longer than 1 year. Free state e file Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Free state e file Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Free state e file Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Free state e file Allocation of consideration paid for a farm. Free state e file   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Free state e file The residual method is required only if the group of assets sold constitutes a trade or business. Free state e file This method determines gain or loss from the transfer of each asset. Free state e file It also determines the buyer's basis in the business assets. Free state e file For more information, see Sale of a Business in chapter 2 of Publication 544. Free state e file Property used in farm operation. Free state e file   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Free state e file Recognized gains and losses on business property must be reported on your return for the year of the sale. Free state e file If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Free state e file Example. Free state e file You sell your farm, including your main home, which you have owned since December 2001. Free state e file You realize gain on the sale as follows. Free state e file   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Free state e file All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Free state e file Treat the balance as section 1231 gain. Free state e file The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Free state e file Partial sale. Free state e file   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Free state e file You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Free state e file For a detailed discussion on installment sales, see Publication 544. Free state e file Adjusted basis of the part sold. Free state e file   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Free state e file , on the part sold. Free state e file If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Free state e file Example. Free state e file You bought a 600-acre farm for $700,000. Free state e file The farm included land and buildings. Free state e file The purchase contract designated $600,000 of the purchase price to the land. Free state e file You later sold 60 acres of land on which you had installed a fence. Free state e file Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Free state e file Use this amount to determine your gain or loss on the sale of the 60 acres. Free state e file Assessed values for local property taxes. Free state e file   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Free state e file Example. Free state e file Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Free state e file However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Free state e file The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Free state e file Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Free state e file The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Free state e file Sale of your home. Free state e file   Your home is a capital asset and not property used in the trade or business of farming. Free state e file If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Free state e file Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Free state e file   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Free state e file For more information on basis, see chapter 6. Free state e file More information. Free state e file   For more information on selling your home, see Publication 523. Free state e file Gain from condemnation. Free state e file   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Free state e file However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Free state e file Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Free state e file The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Free state e file This is true even if you voluntarily return the property to the lender. Free state e file You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Free state e file Buyer's (borrower's) gain or loss. Free state e file   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Free state e file The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Free state e file See Determining Gain or Loss , earlier. Free state e file Worksheet 8-1. Free state e file Worksheet for Foreclosures andRepossessions Part 1. Free state e file Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Free state e file Complete this part only if you were personally liable for the debt. Free state e file Otherwise, go to Part 2. Free state e file   1. Free state e file Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Free state e file Enter the Fair Market Value of the transferred property   3. Free state e file Ordinary income from cancellation of debt upon foreclosure or repossession. Free state e file * Subtract line 2 from line 1. Free state e file If zero or less, enter -0-   Part 2. Free state e file Figure your gain or loss from foreclosure or repossession. Free state e file   4. Free state e file If you completed Part 1, enter the smaller of line 1 or line 2. Free state e file If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Free state e file Enter any proceeds you received from the foreclosure sale   6. Free state e file Add lines 4 and 5   7. Free state e file Enter the adjusted basis of the transferred property   8. Free state e file Gain or loss from foreclosure or repossession. Free state e file Subtract line 7  from line 6   * The income may not be taxable. Free state e file See Cancellation of debt . Free state e file    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Free state e file Amount realized on a nonrecourse debt. Free state e file   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Free state e file The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Free state e file Example 1. Free state e file Ann paid $200,000 for land used in her farming business. Free state e file She paid $15,000 down and borrowed the remaining $185,000 from a bank. Free state e file Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Free state e file The bank foreclosed on the loan 2 years after Ann stopped making payments. Free state e file When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Free state e file The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Free state e file She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Free state e file She has a $20,000 deductible loss. Free state e file Example 2. Free state e file Assume the same facts as in Example 1 except the FMV of the land was $210,000. Free state e file The result is the same. Free state e file The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Free state e file Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Free state e file Amount realized on a recourse debt. Free state e file   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Free state e file   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Free state e file The amount realized does not include the canceled debt that is your income from cancellation of debt. Free state e file See Cancellation of debt , later. Free state e file Example 3. Free state e file Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Free state e file In this case, the amount she realizes is $170,000. Free