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Income tax deadline 3. Income tax deadline   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Income tax deadline Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Income tax deadline Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Income tax deadline When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Income tax deadline Any remaining gain is a section 1231 gain. Income tax deadline Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Income tax deadline Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Income tax deadline Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Income tax deadline If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Income tax deadline Do not take that gain into account as section 1231 gain. Income tax deadline Section 1231 transactions. Income tax deadline   The following transactions result in gain or loss subject to section 1231 treatment. Income tax deadline Sales or exchanges of real property or depreciable personal property. Income tax deadline This property must be used in a trade or business and held longer than 1 year. Income tax deadline Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Income tax deadline Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Income tax deadline Sales or exchanges of leaseholds. Income tax deadline The leasehold must be used in a trade or business and held longer than 1 year. Income tax deadline Sales or exchanges of cattle and horses. Income tax deadline The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Income tax deadline Sales or exchanges of other livestock. Income tax deadline This livestock does not include poultry. Income tax deadline It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Income tax deadline Sales or exchanges of unharvested crops. Income tax deadline The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Income tax deadline You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Income tax deadline Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Income tax deadline Cutting of timber or disposal of timber, coal, or iron ore. Income tax deadline The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Income tax deadline Condemnations. Income tax deadline The condemned property must have been held longer than 1 year. Income tax deadline It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Income tax deadline It cannot be property held for personal use. Income tax deadline Casualties and thefts. Income tax deadline The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Income tax deadline You must have held the property longer than 1 year. Income tax deadline However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Income tax deadline For more information on casualties and thefts, see Publication 547. Income tax deadline Property for sale to customers. Income tax deadline   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Income tax deadline If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Income tax deadline Example. Income tax deadline You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Income tax deadline Customers make deposits on the reels, which you refund if the reels are returned within a year. Income tax deadline If they are not returned, you keep each deposit as the agreed-upon sales price. Income tax deadline Most reels are returned within the 1-year period. Income tax deadline You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Income tax deadline Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Income tax deadline Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Income tax deadline Copyrights. Income tax deadline    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Income tax deadline The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Income tax deadline Treatment as ordinary or capital. Income tax deadline   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Income tax deadline If you have a net section 1231 loss, it is ordinary loss. Income tax deadline If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Income tax deadline The rest, if any, is long-term capital gain. Income tax deadline Nonrecaptured section 1231 losses. Income tax deadline   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Income tax deadline Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Income tax deadline These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Income tax deadline Example. Income tax deadline In 2013, Ben has a $2,000 net section 1231 gain. Income tax deadline To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Income tax deadline From 2008 through 2012 he had the following section 1231 gains and losses. Income tax deadline Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Income tax deadline 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Income tax deadline To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Income tax deadline This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Income tax deadline On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Income tax deadline Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Income tax deadline Whether the adjusted basis was figured using depreciation or amortization another person claimed. Income tax deadline Corporate distributions. Income tax deadline   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Income tax deadline General asset accounts. Income tax deadline   Different rules apply to dispositions of property you depreciated using a general asset account. Income tax deadline For information on these rules, see Publication 946. Income tax deadline Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Income tax deadline See Gain Treated as Ordinary Income, later. Income tax deadline Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Income tax deadline See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Income tax deadline Section 1245 property defined. Income tax deadline   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Income tax deadline Personal property (either tangible or intangible). Income tax deadline Other tangible property (except buildings and their structural components) used as any of the following. Income tax deadline See Buildings and structural components below. Income tax deadline An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Income tax deadline A research facility in any of the activities in (a). Income tax deadline A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Income tax deadline That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Income tax deadline Amortization of certified pollution control facilities. Income tax deadline The section 179 expense deduction. Income tax deadline Deduction for clean-fuel vehicles and certain refueling property. Income tax deadline Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Income tax deadline Deduction for certain qualified refinery property. Income tax deadline Deduction for qualified energy efficient commercial building property. Income tax deadline Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Income tax deadline (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Income tax deadline ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Income tax deadline Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Income