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Free state tax return only 2. Free state tax return only   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. Free state tax return only This chapter will help you determine the source of different types of income you may receive during the tax year. Free state tax return only This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. Free state tax return only Topics - This chapter discusses: Income source rules, and Community income. Free state tax return only Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. Free state tax return only S. Free state tax return only citizen. Free state tax return only If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. Free state tax return only S. Free state tax return only tax return. Free state tax return only You must report these amounts from sources within and outside the United States. Free state tax return only Nonresident Aliens A nonresident alien usually is subject to U. Free state tax return only S. Free state tax return only income tax only on U. Free state tax return only S. Free state tax return only source income. Free state tax return only Under limited circumstances, certain foreign source income is subject to U. Free state tax return only S. Free state tax return only tax. Free state tax return only See Foreign Income in chapter 4. Free state tax return only The general rules for determining U. Free state tax return only S. Free state tax return only source income that apply to most nonresident aliens are shown in Table 2-1. Free state tax return only The following discussions cover the general rules as well as the exceptions to these rules. Free state tax return only Not all items of U. Free state tax return only S. Free state tax return only source income are taxable. Free state tax return only See chapter 3. Free state tax return only Interest Income Generally, U. Free state tax return only S. Free state tax return only source interest income includes the following items. Free state tax return only Interest on bonds, notes, or other interest-bearing obligations of U. Free state tax return only S. Free state tax return only residents or domestic corporations. Free state tax return only Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. Free state tax return only S. Free state tax return only trade or business at any time during the tax year. Free state tax return only Original issue discount. Free state tax return only Interest from a state, the District of Columbia, or the U. Free state tax return only S. Free state tax return only Government. Free state tax return only The place or manner of payment is immaterial in determining the source of the income. Free state tax return only A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. Free state tax return only Exceptions. Free state tax return only   U. Free state tax return only S. Free state tax return only source interest income does not include the following items. Free state tax return only Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. Free state tax return only S. Free state tax return only possession. Free state tax return only However, the interest will be considered U. Free state tax return only S. Free state tax return only source interest income if either of the following apply. Free state tax return only The recipient of the interest is related to the resident alien or domestic corporation. Free state tax return only See section 954(d)(3) for the definition of related person. Free state tax return only The terms of the obligation are significantly modified after August 9, 2010. Free state tax return only Any extension of the term of the obligation is considered a significant modification. Free state tax return only Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. Free state tax return only Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. Free state tax return only Dividends In most cases, dividend income received from domestic corporations is U. Free state tax return only S. Free state tax return only source income. Free state tax return only Dividend income from foreign corporations is usually foreign source income. Free state tax return only Exceptions to both of these rules are discussed below. Free state tax return only A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. Free state tax return only Dividend equivalent payments. Free state tax return only   U. Free state tax return only S. Free state tax return only source dividends also include all dividend equivalent payments. Free state tax return only Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. Free state tax return only S. Free state tax return only sources. Free state tax return only    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. Free state tax return only You can view this regulation at www. Free state tax return only irs. Free state tax return only gov/irb/2013-52_IRB/ar08. Free state tax return only html. Free state tax return only First exception. Free state tax return only   Dividends received from a domestic corporation are not U. Free state tax return only S. Free state tax return only source income if the corporation elects to take the American Samoa economic development credit. Free state tax return only Second exception. Free state tax return only   Part of the dividends received from a foreign corporation is U. Free state tax return only S. Free state tax return only source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. Free state tax return only If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. Free state tax return only Determine the part that is U. Free state tax return only S. Free state tax return only source income by multiplying the dividend by the following fraction. Free state tax return only   Foreign corporation's gross income connected with a U. Free state tax return only S. Free state tax return only trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. Free state tax return only S. Free state tax return only source income. Free state tax return only They must be paid by a noncorporate resident or U. Free state tax return only S. Free state tax return only corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. Free state tax return only S. Free state tax return only trade or business. Free state tax return only For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). Free state tax return only Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. Free state tax return only The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. Free state tax return only If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Free state tax return only Compensation (other than certain fringe benefits) is sourced on a time basis. Free state tax return only Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Free state tax return only Or, you may be permitted to use an alternative basis to determine the source of compensation. Free state tax return only See Alternative Basis , later. Free state tax return only Multi-level marketing. Free state tax return only   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. Free state tax return only Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. Free state tax return only The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. Free state tax return only Self-employed individuals. Free state tax return only   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Free state tax return only In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Free state tax return only Time Basis Use a time basis to figure your U. Free state tax return only S. Free state tax return only source compensation (other than the fringe benefits discussed later). Free state tax return only Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. Free state tax return only The time period for which the compensation is made does not have to be a year. Free state tax return only Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Free state tax return only Example 1. Free state tax return only Christina Brooks, a resident of the Netherlands, worked 240 days for a U. Free state tax return only S. Free state tax return only company during the tax year. Free state tax return only She received $80,000 in compensation. Free state tax return only None of it was for fringe benefits. Free state tax return only Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. Free state tax return only Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. Free state tax return only S. Free state tax return only source income. Free state tax return only Example 2. Free state tax return only Rob Waters, a resident of South Africa, is employed by a corporation. Free state tax return only His annual salary is $100,000. Free state tax return only None of it is for fringe benefits. Free state tax return only During the first quarter of the year he worked entirely within the United States. Free state tax return only On April 1, Rob was transferred to Singapore for the remainder of the year. Free state tax return only Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. Free state tax return only Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. Free state tax return only 25 × $100,000). Free state tax return only All of it is U. Free state tax return only S. Free state tax return only source income because he worked entirely within the United States during that quarter. Free state tax return only The remaining $75,000 is attributable to the last three quarters of the year. Free state tax return only During those quarters, he worked 150 days in Singapore and 30 days in the United States. Free state tax return only His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. Free state tax return only Of this $75,000, $12,500 ($75,000 × 30/180) is U. Free state tax return only S. Free state tax return only source income. Free state tax return only Multi-year compensation. Free state tax return only   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Free state tax return only Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. Free state tax return only   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. Free state tax return only For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. Free state tax return only   The amount of compensation treated as from U. Free state tax return only S. Free state tax return only sources is figured by multiplying the total multi-year compensation by a fraction. Free state tax return only The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. Free state tax return only The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. Free state tax return only Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. Free state tax return only Housing. Free state tax return only Education. Free state tax return only Local transportation. Free state tax return only Tax reimbursement. Free state tax return only Hazardous or hardship duty pay as defined in Regulations section 1. Free state tax return only 861-4(b)(2)(ii)(D)(5). Free state tax return only Moving expense reimbursement. Free state tax return only The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. Free state tax return only Principal place of work. Free state tax return only   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. Free state tax return only Your principal place of work is usually the place where you spend most of your working time. Free state tax return only This could be your office, plant, store, shop, or other location. Free state tax return only If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. Free state tax return only   If you have more than one job at any time, your main job location depends on the facts in each case. Free state tax return only The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. Free state tax return only Housing. Free state tax return only   The source of a housing fringe benefit is determined based on the location of your principal place of work. Free state tax return only A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. Free state tax return only Rent. Free state tax return only Utilities (except telephone charges). Free state tax return only Real and personal property insurance. Free state tax return only Occupancy taxes not deductible under section 164 or 216(a). Free state tax return only Nonrefundable fees for securing a leasehold. Free state tax return only Rental of furniture and accessories. Free state tax return only Household repairs. Free state tax return only Residential parking. Free state tax return only Fair rental value of housing provided in kind by your employer. Free state tax return only   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. Free state tax return only ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. Free state tax return only Education. Free state tax return only   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. Free state tax return only An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. Free state tax return only Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. Free state tax return only Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. Free state tax return only Local transportation. Free state tax return only   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. Free state tax return only Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. Free state tax return only The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. Free state tax return only Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. Free state tax return only Tax reimbursement. Free state tax return only   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. Free state tax return only Moving expense reimbursement. Free state tax return only   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. Free state tax return only However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. Free state tax return only Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. Free state tax return only The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. Free state tax return only It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. Free state tax return only Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. Free state tax return only If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. Free state tax return only Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. Free state tax return only Your name and social security number (written across the top of the statement). Free state tax return only The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. Free state tax return only For each item in (2), the alternative basis of allocation of source used. Free state tax return only For each item in (2), a computation showing how the alternative allocation was computed. Free state tax return only A comparison of the dollar amount of the U. Free state tax return only S. Free state tax return only compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. Free state tax return only Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. Free state tax return only This is true whether the vessel or aircraft is owned, hired, or leased. Free state tax return only The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. Free state tax return only All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. Free state tax return only If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. Free state tax return only For transportation income from personal services, 50% of the income is U. Free state tax return only S. Free state tax return only source income if the transportation is between the United States and a U. Free state tax return only S. Free state tax return only possession. Free state tax return only For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. Free state tax return only For information on how U. Free state tax return only S. Free state tax return only source transportation income is taxed, see chapter 4. Free state tax return only Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. Free state tax return only However, see Activities to be performed outside the United States , later. Free state tax return only For example, payments for research or study in the United States made by the United States, a noncorporate U. Free state tax return only S. Free state tax return only resident, or a domestic corporation, are from U. Free state tax return only S. Free state tax return only sources. Free state tax return only Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. Free state tax return only S. Free state tax return only agent. Free state tax return only Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. Free state tax return only Activities to be performed outside the United States. Free state tax return only   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. Free state tax return only S. Free state tax return only source income. Free state tax return only    These rules do not apply to amounts paid as salary or other compensation for services. Free state tax return only See Personal Services, earlier, for the source rules that apply. Free state tax return only Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. Free state tax return only S. Free state tax return only sources. Free state tax return only That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. Free state tax return only This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). Free state tax return only If you performed services as an employee of the United States, you may receive a distribution from the U. Free state tax return only S. Free state tax return only Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Free state tax return only Your U. Free state tax return only S. Free state tax return only source income is the otherwise taxable amount of the distribution that is attributable to your total U. Free state tax return only S. Free state tax return only Government basic pay other than tax-exempt pay for services performed outside the United States. Free state tax return only Rents or Royalties Your U. Free state tax return only S. Free state tax return only source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. Free state tax return only U. Free state tax return only S. Free state tax return only source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. Free state tax return only Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. Free state tax return only Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. Free state tax return only Natural resources. Free state tax return only   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. Free state tax return only For information on determining that part, see section 1. Free state tax return only 863-1(b) of the regulations. Free state tax return only Table 2-1. Free state tax return only Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. Free state tax return only S. Free state tax return only or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Free state tax return only Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. Free state tax return only For more information, see section 1. Free state tax return only 863-1(b) of the regulations. Free state tax return only *Exceptions include: a) Dividends paid by a U. Free state tax return only S. Free state tax return only corporation are foreign source if the corporation elects the  American Samoa economic development credit. Free state tax return only  b) Part of a dividend paid by a foreign corporation is U. Free state