state e file This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Free state e file Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Free state e file She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Free state e file She is also treated as receiving ordinary income from cancellation of debt. Free state e file That income is $10,000 ($180,000 − $170,000). Free state e file This is the part of the canceled debt not included in the amount realized. Free state e file She reports this as other income on Schedule F, line 8. Free state e file Seller's (lender's) gain or loss on repossession. Free state e file   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Free state e file For more information, see Repossession in Publication 537, Installment Sales. Free state e file Cancellation of debt. Free state e file   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Free state e file This income is separate from any gain or loss realized from the foreclosure or repossession. Free state e file Report the income from cancellation of a business debt on Schedule F, line 8. Free state e file Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Free state e file    You can use Worksheet 8-1 to figure your income from cancellation of debt. Free state e file   However, income from cancellation of debt is not taxed if any of the following apply. Free state e file The cancellation is intended as a gift. Free state e file The debt is qualified farm debt (see chapter 3). Free state e file The debt is qualified real property business debt (see chapter 5 of Publication 334). Free state e file You are insolvent or bankrupt (see  chapter 3). Free state e file The debt is qualified principal residence indebtedness (see chapter 3). Free state e file   Use Form 982 to report the income exclusion. Free state e file Abandonment The abandonment of property is a disposition of property. Free state e file You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Free state e file Business or investment property. Free state e file   Loss from abandonment of business or investment property is deductible as a loss. Free state e file Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Free state e file If your adjusted basis is more than the amount you realize (if any), then you have a loss. Free state e file If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Free state e file This rule also applies to leasehold improvements the lessor made for the lessee. Free state e file However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Free state e file   If the abandoned property is secured by debt, special rules apply. Free state e file The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Free state e file For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Free state e file The abandonment loss is deducted in the tax year in which the loss is sustained. Free state e file Report the loss on Form 4797, Part II, line 10. Free state e file Personal-use property. Free state e file   You cannot deduct any loss from abandonment of your home or other property held for personal use. Free state e file Canceled debt. Free state e file   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Free state e file This income is separate from any loss realized from abandonment of the property. Free state e file Report income from cancellation of a debt related to a business or rental activity as business or rental income. Free state e file Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Free state e file   However, income from cancellation of debt is not taxed in certain circumstances. Free state e file See Cancellation of debt earlier under Foreclosure or Repossession . Free state e file Forms 1099-A and 1099-C. Free state e file   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Free state e file However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Free state e file The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free state e file For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free state e file Prev  Up  Next   Home   More Online Publications
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The Free State E File

Free state e file Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. Free state e file A pension is generally a series of payments made to you after you retire from work. Free state e file Pension payments are made regularly and are for past services with an employer. Free state e file An annuity is a series of payments under a contract. Free state e file You can buy the contract alone or you can buy it with the help of your employer. Free state e file Annuity payments are made regularly for more than one full year. Free state e file Note. Free state e file Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. Free state e file Types of pensions and annuities. Free state e file   Particular types of pensions and annuities include: Fixed period annuities. Free state e file You receive definite amounts at regular intervals for a definite length of time. Free state e file Annuities for a single life. Free state e file You receive definite amounts at regular intervals for life. Free state e file The payments end at death. Free state e file Joint and survivor annuities. Free state e file The first annuitant receives a definite amount at regular intervals for life. Free state e file After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Free state e file The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Free state e file Variable annuities. Free state e file You receive payments that may vary in amount for a definite length of time or for life. Free state e file The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. Free state e file Disability pensions. Free state e file You are under minimum retirement age and receive payments because you retired on disability. Free state e file If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. Free state e file If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. Free state e file A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. Free state e file This plan must meet Internal Revenue Code requirements. Free state e file It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. Free state e file However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. Free state e file A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Free state e file A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. Free state e file   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. Free state e file A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. Free state e file It does not qualify for most of the tax benefits of a qualified plan. Free state e file Annuity worksheets. Free state e file   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. Free state e file Request for a ruling. Free state e file   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. Free state e file This is treated as a request for a ruling. Free state e file See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free state e file Withholding tax and estimated tax. Free state e file   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. Free state e file If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. Free state e file Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. Free state e file Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Free