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Free State Tax

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Free State Tax

Free state tax Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. Free state tax Dispositions — mass asset accounts. Free state tax Early dispositions — 15-year real property. Free state tax Early dispositions — 18- and 19-year real property. Free state tax Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. Free state tax It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Free state tax These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. Free state tax If you placed property in service during this period, you must continue to figure your depreciation under ACRS. Free state tax If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Free state tax Listed property includes cars, other means of transportation, and certain computers. Free state tax Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. Free state tax ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. Free state tax It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Free state tax ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. Free state tax The alternate ACRS method used a recovery percentage based on a modified straight line method. Free state tax The law prescribes fixed percentages to be uses for each class of property. Free state tax Property depreciable under ACRS is called recovery property. Free state tax The recovery class of property determines the recovery period. Free state tax Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. Free state tax Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. Free state tax To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. Free state tax You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. Free state tax For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. Free state tax What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. Free state tax It includes new or used and real or personal property. Free state tax The property must be for use in a trade or business or for the production of income. Free state tax Property you acquired before 1981 or after 1986 is not ACRS recovery property. Free state tax For information on depreciating property acquired before 1981, see chapter 2. Free state tax For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. Free state tax Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. Free state tax It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. Free state tax Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. Free state tax Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. Free state tax Intangible property. Free state tax   Intangible property is not depreciated under ACRS. Free state tax Property depreciated under methods not expressed in a term of years. Free state tax   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. Free state tax This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). Free state tax Public utility property. Free state tax   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. Free state tax Additions or improvements to ACRS property after 1986. Free state tax   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. Free state tax ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. Free state tax It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Free state tax How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Free state tax Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. Free state tax Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Free state tax Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. Free state tax However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. Free state tax If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. Free state tax If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. Free state tax See Publication 551. Free state tax Classes of Recovery Property All recovery property under ACRS is in one of the following classes. Free state tax The class for your property was determined when you began to depreciate it. Free state tax 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Free state tax Race horses over 2 years old when placed in service are 3-year property. Free state tax Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. Free state tax The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. Free state tax You cannot claim depreciation for this property after 1988. Free state tax 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. Free state tax It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). Free state tax The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. Free state tax You cannot claim depreciation for this property after 1990. Free state tax 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. Free state tax Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. Free state tax You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. Free state tax For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. Free state tax The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. Free state tax Example. Free state tax On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. Free state tax You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. Free state tax On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. Free state tax The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Free state tax Your ACRS deduction was $3,000 (8% × $37,500). Free state tax In 1987, your ACRS deduction was $5,250 (14% × $37,500). Free state tax In 1988, your ACRS deduction was $4,500 (12% × $37,500). Free state tax In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). Free state tax In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). Free state tax 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. Free state tax It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. Free state tax Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. Free state tax You could group 15-year real property by month and year placed in service. Free state tax In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. Free state tax You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. Free state tax Example. Free state tax On March 5, 1984, you placed an apartment building in service in your business. Free state tax It is 15-year real property. Free state tax After subtracting the value of the land, your unadjusted basis in the building is $250,000. Free state tax You use the calendar year as your tax year. Free state tax March is the third month of your tax year. Free state tax Your ACRS deduction for 1984 was $25,000 (10% × $250,000). Free state tax For 1985, the percentage for the third month of the second year of the recovery period is 11%. Free state tax Your deduction was $27,500 (11% × $250,000). Free state tax For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. Free state tax For 1989 through 1992, the percentage for the third month is 6%. Free state tax Your deduction each year is $15,000 (6% × $250,000). Free state tax For 1993, 1994, and 1995, the percentage for the third month is 5%. Free state tax Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. Free state tax Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Free state tax Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. Free state tax Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. Free state tax Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Free state tax The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Free state tax Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Free state tax Use the percentages listed under that month for each year of the recovery period. Free state tax Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Free state tax Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. Free state tax Example. Free state tax In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. Free state tax You use the calendar year as your tax year. Free state tax You use Table C–3 because the property was placed in service after May 8, 1985. Free