tax deadline Deduction for qualified tertiary injectant expenses. Income tax deadline Certain reforestation expenditures. Income tax deadline Deduction for election to expense qualified advanced mine safety equipment property. Income tax deadline Single purpose agricultural (livestock) or horticultural structures. Income tax deadline Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Income tax deadline Any railroad grading or tunnel bore. Income tax deadline Buildings and structural components. Income tax deadline   Section 1245 property does not include buildings and structural components. Income tax deadline The term building includes a house, barn, warehouse, or garage. Income tax deadline The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Income tax deadline   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Income tax deadline Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Income tax deadline   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Income tax deadline Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Income tax deadline Facility for bulk storage of fungible commodities. Income tax deadline   This term includes oil or gas storage tanks and grain storage bins. Income tax deadline Bulk storage means the storage of a commodity in a large mass before it is used. Income tax deadline For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Income tax deadline To be fungible, a commodity must be such that one part may be used in place of another. Income tax deadline   Stored materials that vary in composition, size, and weight are not fungible. Income tax deadline Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Income tax deadline For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Income tax deadline Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Income tax deadline The depreciation and amortization allowed or allowable on the property. Income tax deadline The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Income tax deadline A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Income tax deadline For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Income tax deadline See Gifts and Transfers at Death, later. Income tax deadline Use Part III of Form 4797 to figure the ordinary income part of the gain. Income tax deadline Depreciation taken on other property or taken by other taxpayers. Income tax deadline   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Income tax deadline Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Income tax deadline Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Income tax deadline Depreciation and amortization. Income tax deadline   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Income tax deadline Ordinary depreciation deductions. Income tax deadline Any special depreciation allowance you claimed. Income tax deadline Amortization deductions for all the following costs. Income tax deadline Acquiring a lease. Income tax deadline Lessee improvements. Income tax deadline Certified pollution control facilities. Income tax deadline Certain reforestation expenses. Income tax deadline Section 197 intangibles. Income tax deadline Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Income tax deadline Franchises, trademarks, and trade names acquired before August 11, 1993. Income tax deadline The section 179 deduction. Income tax deadline Deductions for all the following costs. Income tax deadline Removing barriers to the disabled and the elderly. Income tax deadline Tertiary injectant expenses. Income tax deadline Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Income tax deadline Environmental cleanup costs. Income tax deadline Certain reforestation expenses. Income tax deadline Qualified disaster expenses. Income tax deadline Any basis reduction for the investment credit (minus any basis increase for credit recapture). Income tax deadline Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Income tax deadline Example. Income tax deadline You file your returns on a calendar year basis. Income tax deadline In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Income tax deadline You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Income tax deadline You did not take the section 179 deduction. Income tax deadline You sold the truck in May 2013 for $7,000. Income tax deadline The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Income tax deadline Figure the gain treated as ordinary income as follows. Income tax deadline 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Income tax deadline   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Income tax deadline   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Income tax deadline Depreciation allowed or allowable. Income tax deadline   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Income tax deadline However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Income tax deadline If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Income tax deadline   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Income tax deadline Multiple asset accounts. Income tax deadline   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Income tax deadline Example. Income tax deadline In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Income tax deadline All of the depreciation was recorded in a single depreciation account. Income tax deadline After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Income tax deadline You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Income tax deadline However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Income tax deadline Normal retirement. Income tax deadline   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Income tax deadline Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Income tax deadline To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Income tax deadline Section 1250 property defined. Income tax deadline   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Income tax deadline It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Income tax deadline A fee simple interest in land is not included because it is not depreciable. Income tax deadline   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Income tax deadline Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Income tax deadline For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Income tax deadline For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Income tax deadline If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Income tax deadline You will not have additional depreciation if any of the following conditions apply to the property disposed of. Income tax deadline You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Income tax deadline In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Income tax deadline The property was residential low-income rental property you held for 162/3 years or longer. Income tax deadline For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Income tax deadline You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Income tax deadline The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Income tax deadline These properties are depreciated using the straight line method. Income tax deadline In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Income tax deadline