state e file These payments are also known as amounts received as an annuity. Free state e file If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. Free state e file In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. Free state e file The amount of each payment that is more than the part that represents your net cost is taxable. Free state e file Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. Free state e file These terms are explained in the following discussions. Free state e file Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. Free state e file First, find your net cost of the contract as of the annuity starting date (defined later). Free state e file To find this amount, you must first figure the total premiums, contributions, or other amounts paid. Free state e file This includes the amounts your employer contributed if you were required to include these amounts in income. Free state e file It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). Free state e file From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. Free state e file Any additional premiums paid for double indemnity or disability benefits. Free state e file Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). Free state e file The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. Free state e file Example. Free state e file On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. Free state e file The annuity starting date is July 1. Free state e file This is the date you use in figuring your investment in the contract and your expected return (discussed later). Free state e file Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. Free state e file Foreign employment. Free state e file   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. Free state e file The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. Free state e file Foreign employment contributions while a nonresident alien. Free state e file   In determining your cost, special rules apply if you are a U. Free state e file S. Free state e file citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Free state e file Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. Free state e file Death benefit exclusion. Free state e file   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. Free state e file The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. Free state e file How to adjust your total cost. Free state e file   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Free state e file Add it to the cost or unrecovered cost of the annuity at the annuity starting date. Free state e file See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. Free state e file Net cost. Free state e file   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. Free state e file This is the unrecovered investment in the contract as of the annuity starting date. Free state e file If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. Free state e file Refund feature. Free state e file   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Free state e file Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. Free state e file   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. Free state e file Zero value of refund feature. Free state e file   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. Free state e file   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). Free state e file   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. Free state e file Examples. Free state e file The first example shows how to figure the value of the refund feature when there is only one beneficiary. Free state e file Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. Free state e file In both examples, the taxpayer elects to use Tables V through VIII. Free state e file If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. Free state e file Example 1. Free state e file At age 65, Barbara bought for $21,053 an annuity with a refund feature. Free state e file She will get $100 a month for life. Free state e file Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. Free state e file In this case, the contract cost and the total guaranteed return are the same ($21,053). Free state e file Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. Free state e file 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. Free state e file For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). Free state e file In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. Free state e file Example 2. Free state e file John died while still employed. Free state e file His widow, Eleanor, age 48, receives $171 a month for the rest of her life. Free state e file John's son, Elmer, age 9, receives $50 a month until he reaches age 18. Free state e file John's contributions to the retirement fund totaled $7,559. Free state e file 45, with interest on those contributions of $1,602. Free state e file 53. Free state e file The guarantee or total refund feature of the contract is $9,161. Free state e file 98 ($7,559. Free state e file 45 plus $1,602. Free state e file 53). Free state e file The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. Free state e file 9 $71,614. Free state e file 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. Free state e file 0 5,400. Free state e file 00   3) Total expected return   $77,014. Free state e file 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. Free state e file 45   2) Guaranteed amount (contributions of $7,559. Free state e file 45 plus interest of $1,602. Free state e file 53) $9,161. Free state e file 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. Free state e file 00   4) Net guaranteed amount $3,761. Free state e file 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. Free state e file 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. Free state e file 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free state e file See the discussion of expected return, later in this publication. Free state e file Free IRS help. Free state e file   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. Free state e file Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free state e file The following discussions explain how to figure the expected return with each type of annuity. Free state e file A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. Free state e file Fixed period annuity. Free state e file   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. Free state e file It is the total amount you will get beginning at the annuity starting date. Free state e file You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). Free state e file To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. Free state e file Single life annuity. Free state e file   If you are to get annuity payments for the rest of your life, find your expected return as follows. Free state e file You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. Free state e file These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). Free state e file   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. Free state e file See Adjustments to Tables I, II, V, VI, and VIA following Table I. Free state e file Example. Free state e file Henry bought an annuity contract that will give him an annuity of $500 a month for his life. Free state e file If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. Free