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Free State Efile Taxes

Free state efile taxes 7. Free state efile taxes   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Free state efile taxes For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Free state efile taxes There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Free state efile taxes However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Free state efile taxes See Contributions , later. Free state efile taxes This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Free state efile taxes What is the tax benefit of the Coverdell ESA. Free state efile taxes   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Free state efile taxes   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Free state efile taxes See Tax-Free Distributions , later. Free state efile taxes    Table 7-1 summarizes the main features of the Coverdell ESA. Free state efile taxes Table 7-1. Free state efile taxes Coverdell ESA at a Glance Do not rely on this table alone. Free state efile taxes It provides only general highlights. Free state efile taxes See the text for definitions of terms in bold type and for more complete explanations. Free state efile taxes Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Free state efile taxes Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Free state efile taxes Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Free state efile taxes Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Free state efile taxes Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Free state efile taxes What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Free state efile taxes When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Free state efile taxes To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Free state efile taxes The document creating and governing the account must be in writing and must satisfy the following requirements. Free state efile taxes The trustee or custodian must be a bank or an entity approved by the IRS. Free state efile taxes The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Free state efile taxes The contribution is in cash. Free state efile taxes The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free state efile taxes The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Free state efile taxes Money in the account cannot be invested in life insurance contracts. Free state efile taxes Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Free state efile taxes The balance in the account generally must be distributed within 30 days after the earlier of the following events. Free state efile taxes The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Free state efile taxes The beneficiary's death. Free state efile taxes Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Free state efile taxes For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Free state efile taxes Designated beneficiary. Free state efile taxes   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Free state efile taxes Contributions to a qualified tuition program (QTP). Free state efile taxes   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Free state efile taxes In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Free state efile taxes See chapter 8, Qualified Tuition Program . Free state efile taxes Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Free state efile taxes Eligible postsecondary school. Free state efile taxes   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free state efile taxes S. Free state efile taxes Department of Education. Free state efile taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free state efile taxes The educational institution should be able to tell you if it is an eligible educational institution. Free state efile taxes   Certain educational institutions located outside the United States also participate in the U. Free state efile taxes S. Free state efile taxes Department of Education's Federal Student Aid (FSA) programs. Free state efile taxes Eligible elementary or secondary school. Free state efile taxes   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Free state efile taxes Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Free state efile taxes As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Free state efile taxes The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Free state efile taxes Tuition and fees. Free state efile taxes Books, supplies, and equipment. Free state efile taxes Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Free state efile taxes Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Free state efile taxes The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Free state efile taxes The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Free state efile taxes The actual amount charged if the student is residing in housing owned or operated by the school. Free state efile taxes Half-time student. Free state efile taxes   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Free state efile taxes Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Free state efile taxes As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Free state efile taxes There are special rules for computer-related expenses. Free state efile taxes The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Free state efile taxes Tuition and fees. Free state efile taxes Books, supplies, and equipment. Free state efile taxes Academic tutoring. Free state efile taxes Special needs services for a special needs beneficiary. Free state efile taxes The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Free state efile taxes Room and board. Free state efile taxes Uniforms. Free state efile taxes Transportation. Free state efile taxes Supplementary items and services (including extended day programs). Free state efile taxes The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Free state efile taxes (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Free state efile taxes ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Free state efile taxes For individuals filing joint returns, that amount is $220,000. Free state efile taxes Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Free state efile taxes There is no requirement that an organization's income be below a certain level. Free state efile taxes Contributions must meet all of the following requirements. Free state efile taxes They must be in cash. Free state efile taxes They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free state efile taxes They must be made by the due date of the contributor's tax return (not including extensions). Free state efile taxes Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Free state efile taxes Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Free state efile taxes Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Free state efile taxes When contributions considered made. Free state efile taxes   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Free state efile taxes They must be made by the due date (not including extensions) for filing your return for the preceding year. Free state efile taxes   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Free state efile taxes Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Free state efile taxes Limit for each designated beneficiary. Free state efile taxes   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Free state efile taxes This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Free state efile taxes Rollovers are discussed under Rollovers and Other Transfers , later. Free state efile taxes Example. Free state efile taxes When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Free state efile taxes In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Free state efile taxes For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Free state efile taxes Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Free state efile taxes These contributions could be put into any of Maria's Coverdell ESA accounts. Free state efile taxes Limit for each contributor. Free state efile taxes   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Free state efile taxes This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Free state efile taxes Example. Free state efile taxes