tax return only S. Free state tax return only source if at least 25% of the  corporation's gross income is effectively connected with a U. Free state tax return only S. Free state tax return only trade or business for the  3 tax years before the year in which the dividends are declared. Free state tax return only Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. Free state tax return only Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. Free state tax return only If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. Free state tax return only Tax home. Free state tax return only   Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Free state tax return only Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. Free state tax return only If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. Free state tax return only If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Free state tax return only Inventory property. Free state tax return only   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Free state tax return only Income from the sale of inventory that you purchased is sourced where the property is sold. Free state tax return only Generally, this is where title to the property passes to the buyer. Free state tax return only For example, income from the sale of inventory in the United States is U. Free state tax return only S. Free state tax return only source income, whether you purchased it in the United States or in a foreign country. Free state tax return only   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. Free state tax return only For information on making this allocation, see section 1. Free state tax return only 863-3 of the regulations. Free state tax return only   These rules apply even if your tax home is not in the United States. Free state tax return only Depreciable property. Free state tax return only   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. Free state tax return only You allocate this part of the gain to sources in the United States based on the ratio of U. Free state tax return only S. Free state tax return only depreciation adjustments to total depreciation adjustments. Free state tax return only The rest of this part of the gain is considered to be from sources outside the United States. Free state tax return only   For this purpose, “U. Free state tax return only S. Free state tax return only depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. Free state tax return only S. Free state tax return only sources. Free state tax return only However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. Free state tax return only S. Free state tax return only depreciation adjustments. Free state tax return only But there are some exceptions for certain transportation, communications, and other property used internationally. Free state tax return only   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. Free state tax return only   A loss is sourced in the same way as the depreciation deductions were sourced. Free state tax return only However, if the property was used predominantly in the United States, the entire loss reduces U. Free state tax return only S. Free state tax return only source income. Free state tax return only   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. Free state tax return only Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. Free state tax return only The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. Free state tax return only A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. Free state tax return only Intangible property. Free state tax return only   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. Free state tax return only The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. Free state tax return only This is the same as the source rule for gain from the sale of depreciable property. Free state tax return only See Depreciable property , earlier, for details on how to apply this rule. Free state tax return only   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. Free state tax return only If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. Free state tax return only If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. Free state tax return only Sales through offices or fixed places of business. Free state tax return only   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. Free state tax return only S. Free state tax return only source income. Free state tax return only However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. Free state tax return only   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. Free state tax return only S. Free state tax return only source income. Free state tax return only The income is treated as U. Free state tax return only S. Free state tax return only source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. Free state tax return only This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. Free state tax return only Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. Free state tax return only S. Free state tax return only state, or a U. Free state tax return only S. Free state tax return only possession, you generally must follow those laws to determine the income of yourself and your spouse for U. Free state tax return only S. Free state tax return only tax purposes. Free state tax return only But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. Free state tax return only S. Free state tax return only citizen or resident and you do not both choose to be treated as U. Free state tax return only S. Free state tax return only residents as explained in chapter 1. Free state tax return only In these cases, you and your spouse must report community income as explained later. Free state tax return only Earned income. Free state tax return only   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. Free state tax return only That spouse must report all of it on his or her separate return. Free state tax return only Trade or business income. Free state tax return only   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. Free state tax return only That spouse must report all of it on his or her separate return. Free state tax return only Partnership income (or loss). Free state tax return only   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. Free state tax return only The partner must report all of it on his or her separate return. Free state tax return only Separate property income. Free state tax return only   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. Free state tax return only That spouse must report all of it on his or her separate return. Free state tax return only Use the appropriate community property law to determine what is separate property. Free state tax return only Other community income. Free state tax return only   All other community income is treated as provided by the applicable community property laws. Free state tax return only Prev  Up  Next   Home   More Online Publications
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The Endangered Species Program, run by the U.S. Fish and Wildlife Service, administers the Endangered Species Act. Working with a variety of partners, the program aims to enable the recovery of species on the Endangered Species List and to prevent more species from being added to the list through proactive conservation efforts.

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The Free State Tax Return Only

Free state tax return only 1. Free state tax return only   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. Free state tax return only Custodian account for your child. Free state tax return only Penalty for failure to supply SSN. Free state tax return only Certification. Free state tax return only Underreported interest and dividends. Free state tax return only How to stop backup withholding due to underreporting. Free state tax return only How to stop backup withholding due to an incorrect identification number. Free state tax return only Reporting backup withholding. Free state tax return only Nonresident aliens. Free state tax return only Penalties. Free state tax return only Savings account with parent as trustee. Free state tax return only Interest IncomeInterest not reported on Form 1099-INT. Free state tax return only Nominees. Free state tax return only Incorrect amount. Free state tax return only Information reporting requirement. Free state tax return only Taxable Interest — General Below-Market Loans U. Free state tax return only S. Free state tax return only Savings Bonds U. Free state tax return only S. Free state tax return only Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. Free state tax return only How To Report Interest IncomeSchedule B (Form 1040A or 1040). Free state tax return only Worksheet for savings bonds distributed from a retirement or profit-sharing plan. Free state tax return only File Form 1099-INT with the IRS. Free state tax return only Dividends and Other DistributionsDividends not reported on Form 1099-DIV. Free state tax return only Nominees. Free state tax return only Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. Free state tax return only Independent contractor. Free state tax return only Investment interest deducted. Free state tax return only Exception 1. Free state tax return only Exception 2. Free state tax return only Undistributed capital gains. Free state tax return only File Form 1099-DIV with the IRS. Free state tax return only Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. Free state tax return only Passive activity losses. Free state tax return only Form 8582. Free state tax return only Investment ClubsInvestments in name of member. Free state tax return only Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . Free state tax return only Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. Free state tax return only S. Free state tax return only Individual Income Tax Return 1040A U. Free state tax return only S. Free state tax return only Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. Free state tax return only S. Free state tax return only Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Free state tax return only S. Free state tax return only Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Free state tax return only General Information A few items of general interest are covered here. Free state tax return only Recordkeeping. Free state tax return only You should keep a list showing sources and investment income amounts you receive during the year. Free state tax return only Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. Free state tax return only Net investment income tax (NIIT). Free state tax return only   Beginning in 2013, you may be subject to the NIIT. Free state tax return only The NIIT is a 3. Free state tax return only 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Free state tax return only    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. Free state tax return only Tax on unearned income of certain children. Free state tax return only   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Free state tax return only This may happen if all of the following are true. Free state tax return only The child had more than $2,000 of unearned income. Free state tax return only The child is required to file a tax return. Free state tax return only The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. Free state tax return only At least one of the child's parents was alive at the end of 2013. Free state tax return only The child does not file a joint return for 2013. Free state tax return only A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. Free state tax return only   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. Free state tax return only If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Free state tax return only    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Free state tax return only Use Form 8814 for this purpose. Free state tax return only   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. Free state tax return only Beneficiary of an estate or trust. Free state tax return only   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. Free state tax return only You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Free state tax return only , from the fiduciary. Free state tax return only Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Free state tax return only Social security number (SSN). Free state tax return only   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Free state tax return only This includes payers of interest and dividends. Free state tax return only If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Free state tax return only SSN for joint account. Free state tax return only   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Free state tax return only (For information on who owns the funds in a joint account, see Joint accounts , later. Free state tax return only ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Free state tax return only This is because only one name and SSN can be shown on Form 1099. Free state tax return only   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Free state tax return only For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Free state tax return only Custodian account for your child. Free state tax return only   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Free state tax return only For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. Free state tax return only Penalty for failure to supply SSN. Free state tax return only   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. Free state tax return only The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. Free state tax return only   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. Free state tax return only   If you fail to supply an SSN, you may also be subject to backup withholding. Free state tax return only Backup withholding. Free state tax return only   Your investment income is generally not subject to regular withholding. Free state tax return only However, it may be subject to backup withholding to ensure that income tax is collected on the income. Free state tax return only Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Free state tax return only   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). Free state tax return only Certification. Free state tax return only   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. Free state tax return only Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. Free state tax return only If you fail to make this certification, backup withholding may begin immediately on your new account or investment. Free state tax return only Underreported interest and dividends. Free state tax return only   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. Free state tax return only How to stop backup withholding due to underreporting. Free state tax return only   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. Free state tax return only You must show that at least one of the following situations applies. Free state tax return only No underreporting occurred. Free state tax return only You have a bona fide dispute with the IRS about whether underreporting occurred. Free state tax return only Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. Free state tax return only You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. Free state tax return only   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. Free state tax return only How to stop backup withholding due to an incorrect identification number. Free state tax return only   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. Free state tax return only Reporting backup withholding. Free state tax return only   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. Free state tax return only The information return will show any backup withholding as “Federal income tax withheld. Free state tax return only ” Nonresident aliens. Free state tax return only    Generally, payments made to nonresident aliens are not subject to backup withholding. Free state tax return only You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. Free state tax return only However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. Free state tax return only For information on the 30% rate, see Publication 519, U. Free state tax return only S. Free state tax return only Tax Guide for Aliens. Free state tax return only Penalties. Free state tax return only   There are civil and criminal penalties for giving false information to avoid backup withholding. Free state tax return only The civil penalty is $500. Free state tax return only The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. Free state tax return only Where to report investment income. Free state tax return only   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. Free state tax return only But see the rest of this publication for detailed information about reporting investment income. Free state tax return only Joint accounts. Free state tax return only   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. Free state tax return only Community property states. Free state tax return only   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. Free state tax return only If you file separate returns, you must each report one-half of any taxable distribution. Free state tax return only See Publication 555, Community Property, for more information on community income. Free state tax return only   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. Free state tax return only Example. Free state tax return only You and your spouse have a joint money market account. Free state tax return only Under state law, half the income from the account belongs to you, and half belongs to your spouse. Free state tax return only If you file separate returns, you each report half the income. Free state tax return only Income from property given to a child. Free state tax return only   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Free state tax return only   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Free state tax return only Savings account with parent as trustee. Free state tax return only   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Free state tax return only The savings account legally belongs to the child. Free state tax return only The parents are not legally permitted to use any of the funds to support the child. Free state tax return only Table 1-1. Free state tax return only Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. Free state tax return only ) Type of Income If you file Form 1040, report on . Free state tax return only . Free state tax return only . Free state tax return only If you can file Form 1040A, report on . Free state tax return only . Free state tax return only . Free state tax return only If you can file Form 1040EZ, report on . Free state tax return only . Free state tax return only . Free state tax return only Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. Free state tax return only ) Line 8a (You may need to file Schedule B as well. Free state tax return only ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. Free state tax return only ) Line 9a (You may need to file Schedule B as well. Free state tax return only )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Free state tax return only Use Part II if you held the shares more than 1 year. Free