state tax Your unadjusted basis for the property, not including the land, was $59,000. Free state tax Your deduction for 1986 through 2001 is shown in the following table. Free state tax Year Rate Deduction 1986 8. Free state tax 9% $5,251 1987 12. Free state tax 1% 7,139 1988 10. Free state tax 5% 6,195 1989 9. Free state tax 1% 5,369 1990 7. Free state tax 9% 4,661 1991 6. Free state tax 9% 4,071 1992 5. Free state tax 9% 3,481 1993 5. Free state tax 2% 3,068 1994 4. Free state tax 6% 2,714 1995 4. Free state tax 6% 2,714 1996 4. Free state tax 6% 2,714 1997 4. Free state tax 6% 2,714 1998 4. Free state tax 6% 2,714 1999 4. Free state tax 5% 2,655 2000 4. Free state tax 5% 2,655 2001 1. Free state tax 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. Free state tax It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. Free state tax The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. Free state tax There are also tables for 18-year real property in the Appendix. Free state tax Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Free state tax Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. Free state tax Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Free state tax Use the percentages listed under that month for each year of the recovery period. Free state tax Example. Free state tax On April 28, 1985, you bought and placed in service a rental house. Free state tax The house, not including the land, cost $95,000. Free state tax This is your unadjusted basis for the house. Free state tax You use the calendar year as your tax year. Free state tax Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. Free state tax You use Table 4 to figure your deduction for the house. Free state tax April is the fourth month of your tax year. Free state tax Your deduction for 1985 through 2003 is shown in the following table. Free state tax Year Rate Deduction 1985 7. Free state tax 0% $6,650 1986 9. Free state tax 0% 8,550 1987 8. Free state tax 0% 7,600 1988 7. Free state tax 0% 6,650 1989 7. Free state tax 0% 6,650 1990 6. Free state tax 0% 5,700 1991 5. Free state tax 0% 4,750 1992 5. Free state tax 0% 4,750 1993 5. Free state tax 0% 4,750 1994 5. Free state tax 0% 4,750 1995 5. Free state tax 0% 4,750 1996 5. Free state tax 0% 4,750 1997 5. Free state tax 0% 4,750 1998 4. Free state tax 0% 3,800 1999 4. Free state tax 0% 3,800 2000 4. Free state tax 0% 3,800 2001 4. Free state tax 0% 3,800 2002 4. Free state tax 0% 3,800 2003 1. Free state tax 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. Free state tax It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. Free state tax The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Free state tax Table 6 shows the percentages for 19-year real property. Free state tax You find the month in your tax year that you placed the property in service. Free state tax You use the percentages listed under that month for each year of the recovery period. Free state tax Recovery Periods Each item of recovery property is assigned to a class of property. Free state tax The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. Free state tax The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. Free state tax This alternate ACRS method uses a recovery percentage based on a modified straight line method. Free state tax This alternate ACRS method generally uses percentages other than those from the tables. Free state tax If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. Free state tax This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. Free state tax   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. Free state tax 00% 10 years 10. Free state tax 00% 12 years 8. Free state tax 333% 15 years 6. Free state tax 667% 25 years 4. Free state tax 00% 35 years 2. Free state tax 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. Free state tax There are tables for 18- and 19-year real property later in this publication in the Appendix. Free state tax For 15-year real property, see 15-year real property, later. Free state tax 3-, 5-, and 10-year property. Free state tax   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. Free state tax This applies throughout the recovery period you selected. Free state tax Half-year convention. Free state tax   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. Free state tax This applied regardless of when in the tax year you placed the property in service. Free state tax For each of the remaining years in the recovery period, you take a full year's deduction. Free state tax If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. Free state tax Example. Free state tax You operate a small upholstery business. Free state tax On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. Free state tax You elected to use the alternate ACRS method. Free state tax You did not elect to take a section 179 deduction. Free state tax You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. Free state tax The saw is 5-year property, but you decided to recover its cost over 12 years. Free state tax For 1986, your ACRS deduction reflected the half-year convention. Free state tax In the first year, you deducted half of the amount determined for a full year. Free state tax Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Free state tax 00     Electric saw   12 years straight line = 8. Free state tax 333% 8. Free state tax 333% ÷ $500 = $41. Free state tax 67 Half-year convention -½ of $41. Free state tax 67= 20. Free state tax 84 Total ACRS deduction for 1986 $1,320. Free state tax 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Free state tax Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. Free state tax 333% 8. Free state tax 333% ÷ $500 = $41. Free state tax 67 Total annual ACRS deduction for 1987 through 1990 $2,641. Free state tax 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Free state tax Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Free state tax 00     Electric saw   12 years straight line = 8. Free state tax 333% 8. Free state tax 333% ÷ $500 = $41. Free state tax 67 Total ACRS deduction for 1991 $1,341. Free state tax 67       The truck is fully depreciated after 1991. Free state tax You take a full year of depreciation for the saw for the years 1992 through 1997. Free state tax Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. Free state tax 333% 8. Free state tax 333% ÷ $500 = $41. Free state tax 67 Total annual ACRS deduction for 1992 through 1997 $41. Free state tax 67       You take a half-year of depreciation for the saw for 1998. Free state tax Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. Free state tax 333% 8. Free state tax 333% ÷ $500 = $41. Free state tax 67 Half-year convention -½ of $41. Free state tax 67= 20. Free state tax 84 Total ACRS deduction for 1998 $20. Free state tax 84       The saw is fully depreciated after 1998. Free state tax 15-year real property. Free state tax   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. Free state tax The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. Free state tax If you selected a 15-year recovery period, you use the percentage (6. Free state tax 667%) from the schedule above. Free state tax You prorate this percentage for the number of months the property was in service in the first year. Free state tax If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. Free state tax Alternate periods for 18-year real property. Free state tax   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. Free state tax The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. Free state tax There are two tables for each alternate recovery period. Free state tax One table shows the percentage for property placed in service after June 22, 1984. Free state tax The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. Free state tax Alternate periods for 19-year real property. Free state tax   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. Free state tax If you selected a 19-year recovery period, use Table 9 to determine your deduction. Free state tax If you select a 35- or 45-year recovery period, use