The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Free state efile taxes If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Free state efile taxes Reduced limit. Free state efile taxes   Your contribution limit may be reduced. Free state efile taxes If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Free state efile taxes If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Free state efile taxes Table 7-2. Free state efile taxes Coverdell ESA Contributions at a Glance Do not rely on this table alone. Free state efile taxes It provides only general highlights. Free state efile taxes See the text for more complete explanations. Free state efile taxes Question Answer Are contributions deductible? No. Free state efile taxes What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Free state efile taxes What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Free state efile taxes What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Free state efile taxes Can contributions other than cash be made to a Coverdell ESA? No. Free state efile taxes When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Free state efile taxes Modified adjusted gross income (MAGI). Free state efile taxes   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free state efile taxes MAGI when using Form 1040A. Free state efile taxes   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free state efile taxes MAGI when using Form 1040. Free state efile taxes   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free state efile taxes MAGI when using Form 1040NR. Free state efile taxes   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Free state efile taxes MAGI when using Form 1040NR-EZ. Free state efile taxes   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Free state efile taxes   If you have any of these adjustments, you can use Worksheet 7-1. Free state efile taxes MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Free state efile taxes Worksheet 7-1. Free state efile taxes MAGI for a Coverdell ESA 1. Free state efile taxes Enter your adjusted gross income  (Form 1040, line 38)   1. Free state efile taxes   2. Free state efile taxes Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free state efile taxes       3. Free state efile taxes Enter your foreign housing deduction (Form 2555, line 50)   3. Free state efile taxes         4. Free state efile taxes Enter the amount of income from Puerto Rico you are excluding   4. Free state efile taxes       5. Free state efile taxes Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free state efile taxes       6. Free state efile taxes Add lines 2, 3, 4, and 5   6. Free state efile taxes   7. Free state efile taxes Add lines 1 and 6. Free state efile taxes This is your  modified adjusted gross income   7. Free state efile taxes   Figuring the limit. Free state efile taxes    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Free state efile taxes The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Free state efile taxes The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Free state efile taxes Subtract the result from $2,000. Free state efile taxes This is the amount you can contribute for each beneficiary. Free state efile taxes You can use Worksheet 7-2. Free state efile taxes Coverdell ESA Contribution Limit to figure the limit on contributions. Free state efile taxes    Worksheet 7-2. Free state efile taxes Coverdell ESA Contribution Limit 1. Free state efile taxes Maximum contribution   1. Free state efile taxes $2,000 2. Free state efile taxes Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free state efile taxes   3. Free state efile taxes Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free state efile taxes   4. Free state efile taxes Subtract line 3 from line 2. Free state efile taxes If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free state efile taxes   5. Free state efile taxes Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free state efile taxes     Note. Free state efile taxes If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Free state efile taxes You are not allowed to contribute to a Coverdell ESA for 2013. Free state efile taxes       6. Free state efile taxes Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free state efile taxes . Free state efile taxes 7. Free state efile taxes Multiply line 1 by line 6   7. Free state efile taxes   8. Free state efile taxes Subtract line 7 from line 1   8. Free state efile taxes   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free state efile taxes Example. Free state efile taxes Paul, who is single, had a MAGI of $96,500 for 2013. Free state efile taxes Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Free state efile taxes Worksheet 7-2. Free state efile taxes Coverdell ESA Contribution Limit—Illustrated 1. Free state efile taxes Maximum contribution   1. Free state efile taxes $2,000 2. Free state efile taxes Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free state efile taxes 96,500 3. Free state efile taxes Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free state efile taxes 95,000 4. Free state efile taxes Subtract line 3 from line 2. Free state efile taxes If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free state efile taxes 1,500 5. Free state efile taxes Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free state efile taxes 15,000   Note. Free state efile taxes If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Free state efile taxes You are not allowed to  contribute to a Coverdell ESA for 2013. Free state efile taxes       6. Free state efile taxes Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free state efile taxes . Free state efile taxes 100 7. Free state efile taxes Multiply line 1 by line 6   7. Free state efile taxes 200 8. Free state efile taxes Subtract line 7 from line 1   8. Free state efile taxes 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free state efile taxes Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Free state efile taxes Excess contributions are the total of the following two amounts. Free state efile taxes Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Free state efile taxes Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Free state efile taxes Exceptions. Free state efile taxes   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Free state efile taxes   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Free state efile taxes You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Free state efile taxes Box 2 of that form will show the amount of earnings on your excess contributions. Free state efile taxes Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Free state efile taxes See Instructions for Recipient on the back of copy B of your Form 1099-Q. Free state efile taxes Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Free state efile taxes For more information, see Taxable Distributions , later. Free state efile taxes   The excise tax does not apply to any rollover contribution. Free state efile taxes Note. Free state efile taxes Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Free state efile taxes Example. Free state efile taxes In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Free state efile taxes Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Free state efile taxes In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Free state efile taxes Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Free state efile taxes (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Free state efile taxes Figuring and reporting the additional tax. Free state efile taxes   You figure this excise tax in Part V of Form 5329. Free state efile taxes Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Free state efile taxes Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Free state efile taxes The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Free state efile taxes Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Free state efile taxes This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free state efile taxes An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Free state efile taxes Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Free state efile taxes These are not taxable distributions. Free state efile taxes Members of the beneficiary's family. Free state efile taxes   