state tax return only Use Part I if you held your mutual fund shares 1 year or less. Free state tax return only For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. Free state tax return only Accuracy-related penalty. Free state tax return only   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. Free state tax return only For information on the penalty and any interest that applies, see Penalties in chapter 2. Free state tax return only Interest Income This section discusses the tax treatment of different types of interest income. Free state tax return only In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Free state tax return only (It does not have to be entered in your passbook. Free state tax return only ) Exceptions to this rule are discussed later. Free state tax return only Form 1099-INT. Free state tax return only   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Free state tax return only This form shows you the interest you received during the year. Free state tax return only Keep this form for your records. Free state tax return only You do not have to attach it to your tax return. Free state tax return only   Report on your tax return the total interest income you receive for the tax year. Free state tax return only Interest not reported on Form 1099-INT. Free state tax return only   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Free state tax return only For example, you may receive distributive shares of interest from partnerships or S corporations. Free state tax return only This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Free state tax return only , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Free state tax return only Nominees. Free state tax return only   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Free state tax return only   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. Free state tax return only Incorrect amount. Free state tax return only   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Free state tax return only The new Form 1099-INT you receive will be marked “Corrected. Free state tax return only ” Form 1099-OID. Free state tax return only   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Free state tax return only For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Free state tax return only Exempt-interest dividends. Free state tax return only   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Free state tax return only (However, see Information reporting requirement , next. Free state tax return only ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Free state tax return only You do not reduce your basis for distributions that are exempt-interest dividends. Free state tax return only Information reporting requirement. Free state tax return only   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Free state tax return only This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Free state tax return only See How To Report Interest Income , later. Free state tax return only Note. Free state tax return only Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Free state tax return only The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. Free state tax return only See Form 6251 and its instructions for more information about this tax. Free state tax return only Private activity bonds are discussed later under State or Local Government Obligations. Free state tax return only Interest on VA dividends. Free state tax return only   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Free state tax return only This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Free state tax return only Individual retirement arrangements (IRAs). Free state tax return only   Interest on a Roth IRA generally is not taxable. Free state tax return only Interest on a traditional IRA is tax deferred. Free state tax return only You generally do not include it in your income until you make withdrawals from the IRA. Free state tax return only See Publication 590 for more information. Free state tax return only Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Free state tax return only The following are some sources of taxable interest. Free state tax return only Dividends that are actually interest. Free state tax return only   Certain distributions commonly called dividends are actually interest. Free state tax return only You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Free state tax return only  The “dividends” will be shown as interest income on Form 1099-INT. Free state tax return only Money market funds. Free state tax return only   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Free state tax return only Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Free state tax return only Certificates of deposit and other deferred interest accounts. Free state tax return only   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Free state tax return only You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Free state tax return only The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Free state tax return only If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Free state tax return only Interest subject to penalty for early withdrawal. Free state tax return only   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Free state tax return only You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Free state tax return only See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. Free state tax return only Money borrowed to invest in certificate of deposit. Free state tax return only   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Free state tax return only You must report the total interest you earn on the certificate in your income. Free state tax return only If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Free state tax return only See Interest Expenses in chapter 3. Free state tax return only Example. Free state tax return only You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Free state tax return only The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Free state tax return only The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Free state tax return only The bank also gives you a statement showing that you paid $310 interest for 2013. Free state tax return only You must include the $575 in your income. Free state tax return only If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Free state tax return only Gift for opening account. Free state tax return only   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Free state tax return only   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Free state tax return only For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Free state tax return only The value is determined by the cost to the financial institution. Free state tax return only Example. Free state tax return only You open a savings account at your local bank and deposit $800. Free state tax return only The account earns $20 interest. Free state tax return only You also receive a $15 calculator. Free state tax return only If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Free state tax return only You must report $35 interest income on your tax return. Free state tax return only Interest on insurance dividends. Free state tax return only   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Free state tax return only However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Free state tax return only Prepaid insurance premiums. Free state tax return only   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Free state tax return only U. Free state tax return only S. Free state tax return only obligations. Free state tax return only   Interest on U. Free state tax return only S. Free state tax return only obligations, such as U. Free state tax return only S. Free state tax return only Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Free state tax return only Interest on tax refunds. Free state tax return only   Interest you receive on tax refunds is taxable income. Free state tax return only Interest on condemnation award. Free state tax return only   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Free state tax return only Installment sale payments. Free state tax return only   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Free state tax return only That interest is taxable when you receive it. Free state tax return only If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Free state tax return only See Unstated Interest and Original Issue Discount (OID) in Publication 537. Free state tax return only Interest on annuity contract. Free state tax return only   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Free state tax return only Usurious interest. Free state tax return only   Usurious interest is interest charged at an illegal rate. Free state tax return only This is taxable as interest unless state law automatically changes it to a payment on the principal. Free state tax return only Interest income on frozen deposits. Free state tax return only   Exclude from your gross income interest on frozen deposits. Free state tax return only A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Free state tax return only   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Free state tax return only If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. Free state tax return only   The interest you exclude is treated as credited to your account in the following year. Free state tax return only You must include it in income in the year you can withdraw it. Free state tax return only Example. Free state tax return only $100 of interest was credited on your frozen deposit during the year. Free state tax return only You withdrew $80 but could not withdraw any more as of the end of the year. Free state tax return only You must include $80 in your income and exclude $20 from your income for the year. Free state tax return only You must include the $20 in your income for the year you can withdraw it. Free state tax return only Bonds traded flat. Free state tax return only    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Free state tax return only The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Free state tax return only When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Free state tax return only Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. Free state tax return only See Bonds Sold Between Interest Dates , later in this chapter. Free state tax return only Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. Free state tax return only The below-market loan rules and exceptions are described in this section. Free state tax return only For more information, see section 7872 of the Internal Revenue Code and its regulations. Free state tax return only If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Free state tax return only Loans subject to the rules. Free state tax return only   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. Free state tax return only A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. Free state tax return only A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. Free state tax return only Forgone interest. Free state tax return only   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Free state tax return only Applicable federal rate. Free state tax return only   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Free state tax return only Some IRS offices have these bulletins available for research. Free state tax return only See chapter 5, How To Get Tax Help , for other ways to get this information. Free state tax return only Rules for below-market loans. Free state tax return only   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Free state tax return only Gift and demand loans. Free state tax return only   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. Free state tax return only   A demand loan is a loan payable in full at any time upon demand by the lender. Free state tax return only A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. Free state tax return only   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. Free state tax return only The borrower is generally treated as transferring the additional payment back to the lender as interest. Free state tax return only The lender must report that amount as interest income. Free state tax return only   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Free state tax return only The borrower may have to report this payment as taxable income, depending on its classification. Free state tax return only These transfers are considered to occur annually, generally on December 31. Free state tax return only Term loans. Free state tax return only   A term loan is any loan that is not a demand loan. Free state tax return only A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. Free state tax return only   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. Free state tax return only ) on the date the loan is made. Free state tax return only The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. Free state tax return only An equal amount is treated as original issue discount (OID). Free state tax return only The lender must report the annual part of the OID as interest income. Free state tax return only The borrower may be able to deduct the OID as interest expense. Free state tax return only See Original Issue Discount (OID) , later. Free state tax return only Exceptions to the below-market loan rules. Free state tax return only   Exceptions to the below-market loan rules are discussed here. Free state tax return only Exception for loans of $10,000 or less. Free state tax return only   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. Free state tax return only This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. Free state tax return only This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. Free state tax return only Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Free state tax return only Exception for loans to continuing care facilities. Free state tax return only   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. Free state tax return only For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). Free state tax return only Exception for loans without significant tax effect. Free state tax return only   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Free state tax return only These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Free state tax return only S. Free state tax return only trade or business and would not be exempt from U. Free state tax return only S. Free state tax return only tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. Free state tax return only For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Free state tax return only Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. Free state tax return only If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. Free state tax return only Limit on forgone interest for gift loans of $100,000 or less. Free state tax return only   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. Free state tax return only If the borrower's net investment income is $1,000 or less, it is treated as zero. Free state tax return only This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. Free state tax return only Effective dates. Free state tax return only    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. Free state tax return only U. Free state tax return only S. Free state tax return only Savings Bonds This section provides tax information on U. Free state tax return only S. Free state tax return only savings bonds. Free state tax return only It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Free state tax return only U. Free state tax return only S. Free state tax return only savings bonds currently offered to individuals include Series EE bonds and Series I bonds. Free state tax return only For other information on U. Free state tax return only S. Free state tax return only savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. Free state tax return only O. Free state tax return only Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. Free state tax return only O. Free state tax return only Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. Free state tax return only O. Free state tax return only Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Free state tax return only treasurydirect. Free state tax return only gov/indiv/indiv. Free state tax return only htm. Free state tax return only Accrual method taxpayers. Free state tax return only   If you use an accrual method of accounting, you must report interest on U. Free state tax return only S. Free state tax return only savings bonds each year as it accrues. Free state tax return only You cannot postpone reporting interest until you receive it or until the bonds mature. Free state tax return only Cash method taxpayers. Free state tax return only   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Free state tax return only S. Free state tax return only savings bonds when you receive it. Free state tax return only But see Reporting options for cash method taxpayers , later. Free state tax return only Series HH bonds. Free state tax return only   These bonds were issued at face value. Free state tax return only Interest is paid twice a year by direct deposit to your bank account. Free state tax return only If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Free state tax return only   Series HH bonds were first offered in 1980 and last offered in August 2004. Free state tax return only Before 1980, series H bonds were issued. Free state tax return only Series H bonds are treated the same as series HH bonds. Free state tax return only If you are a cash method taxpayer, you must report the interest when you receive it. Free state tax return only   Series H bonds have a maturity period of 30 years. Free state tax return only Series HH bonds mature in 20 years. Free state tax return only The last series H bonds matured in 2009. Free state tax return only The last series HH bonds will mature in 2024. Free state tax return only Series EE and series I bonds. Free state tax return only   Interest on these bonds is payable when you redeem the bonds. Free state tax return only The difference between the purchase price and the redemption value is taxable interest. Free state tax return only Series EE bonds. Free state tax return only   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Free state tax return only Before July 1980, series E bonds were issued. Free state tax return only The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Free state tax return only Paper series EE and series E bonds are issued at a discount. Free state tax return only The face value is payable to you at maturity. Free state tax return only Electronic series EE bonds are issued at their face value. Free state tax return only The face value plus accrued interest is payable to you at maturity. Free state tax return only As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Free state tax return only    Owners of paper series EE bonds can convert them to electronic bonds. Free state tax return only These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Free state tax return only Series I bonds. Free state tax return only   Series I bonds were first offered in 1998. Free state tax return only These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Free