either Table 13 or 14. Free state tax Example. Free state tax You placed in service an apartment building on August 3, 1986. Free state tax The building is 19-year real property. Free state tax The sales contract allocated $300,000 to the building and $100,000 to the land. Free state tax You use the calendar year as your tax year. Free state tax You chose the alternate ACRS method over a recovery period of 35 years. Free state tax For 1986, you figure your ACRS deduction usingTable 13. Free state tax August is the eighth month of your tax year. Free state tax The percentage from Table 13 for the eighth month is 1. Free state tax 1%. Free state tax Your deduction was $3,300 ($300,000 ÷ 1. Free state tax 1%). Free state tax The deduction rate from ACRS Table 13 for years 2 through 20 is 2. Free state tax 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. Free state tax 9%). Free state tax Alternate periods for low-income housing. Free state tax   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. Free state tax If you selected a 15-year period for this property, use 6. Free state tax 667% as the percentage. Free state tax If you selected a 35- or 45-year period, use either Table 11, 12, or 15. Free state tax Election. Free state tax   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. Free state tax Revocation of election. Free state tax   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. Free state tax The Commissioner grants consent only in extraordinary circumstances. Free state tax Any request for a revocation will be considered a request for a ruling. Free state tax ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Free state tax Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. Free state tax You figure this by multiplying the unadjusted basis by the recovery percentage. Free state tax You then multiply the ACRS deduction determined for a full tax year by a fraction. Free state tax The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. Free state tax For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. Free state tax The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. Free state tax The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. Free state tax The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). Free state tax You use the full ACRS percentages during the remaining years of the recovery period. Free state tax For the first tax year after the recovery period, the unrecovered basis will be deductible. Free state tax Exception. Free state tax   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. Free state tax You compute the number of months using either a full month or mid-month convention. Free state tax This is true regardless of the number of months in the tax year and the recovery period and method used. Free state tax Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. Free state tax You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. Free state tax You generally recognize gain or loss on the disposition of an asset by sale. Free state tax However, nonrecognition rules can allow you to postpone some gain. Free state tax See Publication 544. Free state tax If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Free state tax Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. Free state tax Early dispositions. Free state tax   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. Free state tax When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. Free state tax Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. Free state tax   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. Free state tax This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. Free state tax Dispositions — mass asset accounts. Free state tax   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. Free state tax A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Free state tax Examples of mass assets include minor items of office, plant, and store furniture and fixtures. Free state tax   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. Free state tax You leave the unadjusted basis of the property in the account until recovered in future years. Free state tax If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. Free state tax Early dispositions — 15-year real property. Free state tax   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Free state tax You use a full-month convention. Free state tax For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. Free state tax This applies whether you use the regular ACRS method or elected the alternate ACRS method. Free state tax Example. Free state tax You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). Free state tax You file your return based on a calendar year. Free state tax Your rate from Table 1 for the third month is 10%. Free state tax Your ACRS deduction for 1984 was $9,800 ($98. Free state tax 000 ÷ 10%). Free state tax For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. Free state tax For 1989 through 1992, you figured your ACRS deductions using 6% for each year. Free state tax The deduction each year was $98,000 ÷ 6%. Free state tax For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. Free state tax You sell the house on June 1, 1995. Free state tax You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. Free state tax The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). Free state tax You then prorate this amount to the 5 months in 1995 during which it was rented. Free state tax Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). Free state tax Early dispositions — 18- and 19-year real property. Free state tax   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Free state tax For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. Free state tax For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Free state tax Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. Free state tax Count the month of disposition as half a month of use. Free state tax Example. Free state tax You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). Free state tax You file your return based on a calendar year. Free state tax Your rate from Table 4 for the seventh month is 4%. Free state tax You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). Free state tax In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. Free state tax You sell the house on September 24, 1995. Free state tax Figure your ACRS deduction for 1995 for the months of use. Free state tax The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Free state tax Prorate this amount for the 8. Free state tax 5 months in 1995 that you held the property. Free state tax Under the mid-month convention, you count September as half a month. Free state tax Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. Free state tax 5/12). Free state tax Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Free state tax Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. Free state tax This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. Free state tax You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Free state tax Section 1245 property generally includes all personal property. Free state tax See Section 1245 property in chapter 4 of Publication 544 for more information. Free state tax You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. Free state tax You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Free state tax Section 1250 property includes most real property. Free state tax See Section 1250 property in chapter 4 of Publication 544 for more information. Free state tax This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. Free state tax Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. Free state tax Any 15-, 18-, or 19-year real property that is subsidized low-income housing. Free state tax For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. Free state tax See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. Free state tax Prev  Up  Next   Home   More Online Publications
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Understanding Your CP75A Notice