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Free state efile taxes Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Free state efile taxes Brother, sister, stepbrother, or stepsister. Free state efile taxes Father or mother or ancestor of either. Free state efile taxes Stepfather or stepmother. Free state efile taxes Son or daughter of a brother or sister. Free state efile taxes Brother or sister of father or mother. Free state efile taxes Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Free state efile taxes The spouse of any individual listed above. Free state efile taxes First cousin. Free state efile taxes Example. Free state efile taxes When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Free state efile taxes He wanted to give this money to his younger sister, who was still in high school. Free state efile taxes In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Free state efile taxes Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Free state efile taxes This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Free state efile taxes Military death gratuity. Free state efile taxes   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Free state efile taxes Such payments are made to an eligible survivor upon the death of a member of the armed forces. Free state efile taxes The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Free state efile taxes   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Free state efile taxes The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Free state efile taxes   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Free state efile taxes See Distributions , later. Free state efile taxes The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Free state efile taxes Changing the Designated Beneficiary The designated beneficiary can be changed. Free state efile taxes See Members of the beneficiary's family , earlier. Free state efile taxes There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Free state efile taxes Example. Free state efile taxes Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Free state efile taxes Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Free state efile taxes Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Free state efile taxes After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Free state efile taxes Example. Free state efile taxes In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Free state efile taxes In this process, the account was transferred into her name. Free state efile taxes Peg now treats the funds in this Coverdell ESA as if she were the original owner. Free state efile taxes Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Free state efile taxes Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Free state efile taxes See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Free state efile taxes Table 7-3. Free state efile taxes Coverdell ESA Distributions at a Glance Do not rely on this table alone. Free state efile taxes It provides only general highlights. Free state efile taxes See the text for definitions of terms in bold type and for more complete explanations. Free state efile taxes Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Free state efile taxes After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Free state efile taxes Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Free state efile taxes Also, certain transfers to members of the beneficiary's family are permitted. Free state efile taxes Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Free state efile taxes Adjusted qualified education expenses. Free state efile taxes   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Free state efile taxes Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free state efile taxes The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Free state efile taxes Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Free state efile taxes Do not report tax-free distributions (including qualifying rollovers) on your tax return. Free state efile taxes Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Free state efile taxes Excess distribution. Free state efile taxes   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Free state efile taxes Earnings and basis. Free state efile taxes   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Free state efile taxes The amount of your gross distribution will be shown in box 1. Free state efile taxes For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Free state efile taxes This will be shown in the blank box below boxes 5 and 6. Free state efile taxes   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Free state efile taxes Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Free state efile taxes Figure the taxable portion for 2013 as shown in the following steps. Free state efile taxes Multiply the total amount distributed by a fraction. Free state efile taxes The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Free state efile taxes Subtract the amount figured in (1) from the total amount distributed during 2013. Free state efile taxes The result is the amount of earnings included in the distribution(s). Free state efile taxes Multiply the amount of earnings figured in (2) by a fraction. Free state efile taxes The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Free state efile taxes Subtract the amount figured in (3) from the amount figured in (2). Free state efile taxes The result is the amount the beneficiary must include in income. Free state efile taxes The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Free state efile taxes Example. Free state efile taxes You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Free state efile taxes There were no contributions in 2013. Free state efile taxes This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Free state efile taxes The value (balance) of your account on December 31, 2013, was $950. Free state efile taxes You had $700 of adjusted qualified education expenses (AQEE) for the year. Free state efile taxes Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Free state efile taxes   1. Free state efile taxes $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Free state efile taxes $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Free state efile taxes $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Free state efile taxes $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Free state efile taxes Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Free state efile taxes Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Free state efile taxes Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Free state efile taxes This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Free state efile taxes Example. Free state efile taxes Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Free state efile taxes He paid his college expenses from the following sources. Free state efile taxes     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Free state efile taxes Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Free state efile taxes Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Free state efile taxes     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Free state efile taxes The balance in Derek's account was $1,800 on December 31, 2013. Free state efile taxes Prior to 2013, $2,100 had been contributed to this account. Free state efile taxes Contributions for 2013 totaled $400. Free state efile taxes Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Free state efile taxes   1. Free state efile taxes $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Free state efile taxes $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Free state efile taxes $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Free state efile taxes $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Free state efile taxes This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Free state efile taxes Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Free state efile taxes The following two examples illustrate possible allocations. Free state efile taxes Example 1. Free state efile taxes In 2013, Beatrice graduated from high school and began her first semester of college. Free state efile taxes That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Free state