state e file 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. Free state e file 2 multiple by +. Free state e file 1. Free state e file His expected return would then be $115,800 ($6,000 × 19. Free state e file 3). Free state e file Annuity for shorter of life or specified period. Free state e file   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. Free state e file To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Free state e file Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. Free state e file Example. Free state e file Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. Free state e file She was age 65 at her birthday nearest the annuity starting date. Free state e file She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. Free state e file 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. Free state e file See Special Elections, later. Free state e file Joint and survivor annuities. Free state e file   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. Free state e file To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. Free state e file If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. Free state e file See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. Free state e file Example. Free state e file John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. Free state e file At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. Free state e file The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. Free state e file 0 Expected return $132,000 Different payments to survivor. Free state e file   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. Free state e file Example 1. Free state e file Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. Free state e file If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. Free state e file 0 Multiple for Gerald, age 70 (from Table V)   16. Free state e file 0 Difference: Multiple applicable to Mary   6. Free state e file 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. Free state e file 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. Free state e file 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. Free state e file Your husband died while still employed. Free state e file Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. Free state e file Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. Free state e file You were 50 years old at the annuity starting date. Free state e file Marie was 16 and Jean was 14. Free state e file Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. Free state e file 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. Free state e file 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. Free state e file 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. Free state e file Computation Under the General Rule Note. Free state e file Variable annuities use a different computation for determining the exclusion amounts. Free state e file See Variable annuities later. Free state e file Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. Free state e file   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. Free state e file See Death benefit exclusion , earlier. Free state e file Step 2. Free state e file   Figure your expected return. Free state e file Step 3. Free state e file   Divide Step 1 by Step 2 and round to three decimal places. Free state e file This will give you the exclusion percentage. Free state e file Step 4. Free state e file   Multiply the exclusion percentage by the first regular periodic payment. Free state e file The result is the tax-free part of each pension or annuity payment. Free state e file   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. Free state e file However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. Free state e file   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. Free state e file Step 5. Free state e file   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. Free state e file This will give you the tax-free part of the total payment for the year. Free state e file    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. Free state e file This fractional amount is multiplied by your exclusion percentage to get the tax-free part. Free state e file Step 6. Free state e file   Subtract the tax-free part from the total payment you received. Free state e file The rest is the taxable part of your pension or annuity. Free state e file Example 1. Free state e file You purchased an annuity with an investment in the contract of $10,800. Free state e file Under its terms, the annuity will pay you $100 a month for life. Free state e file The multiple for your age (age 65) is 20. Free state e file 0 as shown in Table V. Free state e file Your expected return is $24,000 (20 × 12 × $100). Free state e file Your cost of $10,800, divided by your expected return of $24,000, equals 45. Free state e file 0%. Free state e file This is the percentage you will not have to include in income. Free state e file Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. Free state e file If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). Free state e file Example 2. Free state e file Gerald bought a joint and survivor annuity. Free state e file Gerald's investment in the contract is $62,712 and the expected return is $121,200. Free state e file The exclusion percentage is 51. Free state e file 7% ($62,712 ÷ $121,200). Free state e file Gerald will receive $500 a month ($6,000 a year). Free state e file Each year, until his net cost is recovered, $3,102 (51. Free state e file 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. Free state e file If Gerald dies, his wife will receive $350 a month ($4,200 a year). Free state e file If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. Free state e file 7%). Free state e file Each year, until the entire net cost is recovered, his wife will receive $2,171. Free state e file 40 (51. Free state e file 7% of her payments received of $4,200) tax free. Free state e file She will include $2,028. Free state e file 60 ($4,200 − $2,171. Free state e file 40) in her income tax return. Free state e file Example 3. Free state e file Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. Free state e file Your two daughters each receive annual annuities of $1,800 until they reach age 18. Free state e file Your husband contributed $25,576 to the plan. Free state e file You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. Free state e file Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. Free state e file The exclusion percentage of 18. Free state e file 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. Free state e file Each full year $864 (18. Free state e file 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. Free state e file Each year, until age 18, $324 (18. Free state e file 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. Free state e file Part-year payments. Free state e file   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. Free state e file   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. Free state e file For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. Free state e file   If you received a fractional payment, follow Step 5, discussed earlier. Free state e file This gives you the tax-free part of your total payment. Free state e file Example. Free state e file