We’re auditing your tax return and need documentation to verify the Earned Income Credit (EIC), dependent exemption(s) and filing status you claimed.


What you need to do

  • Read the notice and the enclosed forms carefully. They explain the information you must send to us.
  • Provide copies of supporting documentation to verify the items we're auditing.
  • Complete the response form by indicating which items your supporting documentation addresses and return the form with the documents you are submitting.

You may want to

  • Review this notice with your tax preparer.
  • Call us for assistance at the toll-free telephone number listed in the top right corner of your notice.
  • Review the rules for claiming the Earned Income Credit and make sure that your child meets the four tests: the Relationship, Age, Residency and Joint Return tests, to qualify for EIC. Read more about the qualifying child rules.
  • Find out if you can claim the EIC if you don't have a qualifying child. Find the rules for those without a qualifying child here.

Answers to Common Questions

Why was my return selected for audit?
While most returns are accepted as filed, some are selected for examination. The IRS examines (or audits) some federal tax returns to determine if income, expenses, and credits are being reported accurately. The IRS selects returns for examination using various methods which include random sampling, computerized screening, and comparison of information received by the IRS such as Forms W-2 and 1099. Having your return selected for examination doesn't suggest that you made an error or were dishonest.

Can I claim the credit for my fiancé’s child?
No. You must be married to the child’s parent during the tax year in question to receive the earned income credit.

What do I need to send?
Refer to the Form 886-H you received with your notice. There is a separate form for each item being audited that explains what supporting documentation to send.

What if I can’t provide the requested documentation?
We'll disallow the items being audited and send you an examination report that shows the proposed changes to your tax return.

What if I did not file a tax return claiming the items you are questioning and someone else is using my name and social security number?
Contact us at the number listed on the top right corner of your notice. You can also refer to the IRS Identity Theft resource page for more information.

Can I file my tax return while I am being audited?
Yes, you should continue to file all required tax returns before the due date to avoid additional penalties and interest.