efile taxes To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Free state efile taxes No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Free state efile taxes She did not receive any tax-free educational assistance in 2013. Free state efile taxes Beatrice must allocate her total qualified education expenses between the two distributions. Free state efile taxes Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Free state efile taxes The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Free state efile taxes Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Free state efile taxes She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Free state efile taxes Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Free state efile taxes (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Free state efile taxes ) Example 2. Free state efile taxes Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Free state efile taxes In this case, she allocates her qualified education expenses as follows. Free state efile taxes Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Free state efile taxes Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Free state efile taxes   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Free state efile taxes See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Free state efile taxes   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Free state efile taxes The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Free state efile taxes However, you do not have to allocate your expenses in the same way. Free state efile taxes You can use any reasonable method. Free state efile taxes Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Free state efile taxes You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Free state efile taxes Your basis is the total amount of contributions to that Coverdell ESA. Free state efile taxes You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Free state efile taxes If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Free state efile taxes ) from all such accounts in order to determine your taxable earnings for the year. Free state efile taxes By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Free state efile taxes For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Free state efile taxes Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Free state efile taxes Exceptions. Free state efile taxes   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Free state efile taxes Made because the designated beneficiary is disabled. Free state efile taxes A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Free state efile taxes A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Free state efile taxes Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free state efile taxes Made on account of the attendance of the designated beneficiary at a U. Free state efile taxes S. Free state efile taxes military academy (such as the USMA at West Point). Free state efile taxes This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Free state efile taxes S. Free state efile taxes Code) attributable to such attendance. Free state efile taxes Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Free state efile taxes Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Free state efile taxes The distributed earnings must be included in gross income for the year in which the excess contribution was made. Free state efile taxes Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Free state efile taxes Figuring the additional tax. Free state efile taxes    Use Part II of Form 5329, to figure any additional tax. Free state efile taxes Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Free state efile taxes When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Free state efile taxes The designated beneficiary reaches age 30. Free state efile taxes In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Free state efile taxes However, this rule does not apply if the beneficiary is a special needs beneficiary. Free state efile taxes The designated beneficiary dies before reaching age 30. Free state efile taxes In this case, the remaining assets must generally be distributed within 30 days after the date of death. Free state efile taxes Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Free state efile taxes (“Family member” was defined earlier under Rollovers . Free state efile taxes ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Free state efile taxes This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free state efile taxes There are no tax consequences as a result of the transfer. Free state efile taxes How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Free state efile taxes You determine these earnings as shown in the following two steps. Free state efile taxes Multiply the amount distributed by a fraction. Free state efile taxes The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Free state efile taxes Subtract the amount figured in (1) from the total amount distributed during 2013. Free state efile taxes The result is the amount of earnings included in the distribution. Free state efile taxes For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Free state efile taxes The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Free state efile taxes Worksheet 7-3 Instructions. Free state efile taxes Coverdell ESA—Taxable Distributions and Basis Line G. Free state efile taxes Enter the total distributions received from all Coverdell ESAs during 2013. Free state efile taxes Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Free state efile taxes Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Free state efile taxes Line 2. Free state efile taxes Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Free state efile taxes   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Free state efile taxes For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Free state efile taxes For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Free state efile taxes You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Free state efile taxes Line 4. Free state efile taxes Enter the total distributions received from this Coverdell ESA in 2013. Free state efile taxes Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Free state efile taxes   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Free state efile taxes Line 7. Free state efile taxes Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Free state efile taxes A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Free state efile taxes   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Free state efile taxes An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Free state efile taxes Worksheet 7-3. Free state efile taxes Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Free state efile taxes • • • Complete Part I, lines A through H, on only one worksheet. Free state efile taxes  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Free state efile taxes  Complete Part III, the Summary (line 16), on only one worksheet. Free state efile taxes Part I. Free state efile taxes Qualified Education Expenses (Complete for total expenses)       A. Free state efile taxes Enter your total qualified education expenses for 2013   A. Free state efile taxes   B. Free state efile taxes Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Free state efile taxes         C. Free state efile taxes Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Free state efile taxes Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Free state efile taxes         D. Free state efile taxes Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Free state efile taxes         E. Free state efile taxes Add lines B, C, and D   D. Free state efile taxes   F. Free state efile taxes Subtract line E from line A. Free state efile taxes This is your adjusted qualified education expense for 2013   E. Free state efile taxes   G. Free state efile taxes Enter your total distributions from all Coverdell ESAs during 2013. Free state efile taxes Do not include rollovers  or the return of excess contributions (see instructions)   F. Free state efile taxes   H. Free state efile taxes Divide line F by line G. Free state efile taxes Enter the result as a decimal (rounded to at least 3 places). Free state efile taxes If the  result is 1. Free