On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. Free state e file The applicable multiple from Table V is 23. Free state e file 3 (age 61). Free state e file Her expected return is $34,950 ($125 × 12 × 23. Free state e file 3). Free state e file Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. Free state e file 1%. Free state e file Each payment received will consist of 63. Free state e file 1% return of cost and 36. Free state e file 9% taxable income, until her net cost of the contract is fully recovered. Free state e file During the first year, Mary received three payments of $125, or $375, of which $236. Free state e file 63 (63. Free state e file 1% × $375) is a return of cost. Free state e file The remaining $138. Free state e file 37 is included in income. Free state e file Increase in annuity payments. Free state e file   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. Free state e file All increases in the installment payments are fully taxable. Free state e file   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. Free state e file 72-5(a)(5) of the regulations. Free state e file Example. Free state e file Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. Free state e file In figuring the taxable part, Joe elects to use Tables V through VIII. Free state e file The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. Free state e file His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. Free state e file 0 × $1,764 annual payment). Free state e file The exclusion percentage is $7,938 ÷ $35,280, or 22. Free state e file 5%. Free state e file During the year he received 11 monthly payments of $147, or $1,617. Free state e file Of this amount, 22. Free state e file 5% × $147 × 11 ($363. Free state e file 83) is tax free as a return of cost and the balance of $1,253. Free state e file 17 is taxable. Free state e file Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). Free state e file The tax-free part is still only 22. Free state e file 5% of the annuity payments as of the annuity starting date (22. Free state e file 5% × $147 × 12 = $396. Free state e file 90 for a full year). Free state e file The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. Free state e file Variable annuities. Free state e file   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. Free state e file   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. Free state e file If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. Free state e file Example. Free state e file Frank purchased a variable annuity at age 65. Free state e file The total cost of the contract was $12,000. Free state e file The annuity starting date is January 1 of the year of purchase. Free state e file His annuity will be paid, starting July 1, in variable annual installments for his life. Free state e file The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. Free state e file   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. Free state e file Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. Free state e file The result is added to the previously figured periodic tax-free part. Free state e file The sum is the amount of each future payment that will be tax free. Free state e file Example. Free state e file Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. Free state e file Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Free state e file Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. Free state e file 00 Amount received in second year 500. Free state e file 00 Difference $100. Free state e file 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. Free state e file 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. Free state e file 4) $5. Free state e file 43 Revised annual tax-free part for third and later years ($600 + $5. Free state e file 43) $605. Free state e file 43 Amount taxable in third year ($1,200 − $605. Free state e file 43) $594. Free state e file 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. Free state e file 72–4(d)(3) of the Income Tax Regulations. Free state e file The statement must also show the following information: The annuity starting date and your age on that date. Free state e file The first day of the first period for which you received an annuity payment in the current year. Free state e file Your investment in the contract as originally figured. Free state e file The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. Free state e file Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. Free state e file Exclusion limited to net cost. Free state e file   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). Free state e file This is the unrecovered investment in the contract as of the annuity starting date. Free state e file   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Free state e file This deduction is not subject to the 2%-of-adjusted-gross-income limit. Free state e file Example 1. Free state e file Your annuity starting date is after 1986. Free state e file Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. Free state e file There is no refund feature. Free state e file Your monthly annuity payment is $833. Free state e file 33. Free state e file Your exclusion ratio is 12% and you exclude $100 a month. Free state e file Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Free state e file Thereafter, your annuity payments are fully taxable. Free state e file Example 2. Free state e file The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. Free state e file The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. Free state e file The exclusion ratio is 10. Free state e file 8%, and your monthly exclusion is $90. Free state e file After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). Free state e file An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. Free state e file Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. Free state e file Exclusion not limited to net cost. Free state e file   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. Free state e file If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. Free state e file The total exclusion may be more than your investment in the contract. Free state e file How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. Free state e file Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. Free state e file These tables correspond to the old Tables I through IV. Free state e file In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. Free state e file If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. Free state e file However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). Free state e file Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. Free state e file Contributions made both before July 1986 and after June 1986. Free state e file   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. Free state e file (See the examples below. Free state e file )    Making the election. Free state e file Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. Free state e file 72–6 of the Income Tax Regulations. Free state e file ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. Free state e file   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. Free state e file You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. Free state e file    Advantages of election. Free state e file