state tax return only The face value plus all accrued interest is payable to you at maturity. Free state tax return only Reporting options for cash method taxpayers. Free state tax return only   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Free state tax return only Method 1. Free state tax return only Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. Free state tax return only (However, see Savings bonds traded , later. Free state tax return only )  Note. Free state tax return only Series EE bonds issued in 1983 matured in 2013. Free state tax return only If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Free state tax return only The last series E bonds were issued in 1980 and matured in 2010. Free state tax return only If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Free state tax return only Method 2. Free state tax return only Choose to report the increase in redemption value as interest each year. Free state tax return only  You must use the same method for all series EE, series E, and series I bonds you own. Free state tax return only If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Free state tax return only If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Free state tax return only To learn how, see Education Savings Bond Program, later. Free state tax return only Change from method 1. Free state tax return only   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Free state tax return only In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Free state tax return only   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Free state tax return only Change from method 2. Free state tax return only   To change from method 2 to method 1, you must request permission from the IRS. Free state tax return only Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Free state tax return only You have typed or printed the following number at the top: “131. Free state tax return only ” It includes your name and social security number under “131. Free state tax return only ” It includes the year of change (both the beginning and ending dates). Free state tax return only It identifies the savings bonds for which you are requesting this change. Free state tax return only It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Free state tax return only   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Free state tax return only   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Free state tax return only On the statement, type or print “Filed pursuant to section 301. Free state tax return only 9100-2. Free state tax return only ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Free state tax return only    By the date you file the original statement with your return, you must also send a signed copy to the address below. Free state tax return only    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Free state tax return only O. Free state tax return only Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Free state tax return only Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. Free state tax return only In that case, follow the form instructions for an automatic change. Free state tax return only No user fee is required. Free state tax return only Co-owners. Free state tax return only   If a U. Free state tax return only S. Free state tax return only savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Free state tax return only One co-owner's funds used. Free state tax return only   If you used your funds to buy the bond, you must pay the tax on the interest. Free state tax return only This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Free state tax return only Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Free state tax return only The co-owner who redeemed the bond is a “nominee. Free state tax return only ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. Free state tax return only Both co-owners' funds used. Free state tax return only   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Free state tax return only Community property. Free state tax return only   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Free state tax return only If you file separate returns, each of you generally must report one-half of the bond interest. Free state tax return only For more information about community property, see Publication 555. Free state tax return only Table 1-2. Free state tax return only   These rules are also shown in Table 1-2. Free state tax return only Child as only owner. Free state tax return only   Interest on U. Free state tax return only S. Free state tax return only savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. Free state tax return only If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. Free state tax return only Choice to report interest each year. Free state tax return only   The choice to report the accrued interest each year can be made either by your child or by you for your child. Free state tax return only This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Free state tax return only Either you or your child should keep a copy of this return. Free state tax return only   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. Free state tax return only S. Free state tax return only savings bond interest under this choice. Free state tax return only However, see Tax on unearned income of certain children , earlier, under General Information. Free state tax return only Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . Free state tax return only Ownership transferred. Free state tax return only   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Free state tax return only But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Free state tax return only   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Free state tax return only Example. Free state tax return only You bought series EE bonds entirely with your own funds. Free state tax return only You did not choose to report the accrued interest each year. Free state tax return only Later, you transfer the bonds to your former spouse under a divorce agreement. Free state tax return only You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Free state tax return only Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. Free state tax return only Table 1-2. Free state tax return only Who Pays the Tax on U. Free state tax return only S. Free state tax return only Savings Bond Interest IF . Free state tax return only . Free state tax return only . Free state tax return only THEN the interest must be reported by . Free state tax return only . Free state tax return only . Free state tax return only you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Free state tax return only you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Free state tax return only you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Free state tax return only you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Free state tax return only If you file separate returns, both you and your spouse generally report one-half of the interest. Free state tax return only Purchased jointly. Free state tax return only   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Free state tax return only The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Free state tax return only This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Free state tax return only   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Free state tax return only But the new co-owner will report only his or her share of the interest earned after the transfer. Free state tax return only   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Free state tax return only Example 1. Free state tax return only You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Free state tax return only The bond was issued to you and your spouse as co-owners. Free state tax return only You both postpone reporting interest on the bond. Free state tax return only You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Free state tax return only At that time neither you nor your spouse has to report the interest earned to the date of reissue. Free state tax return only Example 2. Free state tax return only You bought a $1,000 series EE savings bond entirely with your own funds. Free state tax return only The bond was issued to you and your spouse as co-owners. Free state tax return only You both postponed reporting interest on the bond. Free state tax return only You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Free state tax return only You must report half the interest earned to the date of reissue. Free state tax return only Transfer to a trust. Free state tax return only   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Free state tax return only However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Free state tax return only You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Free state tax return only   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Free state tax return only See Savings bonds traded , later. Free state tax return only Decedents. Free state tax return only   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Free state tax return only Decedent who reported interest each year. Free state tax return only   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. Free state tax return only The person who acquires the bonds includes in income only interest earned after the date of death. Free state tax return only Decedent who postponed reporting interest. Free state tax return only   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. Free state tax return only The surviving spouse or personal representative (executor, administrator, etc. Free state tax return only ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. Free state tax return only The person who acquires the bonds then includes in income only interest earned after the date of death. Free state tax return only If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. Free state tax return only All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. Free state tax return only If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. Free state tax return only In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. Free state tax return only For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. Free state tax return only Example 1. Free state tax return only Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. Free state tax return only He had bought the bond for $500 and had not chosen to report the interest each year. Free state tax return only At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. Free state tax return only Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. Free state tax return only The $200 is income in respect of the decedent. Free state tax return only You are a cash method taxpayer and do not choose to report the interest each year as it is earned. Free state tax return only If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. Free state tax return only For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. Free state tax return only Example 2. Free state tax return only If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. Free state tax return only $300 is the interest earned after your uncle's death. Free state tax return only Example 3. Free state tax return only If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. Free state tax return only Example 4. Free state tax return only When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. Free state tax return only You were the beneficiary of these bonds. Free state tax return only Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. Free state tax return only Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. Free state tax return only The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. Free state tax return only You must report any interest received during the year as income on your return. Free state tax return only The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. Free state tax return only For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. Free state tax return only Savings bonds distributed from a retirement or profit-sharing plan. Free state tax return only   If you acquire a U. Free state tax return only S. Free state tax return only savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). Free state tax return only When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. Free state tax return only To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. Free state tax return only Savings bonds traded. Free state tax return only   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Free state tax return only (You cannot trade series I bonds for series HH bonds. Free state tax return only After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Free state tax return only ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Free state tax return only When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Free state tax return only Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Free state tax return only Example. Free state tax return only You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Free state tax return only You reported the $223 as taxable income on your tax return. Free state tax return only At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Free state tax return only You hold the series HH bonds until maturity, when you receive $2,500. Free state tax return only You must report $300 as interest income in the year of maturity. Free state tax return only This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Free state tax return only (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Free state tax return only ) Choice to report interest in year of trade. Free state tax return only   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. Free state tax return only If you made this choice, it is treated as a change from method 1. Free state tax return only See Change from method 1 under Series EE and series I bonds, earlier. Free state tax return only Form 1099-INT for U. Free state tax return only S. Free state tax return only savings bond interest. Free state tax return only   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Free state tax return only Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Free state tax return only However, your Form 1099-INT may show more interest than you have to include on your income tax return. Free state tax return only For example, this may happen if any of the following are true. Free state tax return only You chose to report the increase in the redemption value of the bond each year. Free state tax return only The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Free state tax return only You received the bond from a decedent. Free state tax return only The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Free state tax return only Ownership of the bond was transferred. Free state tax return only The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Free state tax return only You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Free state tax return only The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Free state tax return only (See Co-owners , earlier in this section, for more information about the reporting requirements. Free state tax return only ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Free state tax return only The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Free state tax return only (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free state tax return only , for the year of distribution. Free state tax return only )   For more information on including the correct amount of interest on your return, see U. Free state tax return only S. Free state tax return only savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. Free state tax return only    Interest on U. Free state tax return only S. Free state tax return only savings bonds is exempt from state and local taxes. Free state tax return only The Form 1099-INT you receive will indicate the amount that is for U. Free state tax return only S. Free state tax return only savings bonds interest in box 3. Free state tax return only Do not include this income on your state or local income tax return. Free state tax return only Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Free state tax return only S. Free state tax return only savings bonds during the year if you pay qualified higher educational expenses during the same year. Free state tax return only This exclusion is known as the Education Savings Bond Program. Free state tax return only You do not qualify for this exclusion if your filing status is married filing separately. Free state tax return only Form 8815. Free state tax return only   Use Form 8815 to figure your exclusion. Free state tax return only Attach the form to your Form 1040 or Form 1040A. Free state tax return only Qualified U. Free state tax return only S. Free state tax return only savings bonds. Free state tax return only   A qualified U. Free state tax return only S. Free state tax return only savings bond is a series EE bond issued after 1989 or a series I bond. Free state tax return only The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Free state tax return only You must be at least 24 years old before the bond's issue date. Free state tax return only For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Free state tax return only    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Free state tax return only Beneficiary. Free state tax return only   You can designate any individual (including a child) as a beneficiary of the bond. Free state tax return only Verification by IRS. Free state tax return only   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Free state tax return only Qualified expenses. Free state tax return only   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Free state tax return only   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Free state tax return only For information about these programs, see Publication 970, Tax Benefits for Education. Free state tax return only   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Free state tax return only Eligible educational institutions. Free state tax return only   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. Free state tax return only Reduction for certain benefits. Free state tax return only   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Free state tax return only Tax-free part of scholarships and fellowships. Free state tax return only Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Free state tax return only Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Free state tax return only Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Free state tax return only Any expense used in figuring the American Opportunity and lifetime learning credits. Free state tax return only For information about these benefits, see Publication 970. Free state tax return only Amount excludable. Free state tax return only   If the total proceeds (interest and principal) from the qualified U. Free state tax return only S. Free state tax return only savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Free state tax return only If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Free state tax return only   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Free state tax return only The numer