Depreciation taken by other taxpayers or on other property. Income tax deadline   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Income tax deadline Example. Income tax deadline Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Income tax deadline Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Income tax deadline On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Income tax deadline At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Income tax deadline Depreciation allowed or allowable. Income tax deadline   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Income tax deadline If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Income tax deadline Retired or demolished property. Income tax deadline   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Income tax deadline Example. Income tax deadline A wing of your building is totally destroyed by fire. Income tax deadline The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Income tax deadline Figuring straight line depreciation. Income tax deadline   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Income tax deadline If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Income tax deadline   Salvage value and useful life are not used for the ACRS method of depreciation. Income tax deadline Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Income tax deadline   The straight line method is applied without any basis reduction for the investment credit. Income tax deadline Property held by lessee. Income tax deadline   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Income tax deadline This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Income tax deadline The same rule applies to the cost of acquiring a lease. Income tax deadline   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Income tax deadline However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Income tax deadline Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Income tax deadline The percentages for these types of real property are as follows. Income tax deadline Nonresidential real property. Income tax deadline   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Income tax deadline For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Income tax deadline Residential rental property. Income tax deadline   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Income tax deadline The percentage for periods before 1976 is zero. Income tax deadline Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Income tax deadline Low-income housing. Income tax deadline    Low-income housing includes all the following types of residential rental property. Income tax deadline Federally assisted housing projects if 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. Income tax deadline Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Income tax deadline 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 provisions of state or local laws that authorize similar subsidies for low-income families. Income tax deadline Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Income tax deadline   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Income tax deadline If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Income tax deadline Foreclosure. Income tax deadline   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Income tax deadline Example. Income tax deadline On June 1, 2001, you acquired low-income housing property. Income tax deadline On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Income tax deadline The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Income tax deadline The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Income tax deadline Therefore, 70% of the additional depreciation is treated as ordinary income. Income tax deadline Holding period. Income tax deadline   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Income tax deadline For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Income tax deadline If you sold it on January 2, 2013, the holding period is exactly 192 full months. Income tax deadline The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Income tax deadline Holding period for constructed, reconstructed, or erected property. Income tax deadline   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Income tax deadline Property acquired by gift or received in a tax-free transfer. Income tax deadline   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Income tax deadline   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Income tax deadline See Low-Income Housing With Two or More Elements, next. Income tax deadline Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Income tax deadline The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Income tax deadline The following are the types of separate elements. Income tax deadline A separate improvement (defined below). Income tax deadline The basic section 1250 property plus improvements not qualifying as separate improvements. Income tax deadline The units placed in service at different times before all the section 1250 property is finished. Income tax deadline For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Income tax deadline As a result, the apartment house consists of three separate elements. Income tax deadline The 36-month test for separate improvements. Income tax deadline   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Income tax deadline Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Income tax deadline Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Income tax deadline $5,000. Income tax deadline The 1-year test. Income tax deadline   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Income tax deadline The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Income tax deadline In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Income tax deadline Example. Income tax deadline The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Income tax deadline During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Income tax deadline The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Income tax deadline However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Income tax deadline Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Income tax deadline Addition to the capital account. Income tax deadline   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Income tax deadline   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Income tax deadline For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Income tax deadline The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Income tax deadline The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Income tax deadline   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Income tax deadline If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Income tax deadline Unadjusted basis. Income tax deadline   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Income tax deadline However, the cost of components retired before that date is not included in the unadjusted basis. Income tax deadline Holding period. Income tax deadline   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Income tax deadline The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Income tax deadline The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Income tax deadline