state efile taxes 000 or more, enter 1. Free state efile taxes 000   G. Free state efile taxes . Free state efile taxes Part II. Free state efile taxes Taxable Distributions and Basis (Complete separately for each account) 1. Free state efile taxes Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Free state efile taxes Do not include rollovers or the return of excess contributions   1. Free state efile taxes   2. Free state efile taxes Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Free state efile taxes   3. Free state efile taxes Add lines 1 and 2   3. Free state efile taxes   4. Free state efile taxes Enter the total distributions from this Coverdell ESA during 2013. Free state efile taxes Do not include rollovers  or the return of excess contributions (see instructions)   4. Free state efile taxes   5. Free state efile taxes Multiply line 4 by line H. Free state efile taxes This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Free state efile taxes         6. Free state efile taxes Subtract line 5 from line 4   6. Free state efile taxes         7. Free state efile taxes Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Free state efile taxes         8. Free state efile taxes Add lines 4 and 7   8. Free state efile taxes         9. Free state efile taxes Divide line 3 by line 8. Free state efile taxes Enter the result as a decimal (rounded to  at least 3 places). Free state efile taxes If the result is 1. Free state efile taxes 000 or more, enter 1. Free state efile taxes 000   9. Free state efile taxes . Free state efile taxes       10. Free state efile taxes Multiply line 4 by line 9. Free state efile taxes This is the amount of basis allocated to your  distributions, and is tax free   10. Free state efile taxes     Note. Free state efile taxes If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Free state efile taxes       11. Free state efile taxes Subtract line 10 from line 4   11. Free state efile taxes   12. Free state efile taxes Divide line 5 by line 4. Free state efile taxes Enter the result as a decimal (rounded to  at least 3 places). Free state efile taxes If the result is 1. Free state efile taxes 000 or more, enter 1. Free state efile taxes 000   12. Free state efile taxes . Free state efile taxes       13. Free state efile taxes Multiply line 11 by line 12. Free state efile taxes This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Free state efile taxes   14. Free state efile taxes Subtract line 13 from line 11. Free state efile taxes This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Free state efile taxes   15. Free state efile taxes Subtract line 10 from line 3. Free state efile taxes This is your basis in this Coverdell ESA as of December 31, 2013   15. Free state efile taxes   Part III. Free state efile taxes Summary (Complete only once)       16. Free state efile taxes Taxable amount. Free state efile taxes Add together all amounts on line 14 for all your Coverdell ESAs. Free state efile taxes Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Free state efile taxes   Prev  Up  Next   Home   More Online Publications
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The Free State Efile Taxes

Free state efile taxes 3. Free state efile taxes   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. Free state efile taxes Dual use of assets or facilities. Free state efile taxes Exploitation of exempt functions. Free state efile taxes ExamplesExceptions. Free state efile taxes Excluded Trade or Business ActivitiesQualified sponsorship payment. Free state efile taxes Advertising. Free state efile taxes Exception for contingent payments. Free state efile taxes Exception for periodicals. Free state efile taxes Exception for conventions and trade shows. Free state efile taxes Legal definition. Free state efile taxes Legal where played. Free state efile taxes No for-profit games where played. Free state efile taxes Unrelated business income. Free state efile taxes   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. Free state efile taxes   Certain trade or business activities are not treated as an unrelated trade or business. Free state efile taxes See Excluded Trade or Business Activities, later. Free state efile taxes Trade or business. Free state efile taxes   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. Free state efile taxes An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. Free state efile taxes   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. Free state efile taxes Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. Free state efile taxes Regularly conducted. Free state efile taxes   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Free state efile taxes   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. Free state efile taxes The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. Free state efile taxes However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. Free state efile taxes Not substantially related. Free state efile taxes    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Free state efile taxes Whether an activity contributes importantly depends in each case on the facts involved. Free state efile taxes   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. Free state efile taxes For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. Free state efile taxes The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. Free state efile taxes   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. Free state efile taxes Selling of products of exempt functions. Free state efile taxes   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. Free state efile taxes Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. Free state efile taxes   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. Free state efile taxes For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. Free state efile taxes But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. Free state efile taxes , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. Free state efile taxes Dual use of assets or facilities. Free state efile taxes   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. Free state efile taxes The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. Free state efile taxes   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. Free state efile taxes The theater is a principal feature of the museum and operates continuously while the museum is open to the public. Free state efile taxes If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. Free state efile taxes   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. Free state efile taxes Exploitation of exempt functions. Free state efile taxes   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. Free state efile taxes When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. Free state efile taxes Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. Free state efile taxes   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. Free state efile taxes Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. Free state efile taxes Sales commissions. Free state efile taxes   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. Free state efile taxes Artists' facilities. Free state efile taxes   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. Free state efile taxes These two activities do not contribute importantly to accomplishing the organization's exempt purpose. Free state efile taxes Therefore, they are unrelated trades or businesses. Free state efile taxes Membership list sales. Free state efile taxes   An exempt educational organization regularly sells membership mailing lists to business firms. Free state efile taxes This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. Free state efile taxes Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. Free state efile taxes Hospital facilities. Free state efile taxes   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. Free state efile taxes The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. Free state efile taxes The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. Free state efile taxes   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. Free state efile taxes These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. Free state efile taxes Book publishing. Free state efile taxes   An