In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. Free state e file    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. Free state e file If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. Free state e file   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. Free state e file Example 1. Free state e file Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. Free state e file Payment of the $42,000 contribution is guaranteed under a refund feature. Free state e file Bill is 55 years old as of the annuity starting date. Free state e file For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. Free state e file       Pre- July 1986   Post- June 1986 A. Free state e file Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. Free state e file of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. Free state e file Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. Free state e file Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. Free state e file 7   28. Free state e file 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. Free state e file Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . Free state e file 079   . Free state e file 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). Free state e file The taxable part of his annuity is $22,080 ($24,000 minus $1,920). Free state e file If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). Free state e file Example 2. Free state e file Al is age 62 at his nearest birthday to the annuity starting date. Free state e file Al's wife is age 60 at her nearest birthday to the annuity starting date. Free state e file The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. Free state e file The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. Free state e file Al makes the election described in Example 1 . Free state e file For purposes of this example, assume the refund feature adjustment is zero. Free state e file If an adjustment is required, IRS will figure the amount. Free state e file See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free state e file       Pre-  July 1986   Post-  June 1986 A. Free state e file Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. Free state e file Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. Free state e file Expected return         1) Multiple for both annuitants from Tables II and VI 25. Free state e file 4   28. Free state e file 8   2) Multiple for first annuitant from Tables I and V 16. Free state e file 9   22. Free state e file 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. Free state e file 5   6. Free state e file 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. Free state e file Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . Free state e file 209   . Free state e file 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). Free state e file The taxable part of his annuity is $9,216 ($12,000 − $2,784). Free state e file The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. Free state e file After Al's death, his widow will apply the same exclusion percentages (20. Free state e file 9% and 2. Free state e file 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. Free state e file Annuity received after June 30, 1986. Free state e file   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. Free state e file Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. Free state e file    Make the election by attaching the following statement to your income tax return. Free state e file    “I elect, under section 1. Free state e file 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. Free state e file ”   The statement must also include your name, address, and social security number. Free state e file   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. Free state e file Disqualifying form of payment or settlement. Free state e file   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. Free state e file See regulations section 1. Free state e file 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. Free state e file You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. Free state e file Worksheets for Determining Taxable Annuity Worksheets I and II. Free state e file   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. Free state e file 72–6(d)(6) Election. Free state e file Worksheet I For Determining Taxable Annuity Under Regulations Section 1. Free state e file 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free state e file   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free state e file )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free state e file If not, the IRS will calculate the refund feature percentage. Free state e file             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free state e file   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. Free state e file   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. Free state e file   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free state e file     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. Free state e file 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free state e file   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free state e file )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free state e file If not, the IRS will calculate the refund feature percentage. Free state e file             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free state e file   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. Free state e file   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. Free state e file Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. Free state e file   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free state e file   Actuarial Tables Please click here for the text description of the image. Free state e file Actuarial Tables Please click here for the text description of the image. Free state e file Actuarial Tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. 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Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. 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Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Please click here for the text description of the image. Free state e file Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. Free state e file If you make this request, you are asking for a ruling. Free state e file User fee. Free state e file   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. Free state e file You should call the IRS for the proper fee. Free state e file A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. Free state e file Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. Free state e file O. Free state e file Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. Free state e file When to make the request. Free state e file   Please note that requests sent between February 1 and April 15 may experience some delay. Free state e file We process requests in the order received, and we will reply to your request as soon as we can process it. Free state e file If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. Free state e file S. Free state e file Individual Income Tax Return, to get an extension of time to file. Free state e file Information you must furnish. Free state e file   You must furnish the information listed below so the IRS can comply