The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Income tax deadline   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Income tax deadline Use the first day of a calendar month that is closest to the middle of the tax year. Income tax deadline If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Income tax deadline Figuring ordinary income attributable to each separate element. Income tax deadline   Figure ordinary income attributable to each separate element as follows. Income tax deadline   Step 1. Income tax deadline Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Income tax deadline   Step 2. Income tax deadline Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Income tax deadline   Step 3. Income tax deadline Multiply the result in Step 2 by the applicable percentage for the element. Income tax deadline Example. Income tax deadline You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Income tax deadline The property consisted of four elements (W, X, Y, and Z). Income tax deadline Step 1. Income tax deadline The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Income tax deadline The sum of the additional depreciation for all the elements is $24,000. Income tax deadline Step 2. Income tax deadline The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Income tax deadline Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Income tax deadline $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Income tax deadline Step 3. Income tax deadline The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Income tax deadline From these facts, the sum of the ordinary income for each element is figured as follows. Income tax deadline   Step 1 Step 2 Step 3 Ordinary Income W . Income tax deadline 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Income tax deadline 25 5,000 92% 4,600 Z . Income tax deadline 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Income tax deadline In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Income tax deadline In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Income tax deadline Figure the additional depreciation for the periods after 1975. Income tax deadline Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Income tax deadline Stop here if this is residential rental property or if (2) is equal to or more than (1). Income tax deadline This is the gain treated as ordinary income because of additional depreciation. Income tax deadline Subtract (2) from (1). Income tax deadline Figure the additional depreciation for periods after 1969 but before 1976. Income tax deadline Add the lesser of (4) or (5) to the result in (3). Income tax deadline This is the gain treated as ordinary income because of additional depreciation. Income tax deadline A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Income tax deadline Use Form 4797, Part III, to figure the ordinary income part of the gain. Income tax deadline Corporations. Income tax deadline   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Income tax deadline The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Income tax deadline Report this additional ordinary income on Form 4797, Part III, line 26 (f). Income tax deadline Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Income tax deadline This applies even if no payments are received in that year. Income tax deadline If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Income tax deadline For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Income tax deadline If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Income tax deadline To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Income tax deadline Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Income tax deadline For a detailed discussion of installment sales, see Publication 537. Income tax deadline Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Income tax deadline However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Income tax deadline For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Income tax deadline See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Income tax deadline Part gift and part sale or exchange. Income tax deadline   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Income tax deadline If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Income tax deadline However, see Bargain sale to charity, later. Income tax deadline Example. Income tax deadline You transferred depreciable personal property to your son for $20,000. Income tax deadline When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Income tax deadline You took depreciation of $30,000. Income tax deadline You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Income tax deadline You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Income tax deadline You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Income tax deadline Gift to charitable organization. Income tax deadline   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Income tax deadline Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Income tax deadline   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Income tax deadline For more information, see Giving Property That Has Increased in Value in Publication 526. Income tax deadline Bargain sale to charity. Income tax deadline   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Income tax deadline First, figure the ordinary income as if you had sold the property at its fair market value. Income tax deadline Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Income tax deadline See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Income tax deadline Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Income tax deadline Example. Income tax deadline You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Income tax deadline Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Income tax deadline If you had sold the property at its fair market value, your ordinary income would have been $5,000. Income tax deadline Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Income tax deadline Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Income tax deadline For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Income tax deadline However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Income tax deadline Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Income tax deadline Example 1. Income tax deadline Janet Smith owned depreciable property that, upon her death, was inherited by her son. Income tax deadline No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Income tax deadline However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Income tax deadline Example 2. Income tax deadline The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Income tax deadline If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Income tax deadline Ordinary income from depreciation must be reported by the trust on the transfer. Income tax deadline Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Income tax deadline For information on like-kind exchanges and involuntary conversions, see chapter 1. Income tax deadline Depreciable personal property. Income tax deadline   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Income tax deadline The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Income tax deadline