exempt organization engages primarily in activities that further its exempt purposes. Free state efile taxes It also owns the publication rights to a book that does not relate to any of its exempt purposes. Free state efile taxes The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. Free state efile taxes These activities constitute a trade or business regularly conducted. Free state efile taxes Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. Free state efile taxes   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. Free state efile taxes See Royalties under Exclusions in chapter 4. Free state efile taxes School handicraft shop. Free state efile taxes   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. Free state efile taxes The students are paid a percentage of the sales price. Free state efile taxes In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. Free state efile taxes The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. Free state efile taxes Although many local participants are former students of the school, any qualified person may participate in the program. Free state efile taxes The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. Free state efile taxes School facilities. Free state efile taxes   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. Free state efile taxes During the summer, the school operates a tennis club open to the general public. Free state efile taxes Employees of the school run the club, including collecting membership fees and scheduling court time. Free state efile taxes   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. Free state efile taxes The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. Free state efile taxes   In both situations, the exempt purpose is the advancement of education. Free state efile taxes Furnishing tennis facilities in the manner described does not further that exempt purpose. Free state efile taxes These activities are unrelated trades or businesses. Free state efile taxes However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. Free state efile taxes See Rents under Exclusions in chapter 4. Free state efile taxes Services provided with lease. Free state efile taxes   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. Free state efile taxes Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. Free state efile taxes It also provides dressing room, linen, and stadium security services for the professional team. Free state efile taxes   Leasing of the stadium is an unrelated trade or business. Free state efile taxes In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. Free state efile taxes Therefore, the income from this lease is rent from real property and unrelated business taxable income. Free state efile taxes Broadcasting rights. Free state efile taxes   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. Free state efile taxes Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. Free state efile taxes An athletic program is considered an integral part of the educational process of a university. Free state efile taxes   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. Free state efile taxes Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. Free state efile taxes Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. Free state efile taxes   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. Free state efile taxes The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. Free state efile taxes   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. Free state efile taxes The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. Free state efile taxes Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. Free state efile taxes Yearbook advertising. Free state efile taxes   An exempt organization receives income from the sale of advertising in its annual yearbook. Free state efile taxes The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. Free state efile taxes This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Free state efile taxes This advertising activity is an unrelated trade or business. Free state efile taxes Pet boarding and grooming services. Free state efile taxes   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. Free state efile taxes These activities do not contribute importantly to its purpose of preventing cruelty to animals. Free state efile taxes Museum eating facilities. Free state efile taxes   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. Free state efile taxes Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. Free state efile taxes The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. Free state efile taxes Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. Free state efile taxes Halfway house workshop. Free state efile taxes   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. Free state efile taxes The profits are applied to the operating costs of the halfway house. Free state efile taxes The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. Free state efile taxes Travel tour programs. Free state efile taxes   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. Free state efile taxes Example 1. Free state efile taxes A tax-exempt university alumni association provides a travel tour program for its members and their families. Free state efile taxes The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. Free state efile taxes It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. Free state efile taxes The organization provides an employee for each tour as a tour leader. Free state efile taxes There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. Free state efile taxes By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. Free state efile taxes Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. Free state efile taxes Therefore, the sale of the travel tours is an unrelated trade or business. Free state efile taxes Example 2. Free state efile taxes A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. Free state efile taxes These tours are conducted by teachers and others certified by the state board of education. Free state efile taxes The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. Free state efile taxes A tour's study program consists of instruction on subjects related to the location being visited on the tour. Free state efile taxes Each tour group brings along a library of material related to the subjects being studied on the tour. Free state efile taxes During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. Free state efile taxes Examinations are given at the end of each tour. Free state efile taxes The state board of education awards academic credit for tour participation. Free state efile taxes Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. Free state efile taxes Insurance programs. Free state efile taxes   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. Free state efile taxes Exceptions. Free state efile taxes   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. Free state efile taxes Magazine publishing. Free state efile taxes   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. Free state efile taxes   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. Free state efile taxes This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. Free state efile taxes   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. Free state efile taxes Directory of members. Free state efile taxes   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. Free state efile taxes Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. Free state efile taxes The directory contains no commercial advertisement and is sold only to the organization's members. Free state efile taxes   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. Free state efile taxes Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. Free state efile taxes The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. Free state efile taxes This directory differs from the publication discussed next because of its noncommercial characteristics. Free state efile taxes Sales of advertising space. Free state efile taxes   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. Free state efile taxes The journal is distributed without charge, mainly to the organization's members. Free state efile taxes   