with your request. Free state e file Failure to furnish the information will result in a delay in processing your request. Free state e file Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. Free state e file Copies of any documents showing distributions, annuity rates, and annuity options available to you. Free state e file A copy of any Form 1099–R you received since your annuity began. Free state e file A statement indicating whether you have filed your return for the year for which you are making the request. Free state e file If you have requested an extension of time to file that return, please indicate the extension date. Free state e file Your daytime phone number. Free state e file Your current mailing address. Free state e file A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. Free state e file Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. Free state e file A completed Tax Information Sheet (or facsimile) shown on the next page. Free state e file Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. Free state e file This statement must be signed by the retiree or the survivor annuitant. Free state e file It cannot be signed by a representative. Free state e file Tax Information Sheet Please click here for the text description of the image. Free state e file Tax Information Sheet Please click here for the text description of the image. Free state e file Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Free state e file Free help with your tax return. Free state e file   You can get free help preparing your return nationwide from IRS-certified volunteers. Free state e file The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Free state e file The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Free state e file Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Free state e file In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Free state e file To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Free state e file gov, download the IRS2Go app, or call 1-800-906-9887. Free state e file   As part of the TCE program, AARP offers the Tax-Aide counseling program. Free state e file To find the nearest AARP Tax-Aide site, visit AARP's website at www. Free state e file aarp. Free state e file org/money/taxaide or call 1-888-227-7669. Free state e file For more information on these programs, go to IRS. Free state e file gov and enter “VITA” in the search box. Free state e file Internet. Free state e file    IRS. Free state e file gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Free state e file Download the free IRS2Go app from the iTunes app store or from Google Play. Free state e file Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Free state e file Check the status of your 2013 refund with the Where's My Refund? application on IRS. Free state e file gov or download the IRS2Go app and select the Refund Status option. Free state e file The IRS issues more than 9 out of 10 refunds in less than 21 days. Free state e file Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Free state e file You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Free state e file The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Free state e file Use the Interactive Tax Assistant (ITA) to research your tax questions. Free state e file No need to wait on the phone or stand in line. Free state e file The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Free state e file When you reach the response screen, you can print the entire interview and the final response for your records. Free state e file New subject areas are added on a regular basis. Free state e file  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Free state e file gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Free state e file You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Free state e file The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Free state e file When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Free state e file Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Free state e file You can also ask the IRS to mail a return or an account transcript to you. Free state e file Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Free state e file gov or by calling 1-800-908-9946. Free state e file Tax return and tax account transcripts are generally available for the current year and the past three years. Free state e file Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Free state e file Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Free state e file If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Free state e file Check the status of your amended return using Where's My Amended Return? Go to IRS. Free state e file gov and enter Where's My Amended Return? in the search box. Free state e file You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Free state e file It can take up to 3 weeks from the date you mailed it to show up in our system. Free state e file Make a payment using one of several safe and convenient electronic payment options available on IRS. Free state e file gov. Free state e file Select the Payment tab on the front page of IRS. Free state e file gov for more information. Free state e file Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Free state e file Figure your income tax withholding with the IRS Withholding Calculator on IRS. Free state e file gov. Free state e file Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Free state e file Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Free state e file gov. Free state e file Request an Electronic Filing PIN by going to IRS. Free state e file gov and entering Electronic Filing PIN in the search box. Free state e file Download forms, instructions and publications, including accessible versions for people with disabilities. Free state e file Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Free state e file gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Free state e file An employee can answer questions about your tax account or help you set up a payment plan. Free state e file Before you visit, check the Office Locator on IRS. Free state e file gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Free state e file If you have a special need, such as a disability, you can request an appointment. Free state e file Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Free state e file Apply for an Employer Identification Number (EIN). Free state e file Go to IRS. Free state e file gov and enter Apply for an EIN in the search box. Free state e file Read the Internal Revenue Code, regulations, or other official guidance. Free state e file Read Internal Revenue Bulletins. Free state e file Sign up to receive local and national tax news and more by email. Free state e file Just click on “subscriptions” above the search box on IRS. Free state e file gov and choose from a variety of options. Free state e file    Phone. Free state e file You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Free state e file Download the free IRS2Go app from the iTunes app store or from Google Play. Free state e file Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Free state e file gov, or download the IRS2Go app. Free state e file Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Free state e file The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Free state e file Mos