The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Income tax deadline Example 1. Income tax deadline You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Income tax deadline The old machine cost you $5,000 two years ago. Income tax deadline You took depreciation deductions of $3,950. Income tax deadline Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Income tax deadline Example 2. Income tax deadline You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Income tax deadline This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Income tax deadline You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Income tax deadline Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Income tax deadline All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Income tax deadline Example 3. Income tax deadline A fire destroyed office machinery you bought for $116,000. Income tax deadline The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Income tax deadline You received a $117,000 insurance payment, realizing a gain of $92,640. Income tax deadline You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Income tax deadline $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Income tax deadline The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Income tax deadline The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Income tax deadline 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Income tax deadline Depreciable real property. Income tax deadline   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Income tax deadline The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Income tax deadline The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Income tax deadline   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Income tax deadline Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Income tax deadline Example. Income tax deadline The state paid you $116,000 when it condemned your depreciable real property for public use. Income tax deadline You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Income tax deadline You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Income tax deadline You choose to postpone reporting the gain. Income tax deadline If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Income tax deadline The ordinary income to be reported is $6,000, which is the greater of the following amounts. Income tax deadline The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Income tax deadline The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Income tax deadline   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Income tax deadline Basis of property acquired. Income tax deadline   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Income tax deadline   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Income tax deadline However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Income tax deadline Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Income tax deadline Add the fair market value (or cost) of the other property acquired to the result in (1). Income tax deadline Divide the result in (1) by the result in (2). Income tax deadline Multiply the total basis by the result in (3). Income tax deadline This is the basis of the depreciable real property acquired. Income tax deadline If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Income tax deadline Subtract the result in (4) from the total basis. Income tax deadline This is the basis of the other property acquired. Income tax deadline If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Income tax deadline Example 1. Income tax deadline In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Income tax deadline The property's adjusted basis was $38,400, with additional depreciation of $14,932. Income tax deadline On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Income tax deadline Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Income tax deadline You chose to postpone reporting the gain under the involuntary conversion rules. Income tax deadline Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Income tax deadline The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Income tax deadline The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Income tax deadline If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Income tax deadline Example 2. Income tax deadline John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Income tax deadline He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Income tax deadline He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Income tax deadline Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Income tax deadline The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Income tax deadline The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Income tax deadline The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Income tax deadline The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Income tax deadline 4. Income tax deadline The basis of the depreciable real property is $12,000. Income tax deadline This is the $30,000 total basis multiplied by the 0. Income tax deadline 4 figured in (3). Income tax deadline The basis of the other property (land) is $18,000. Income tax deadline This is the $30,000 total basis minus the $12,000 figured in (4). Income tax deadline The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Income tax deadline Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Income tax deadline Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Income tax deadline See chapter 2. Income tax deadline In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Income tax deadline In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Income tax deadline These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Income tax deadline The comparison should take into account all the following facts and circumstances. Income tax deadline The original cost and reproduction cost of construction, erection, or production. Income tax deadline The remaining economic useful life. Income tax deadline The state of obsolescence. Income tax deadline The anticipated expenditures required to maintain, renovate, or modernize the properties. Income tax deadline Like-kind exchanges and involuntary conversions. Income tax deadline   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Income tax deadline The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Income tax deadline The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Income tax deadline   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Income tax deadline The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Income tax deadline If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Income tax deadline Example. Income tax deadline A fire destroyed your property with a total fair market value of $50,000. Income tax deadline It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Income tax deadline You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Income tax deadline The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Income tax deadline You choose to postpone reporting your gain from the involuntary conversion. Income tax deadline You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Income tax deadline The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Income tax deadline The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Income tax deadline The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Income tax deadline Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Income tax deadline The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Income tax deadline All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Income tax deadline Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Income tax deadline However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 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The Income Tax Deadline