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. Free state efile taxes Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. Free state efile taxes A business firm identified in a separate space is further identified in an Index of Advertisers. Free state efile taxes   The organization solicits advertising by personal contacts. Free state efile taxes Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. Free state efile taxes The organization also solicits advertising in form letters appealing for corporate and personal contributions. Free state efile taxes   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. Free state efile taxes Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. Free state efile taxes Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. Free state efile taxes However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. Free state efile taxes In that case, other factors should also be considered in determining whether a commercial benefit can be expected. Free state efile taxes Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. Free state efile taxes   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. Free state efile taxes However, the purchaser of a listing cannot expect more than an inconsequential benefit. Free state efile taxes Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. Free state efile taxes Publishing legal notices. Free state efile taxes   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. Free state efile taxes The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. Free state efile taxes The state designated the bar association's journal as the place to publish the required notices. Free state efile taxes   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. Free state efile taxes Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. Free state efile taxes Therefore, the advertising income is unrelated trade or business income. Free state efile taxes   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. Free state efile taxes This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. Free state efile taxes Therefore, the publishing of legal notices does not constitute an unrelated trade or business. Free state efile taxes Museum greeting card sales. Free state efile taxes    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. Free state efile taxes Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. Free state efile taxes The cards contain appropriate greetings and are personalized on request. Free state efile taxes   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. Free state efile taxes It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. Free state efile taxes As a result, a large number of cards are sold at a significant profit. Free state efile taxes   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. Free state efile taxes The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. Free state efile taxes The cards may encourage more people to visit the museum itself to share in its educational programs. Free state efile taxes The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. Free state efile taxes Therefore, these sales activities are not an unrelated trade or business. Free state efile taxes Museum shop. Free state efile taxes   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. Free state efile taxes   The shop also rents originals or reproductions of paintings contained in its collection. Free state efile taxes All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. Free state efile taxes   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. Free state efile taxes   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. Free state efile taxes The same is true for the sale of literature relating to art. Free state efile taxes Therefore, these sales activities are not an unrelated trade or business. Free state efile taxes   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. Free state efile taxes The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. Free state efile taxes Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. Free state efile taxes Therefore, these sales are an unrelated trade or business. Free state efile taxes Business league's parking and bus services. Free state efile taxes   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. Free state efile taxes It also operates, as an insubstantial part of its activities, a park and shop plan. Free state efile taxes   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. Free state efile taxes The merchants cannot offer free or discount parking or bus fares to their customers. Free state efile taxes   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. Free state efile taxes Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. Free state efile taxes   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. Free state efile taxes That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. Free state efile taxes   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. Free state efile taxes This provides a particular service to individual members of the organization and does not further its exempt purpose. Free state efile taxes Therefore, operating the park and shop plan is an unrelated trade or business. Free state efile taxes Youth residence. Free state efile taxes   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. Free state efile taxes The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. Free state efile taxes The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. Free state efile taxes The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. Free state efile taxes Health club program. Free state efile taxes   An exempt charitable organization's purpose is to provide for the welfare of young people. Free state efile taxes The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. Free state efile taxes Nominal annual dues are charged for membership in the organization and use of the facilities. Free state efile taxes   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. Free state efile taxes The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. Free state efile taxes   The health club program is in addition to the general physical fitness program of the organization. Free state efile taxes Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. Free state efile taxes Miniature golf course. Free state efile taxes   An exempt youth welfare organization operates a miniature golf course that is open to the general public. Free state efile taxes The course, which is managed by salaried employees, is substantially similar to commercial courses. Free state efile taxes The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. Free state efile taxes   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. Free state efile taxes Sales of hearing aids. Free state efile taxes   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. Free state efile taxes This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. Free state efile taxes It is not an unrelated trade or business. Free state efile taxes Nonpatient laboratory testing. Free state efile taxes   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. Free state efile taxes However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. Free state efile taxes Selling endorsements. Free state efile taxes   An exempt scientific organization enjoys an excellent reputation in the field of biological research. Free state efile taxes It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. Free state efile taxes Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. Free state efile taxes Accordingly, the sale of endorsements is an unrelated trade or business. Free state efile taxes Sponsoring entertainment events. Free state efile taxes   An exempt university has a regular faculty and a regularly enrolled student body. Free state efile taxes During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. Free state efile taxes Members of the general public also are admitted. Free state efile taxes The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. Free state efile taxes Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. Free state efile taxes Therefore, the activity is not an unrelated trade or business. Free state efile taxes Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. Free state efile taxes