Tips for next year

Avoid errors that can delay your refund or result in the IRS denying your EITC claim. Find out the most common errors in claiming EITC here.

Page Last Reviewed or Updated: 07-Mar-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Free State Tax

Free state tax Index A Abortion, Abortion Acupuncture, Acupuncture Adopted child's medical expenses, Adopted child. Free state tax AGI limitation, Introduction, Community property states. Free state tax Alcoholism, Alcoholism Ambulances, Ambulance Archer MSAs Health coverage tax credit, How To Take the Credit Medical expenses paid for decedent from, Decedent Artificial limbs, Artificial Limb Artificial teeth, Artificial Teeth Aspirin, Nonprescription Drugs and Medicines Assistance (see Tax help) Assisted living homes, Nursing Home Athletic club dues, Health Club Dues Automobiles (see Cars) B Baby sitting, Baby Sitting, Childcare, and Nursing Services for a Normal, Healthy Baby Bandages, Bandages Basis Medical equipment or property (Worksheet D), Worksheet D. Free state tax Adjusted Basis of Medical Equipment or Property Sold Birth control pills, Birth Control Pills Body scan, Body Scan Braille books and magazines, Braille Books and Magazines Breast pumps and supplies, Breast Pumps and Supplies Breast reconstruction surgery, Breast Reconstruction Surgery C Calculation of deduction, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Capital expenses, Capital Expenses Improvements to rented property, Improvements to property rented by a person with a disability. Free state tax Operation and upkeep, Operation and upkeep. Free state tax Worksheet A, Capital expense worksheet. Free state tax Cars, Car Out-of-pocket expenses, Car expenses. Free state tax Standard medical mileage rates, Car expenses. Free state tax Child care, Baby Sitting, Childcare, and Nursing Services for a Normal, Healthy Baby Children's medical expenses Adopted child, Adopted child. Free state tax Dependents, Dependent Chiropractor, Chiropractor Christian Scientist practitioner, Christian Science Practitioner Chronically ill persons, Chronically ill individual. Free state tax COBRA assistance Recapture of COBRA premium assistance, Worksheet F. Free state tax Recapture of COBRA Premium Assistance for Higher Income Taxpayers COBRA premium assistance, COBRA Premium Assistance Community property states, Community property states. Free state tax Computer banks to track medical information, Medical Information Plan Contact lenses, Contact Lenses Controlled substances, Controlled Substances Cosmetic surgery, Cosmetic Surgery Credit (see Health coverage tax credit) Crutches, Crutches D Dancing lessons, Dancing Lessons Decedent's medical expenses, Decedent, What if you pay medical expenses of a deceased spouse or dependent? Deductible amount, How Much of the Expenses Can You Deduct? Deductible expenses, Whose Medical Expenses Can You Include?, X-ray Definition of medical expenses Doctor, What Are Medical Expenses? Physician, What Are Medical Expenses? Dental treatment, Dental Treatment Artificial teeth, Artificial Teeth Teeth whitening, Teeth Whitening Dentures, Artificial Teeth Dependent's medical expenses Adopted child, Adopted child. Free state tax Multiple support agreement, Support claimed under a multiple support agreement. Free state tax Qualifying child, Dependent Qualifying relative, Dependent Dependents Disabled dependent care, Disabled Dependent Care Expenses, Dependents with disabilities. Free state tax Diagnostic devices, Diagnostic Devices Diaper services, Diaper Service Disabilities, persons with Dependent care expenses, Disabled Dependent Care Expenses, Dependents with disabilities. Free state tax Improvements to rented property, Improvements to property rented by a person with a disability. Free state tax Special education, Special Education Divorced taxpayers Medical expenses of child, Child of divorced or separated parents. Free state tax Drug addiction, Drug Addiction Drugs (see Medicines) Dues Health club, Health Club Dues E Education, special, Special Education Electrolysis, Cosmetic Surgery Employer-sponsored health insurance plans, Employer-Sponsored Health Insurance Plan Employment taxes, Employment taxes. Free state tax Excluded expenses Insurance premiums, Insurance Premiums You Cannot Include Eye surgery, Eye Surgery Eyeglasses, Eyeglasses F Fertility enhancement Eggs, temporary storage of, Fertility Enhancement Fertility, Fertility Enhancement In vitro fertilization, Fertility Enhancement Figuring the deduction, How Do You Figure and Report the Deduction on Your Tax Return? Final return for decedent Medical expenses paid, Decedent Flexible spending account, Flexible Spending Account Food (see Weight-loss programs) Form 1040 Health coverage tax credit, How To Take the Credit Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 1040, Schedule A Impairment-related work expenses, Where to report. Free state tax Medical and dental expenses, Introduction, What Tax Form Do You Use? Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 1040, Schedule C Impairment-related work expenses, Where to report. Free state tax Form 1040, Schedule C-EZ Impairment-related work expenses, Where to report. Free state tax Form 1040, Schedule E Impairment-related work expenses, Where to report. Free state tax Form 1040, Schedule F Impairment-related work expenses, Where to report. Free state tax Form 1040NR Health coverage tax credit, How To Take the Credit Form 1040X Amended return, What Expenses Can You Include This Year? Deceased taxpayer, What if the decedent's return had been filed and the medical expenses were not included? Form 1099-H Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 2106 Impairment-related work expenses, Where to report. Free state tax Form 2106-EZ Impairment-related work expenses, Where to report. Free state tax Form 2555 Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 2555-EZ Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 8453 Health coverage tax credit, How To Take the Credit Form 8885 Health coverage tax credit, How To Take the Credit Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Founder's fee (see Lifetime care, advance payments) Free tax services, Free help with your tax return. Free state tax Funeral expenses, Funeral Expenses Future medical care, Payments for future medical care. Free state tax , Future Medical Care G Glasses, Eyeglasses Guide dog or other animal, Guide Dog or Other Service Animal H Hair Removal, Cosmetic Surgery Transplants, Cosmetic Surgery Wigs, Wig Health club dues, Health Club Dues Health coverage tax credit, Health Coverage Tax Credit Advanced payments, Monthly HCTC Alternative TAA recipient, Health Coverage Tax Credit Archer MSAs, How To Take the Credit Both spouses eligible, Qualifying Family Member Children of divorced parents, Health Coverage Tax Credit, Qualifying Family Member Eligible coverage month, Eligible Coverage Month Insurance that covers other individuals, Insurance that covers other individuals. Free state tax Legally separated, Legally separated. Free state tax Married persons filing separate returns, Qualifying Family Member Monthly HCTC, Monthly HCTC Nonqualified health insurance, Nonqualified Health Insurance Other specified coverage Benefits from the Veterans Administration, Other Specified Coverage Pension Benefit Guaranty Corporation (PBGC) recipient, Health Coverage Tax Credit Qualified health insurance, Qualified Health Insurance Qualifying family member, Qualifying Family Member Reimbursement credit, Monthly HCTC Reporting, How To Take the Credit State-qualified health insurance, State-qualified health insurance. Free state tax TAA recipient, Health Coverage Tax Credit Yearly HCTC, Yearly HCTC Health Coverage Tax Credit Alternative TAA recipient, Who Can Take This Credit? PBGC pension payee, Who Can Take This Credit? TAA recipient, Who Can Take This Credit? Health institutes, Health Institute Health insurance Credit (see Health coverage tax credit) Employer-sponsored plan, Employer-Sponsored Health Insurance Plan Premiums Deductible, Insurance Premiums Nondeductible, Insurance Premiums You Cannot Include Paid by employer, Premiums paid by your employer. Free state tax Paid by employer and you, Premiums paid by you and your employer. Free state tax Paid by you, Premiums paid by you. Free state tax Prepaid, Prepaid Insurance Premiums Unused sick leave used to pay, Unused Sick Leave Used To Pay Premiums Reimbursements (see Reimbursements) Self-employed persons, Health Insurance Costs for Self-Employed Persons Health maintenance organizations (HMOs), Health Maintenance Organization (HMO) Health reimbursement arrangements (HRAs), Health reimbursement arrangement (HRA). Free state tax Health savings accounts (HSAs) Payments from, Health Savings Accounts Hearing aids, Hearing Aids Hearing-impaired persons Guide dog or other animal for, Guide Dog or Other Service Animal Help (see Tax