Volunteer workforce. Free state efile taxes   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. Free state efile taxes Example 1. Free state efile taxes A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. Free state efile taxes Example 2. Free state efile taxes A volunteer fire company conducts weekly public dances. Free state efile taxes Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. Free state efile taxes However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. Free state efile taxes Convenience of members. Free state efile taxes   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. Free state efile taxes For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. Free state efile taxes Qualified sponsorship activities. Free state efile taxes   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. Free state efile taxes Qualified sponsorship payment. Free state efile taxes   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. Free state efile taxes “Use or acknowledgment” does not include advertising the sponsor's products or services. Free state efile taxes The organization's activities include all its activities, whether or not related to its exempt purposes. Free state efile taxes   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. Free state efile taxes   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. Free state efile taxes Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. Free state efile taxes Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. Free state efile taxes   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. Free state efile taxes   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. Free state efile taxes For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. Free state efile taxes Advertising. Free state efile taxes   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. Free state efile taxes For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Free state efile taxes   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. Free state efile taxes   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. Free state efile taxes In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. Free state efile taxes Exception for contingent payments. Free state efile taxes   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. Free state efile taxes However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. Free state efile taxes Exception for periodicals. Free state efile taxes   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. Free state efile taxes For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. Free state efile taxes It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). Free state efile taxes   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. Free state efile taxes See Sales of advertising space under Examples, earlier in this chapter. Free state efile taxes Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Free state efile taxes Exception for conventions and trade shows. Free state efile taxes   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. Free state efile taxes The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. Free state efile taxes Selling donated merchandise. Free state efile taxes   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. Free state efile taxes For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. Free state efile taxes Employee association sales. Free state efile taxes   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. Free state efile taxes This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. Free state efile taxes Bingo games. Free state efile taxes   Certain bingo games are not included in the term “unrelated trade or business. Free state efile taxes ” To qualify for this exclusion, the bingo game must meet the following requirements. Free state efile taxes It meets the legal definition of bingo. Free state efile taxes It is legal where it is played. Free state efile taxes It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. Free state efile taxes Legal definition. Free state efile taxes   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. Free state efile taxes   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. Free state efile taxes For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. Free state efile taxes Legal where played. Free state efile taxes   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. Free state efile taxes The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. Free state efile taxes No for-profit games where played. Free state efile taxes   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. Free state efile taxes Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. Free state efile taxes Example. Free state efile taxes Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. Free state efile taxes In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. Free state efile taxes Several for-profit organizations conduct nightly games. Free state efile taxes Y conducts weekly bingo games in city S, while X conducts weekly games in county R. Free state efile taxes Since state law confines the for-profit organizations to city S, local jurisdiction controls. Free state efile taxes Y's bingo games conducted in city S are an unrelated trade or business. Free state efile taxes However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. Free state efile taxes Gambling activities other than bingo. Free state efile taxes   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. Free state efile taxes Pole rentals. Free state efile taxes   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). Free state efile taxes A qualified pole rental is the rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. Free state efile taxes For this purpose, the term rental includes any sale of the right to use the pole (or other structure). Free state efile taxes Distribution of low cost articles. Free state efile taxes   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. Free state efile taxes This applies to organizations described in section 501 that are eligible to receive charitable contributions. Free state efile taxes   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. Free state efile taxes   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. Free state efile taxes The maximum cost of a low cost article is $9. Free state efile taxes 70 for 2011. Free state efile taxes The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. Free state efile taxes Exchange or rental of member lists. Free state efile taxes   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. Free state efile taxes Hospital services. Free state efile taxes   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. Free state efile taxes This exclusion applies only to services described in section 501(e)(1)(A). Free state efile taxes Public entertainment activity. Free state efile taxes   An unrelated trade or business does not include a qualified public entertainment activity. Free state efile taxes A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. Free state efile taxes   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. Free state efile taxes   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. Free state efile taxes Its conducting qualified public entertainment activities will not affect determination of its exempt status. Free state efile taxes Convention or trade show activity. Free state efile taxes   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. Free state efile taxes   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. Free state efile taxes   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). Free state efile taxes The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. Free state efile taxes   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. Free state efile taxes For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. Free state efile taxes    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. Free state efile taxes The trade show itself must be a qualified convention and trade show activity. Free state efile taxes The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. Free state efile taxes Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. Free state efile taxes Prev  Up  Next   Home   More Online Publications