help) HMOs (Health maintenance organizations), Health Maintenance Organization (HMO) Home care (see Nursing services) Home improvements (see Capital expenses:) Hospital services, Hospital Services Hotels, Lodging Household help, Household Help HRAs (Health reimbursement arrangements), Health reimbursement arrangement (HRA). Free state tax I Illegal operations and treatments, Illegal Operations and Treatments Illegal substances, Controlled Substances Impairment-related work expenses, Workers' compensation. Free state tax , Impairment-related expenses defined. Free state tax Reporting of, Where to report. Free state tax Insulin, Nonprescription Drugs and Medicines Insurance (see Health insurance) Intellectually and developmentally disabled persons Mentally retarded, Intellectually and Developmentally Disabled, Special Home for Special homes for, Intellectually and Developmentally Disabled, Special Home for L Laboratory fees, Laboratory Fees Lactation expenses (see Breast pumps and supplies) Laser eye surgery, Eye Surgery Lead-based paint removal, Lead-Based Paint Removal Learning disabilities, Special Education Legal fees, Legal Fees Lessons, dancing and swimming, Dancing Lessons Lifetime care Advance payments for, Lifetime Care—Advance Payments Lodging, Lodging, Trips (see also Trips) Long-term care, Long-Term Care Chronically ill individuals, Chronically ill individual. Free state tax Maintenance and personal care services, Maintenance and personal care services. Free state tax Qualified insurance contracts, Qualified Long-Term Care Insurance Contracts Qualified services, Qualified Long-Term Care Services M Maintenance and personal care services, Maintenance and personal care services. Free state tax Maternity clothes, Maternity Clothes Meals, Meals, Weight-Loss Program (see also Weight-loss programs) Medical conferences, Medical Conferences Medical equipment or property Adjusted basis (Worksheet D), Worksheet D. Free state tax Adjusted Basis of Medical Equipment or Property Sold Medical expense records, What Tax Form Do You Use? Medical information plans, Medical Information Plan Medical savings accounts (MSAs), Medical Savings Account (MSA) Medicare Medicare A, deductible expense, Medicare A Medicare B, deductible expense, Medicare B Medicare D, deductible expense, Medicare D Medicines, Medicines Imported, Imported medicines and drugs. Free state tax , Medicines and Drugs From Other Countries Nonprescription drugs and medicines, Nonprescription Drugs and Medicines Missing children, photographs of in IRS publications, Reminders Multiple support agreement, Support claimed under a multiple support agreement. Free state tax N Nondeductible expenses, What Expenses Are Not Includible?, Weight-Loss Program Nonprescription drugs and medicines, Nonprescription Drugs and Medicines Nursing homes, Nursing Home Nursing services, Nursing Services, Baby Sitting, Childcare, and Nursing Services for a Normal, Healthy Baby Chronically ill individuals, Chronically ill individual. Free state tax Nutritional supplements Natural medicines, Nutritional Supplements O Operations, Operations Cosmetic surgery, Cosmetic Surgery Eye surgery, Eye Surgery Illegal operations and treatments, Illegal Operations and Treatments Optometrist, Optometrist Optometrist services, Eyeglasses Organ donors, Transplants Osteopath, Osteopath Oxygen, Oxygen P Paint removal, for lead-based, Lead-Based Paint Removal Parking fees and tolls, Car expenses. Free state tax Personal injury damages, Damages for Personal Injuries Personal use items, Personal Use Items Photographs of missing children in IRS publications, Reminders Physical examination, Physical Examination Physical therapy, Therapy Plastic surgery, Cosmetic Surgery Pregnancy test kit, Pregnancy Test Kit Premiums (see Health insurance) Prepaid insurance premiums, Prepaid Insurance Premiums Prosthesis, Artificial Limb Psychiatric care, Psychiatric Care Psychoanalysis, Psychoanalysis Psychologists, Psychologist Publications (see Tax help) R Radial keratotomy, Eye Surgery Recordkeeping, What Tax Form Do You Use? Rehabilitation facilities, Nursing Home Reimbursements, How Do You Treat Reimbursements?, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Excess includible in income More than one policy (Worksheet C), More than one policy. Free state tax One policy (Worksheet B), Worksheet B. Free state tax Excess Reimbursement Includible in Income When You Have Only One Policy Excess may be taxable (Figure 1), What If Your Insurance Reimbursement Is More Than Your Medical Expenses? Health Reimbursement Arrangement (HRA), Health reimbursement arrangement (HRA). Free state tax Insurance, Insurance Reimbursement, What If Your Insurance Reimbursement Is More Than Your Medical Expenses? Medical expenses not deducted, What If You Receive Insurance Reimbursement in a Later Year? More than one policy, More than one policy. Free state tax Received in later year, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Rental property Improvements to, Improvements to property rented by a person with a disability. Free state tax Reporting Health coverage tax credit, How To Take the Credit Impairment-related work expenses, Where to report. Free state tax Medical and dental expenses, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Medical deduction (see Form 1040, Schedule A) Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons S Sale of medical equipment or property, Sale of Medical Equipment or Property Adjusted basis (Worksheet D), Worksheet D. Free state tax Adjusted Basis of Medical Equipment or Property Sold Schedules (see Form 1040) Seeing-eye dogs, Guide Dog or Other Service Animal Self-employed persons Health coverage tax credit, How To Take the Credit Health insurance costs, Health Insurance Costs for Self-Employed Persons Senior housing, Nursing Home Separate returns Community property states, Community property states. Free state tax Medical and dental expenses, Separate returns. Free state tax Separated taxpayers Health coverage tax credit, Legally separated. Free state tax Medical expenses of child, Child of divorced or separated parents. Free state tax Service animals, Guide Dog or Other Service Animal Sick leave Used to pay health insurance premiums, Unused Sick Leave Used To Pay Premiums Special education, Special Education Spouse's medical expenses, Spouse Deceased spouse, What if you pay medical expenses of a deceased spouse or dependent? Sterilization, Sterilization Stop-smoking programs, Stop-Smoking Programs Surgery (see Operations) Swimming lessons, Dancing Lessons T Tables and figures Medical equipment or property Adjusted basis (Worksheet D), Worksheet D. Free state tax Adjusted Basis of Medical Equipment or Property Sold Reimbursements, excess includible in income More than one policy (Worksheet C), More than one policy. Free state tax One policy (Worksheet B), Worksheet B. Free state tax Excess Reimbursement Includible in Income When You Have Only One Policy Reimbursements, excess may be taxable (Figure 1), What If Your Insurance Reimbursement Is More Than Your Medical Expenses? Tax help, How To Get Tax Help Teeth Artificial, Artificial Teeth Dental treatment, Dental Treatment Whitening, Teeth Whitening Telephone, Telephone Television, Television Therapy, Therapy Transplants, Transplants Travel and transportation expenses, Transportation Car expenses, Car expenses. Free state tax Includible expenses, You can include:, Transportation expenses you cannot include. Free state tax Parking fees and tolls, Car expenses. Free state tax Trips, Trips TTY/TDD information, How To Get Tax Help Tuition, Tuition V Vasectomy, Vasectomy Veterinary fees, Veterinary Fees Vision correction surgery, Eye Surgery Visually impaired persons Guide dog or other animal for, Guide Dog or Other Service Animal Vitamins or minerals, Nutritional Supplements Voluntary Employee's Beneficiary Association (VEBA) Qualified health insurance, Voluntary Employee's Beneficiary Association (VEBA) W Weight-loss programs, Weight-Loss Program, Weight-Loss Program What's new COBRA continuous coverage, What's New Health coverage tax credit, What's New Standard medical mileage rate, What's New Wheelchairs, Wheelchair Wigs, Wig Work expenses Disabled dependent care, Disabled Dependent Care Expenses Impairment-related, Impairment-Related Work Expenses Workers' compensation, Workers' compensation. Free state tax Worksheets Capital expenses (Worksheet A), Capital expense worksheet. Free state tax Medical equipment or property Adjusted basis (Worksheet D), Worksheet D. Free state tax Adjusted Basis of Medical Equipment or Property Sold Reimbursements, excess includible in income More than one policy (Worksheet C), More than one policy. Free state tax One policy (Worksheet B), Worksheet B. Free state tax Excess Reimbursement Includible in Income When You Have Only One Policy X X-rays, X-ray Prev  Up     Home   More Online Publications