Income tax deadline 30. Income tax deadline   How To Figure Your Tax Table of Contents Introduction Figuring Your Tax Alternative Minimum Tax (AMT) Tax Figured by IRSFiling the Return Introduction After you have figured your income and deductions as explained in Parts One through Five, your next step is to figure your tax. Income tax deadline This chapter discusses: The general steps you take to figure your tax, An additional tax you may have to pay called the alternative minimum tax (AMT), and The conditions you must meet if you want the IRS to figure your tax. Income tax deadline Figuring Your Tax Your income tax is based on your taxable income. Income tax deadline After you figure your income tax and AMT, if any, subtract your tax credits and add any other taxes you may owe. Income tax deadline The result is your total tax. Income tax deadline Compare your total tax with your total payments to determine whether you are entitled to a refund or if you must make a payment. Income tax deadline This section provides a general outline of how to figure your tax. Income tax deadline You can find step-by-step directions in the Instructions for Forms 1040EZ, 1040A, and 1040. Income tax deadline If you are unsure of which tax form you should file, see Which Form Should I Use? in chapter 1. Income tax deadline Tax. Income tax deadline   Most taxpayers use either the Tax Table or the Tax Computation Worksheet to figure their income tax. Income tax deadline However, there are special methods if your income includes any of the following items. Income tax deadline A net capital gain. Income tax deadline (See chapter 16. Income tax deadline ) Qualified dividends taxed at the same rates as a net capital gain. Income tax deadline (See chapters 8 and 16. Income tax deadline ) Lump-sum distributions. Income tax deadline (See chapter 10. Income tax deadline ) Farming or fishing income. Income tax deadline (See Schedule J (Form 1040), Income Averaging for Farmers and Fishermen. Income tax deadline ) Unearned income over $2,000 for certain children. Income tax deadline (See chapter 31. Income tax deadline ) Parents' election to report child's interest and dividends. Income tax deadline (See chapter 31. Income tax deadline ) Foreign earned income exclusion or the housing exclusion. Income tax deadline (See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, and the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. Income tax deadline ) Credits. Income tax deadline   After you figure your income tax and any AMT (discussed later), determine if you are eligible for any tax credits. Income tax deadline Eligibility information for these tax credits is discussed in chapters 32 through 37 and your form instructions. Income tax deadline The following table lists the credits you may be able to subtract from your tax and shows where you can find more information on each credit. Income tax deadline CREDITS For information on: See  chapter: Adoption 37 Alternative motor vehicle 37 Alternative fuel vehicle refueling  property 37 Child and dependent care 32 Child tax 34 Credit to holders of tax credit  bonds 37 Education 35 Elderly or disabled 33 Electric vehicle 37 Foreign tax 37 Mortgage interest 37 Prior year minimum tax 37 Residential energy 37 Retirement savings contributions 37   Some credits (such as the earned income credit) are not listed because they are treated as payments. Income tax deadline See Payments , later. Income tax deadline   There are other credits that are not discussed in this publication. Income tax deadline These include the following credits. Income tax deadline General business credit, which is made up of several separate business-related credits. Income tax deadline These generally are reported on Form 3800, General Business Credit, and are discussed in chapter 4 of Publication 334, Tax Guide for Small Business. Income tax deadline Renewable electricity, refined coal, and Indian coal production credit for electricity and refined coal produced at facilities placed in service after October 22, 2004 (after October 2, 2008, for electricity produced from marine and hydrokinetic renewables), and Indian coal produced at facilities placed in service after August 8, 2005. Income tax deadline See Form 8835, Part II. Income tax deadline Work opportunity credit. Income tax deadline See Form 5884. Income tax deadline Credit for employer social security and Medicare taxes paid on certain employee tips. Income tax deadline See Form 8846. Income tax deadline Other taxes. Income tax deadline   After you subtract your tax credits, determine whether there are any other taxes you must pay. Income tax deadline This chapter does not explain these other taxes. Income tax deadline You can find that information in other chapters of this publication and your form instructions. Income tax deadline See the following table for other taxes you may need to add to your income tax. Income tax deadline OTHER TAXES For information on: See  chapter: Additional taxes on qualified retirement plans and IRAs 10, 17 Household employment taxes 32 Recapture of an education credit 35 Social security and Medicare tax on wages 5 Social security and Medicare tax on tips 6 Uncollected social security and Medicare tax on tips 6   You also may have to pay AMT (discussed later in this chapter). Income tax deadline   There are other taxes that are not discussed in this publication. Income tax deadline These include the following items. Income tax deadline Self-employment tax. Income tax deadline You must figure this tax if either of the following applies to you (or your spouse if you file a joint return). Income tax deadline Your net earnings from self-employment from other than church employee income were $400 or more. Income tax deadline The term “net earnings from self-employment” may include certain nonemployee compensation and other amounts reported to you on Form 1099-MISC, Miscellaneous Income. Income tax deadline If you received a Form 1099-MISC, see the Instructions for Recipient on the back. Income tax deadline Also see the Instructions for Schedule SE (Form 1040), Self-Employment Tax; and Publication 334, Tax Guide for Small Business. Income tax deadline You had church employee income of $108. Income tax deadline 28 or more. Income tax deadline Additional Medicare Tax. Income tax deadline Beginning in 2013, you may be subject to a 0. Income tax deadline 9% Additional Medicare Tax that applies to Medicare wages, Railroad Retirement Act compensation, and self-employment income over a threshold based on your filing status. Income tax deadline For more information, see the Instructions for Form 1040, line 60 and Form 8959. Income tax deadline Net Investment Income Tax (NIIT). Income tax deadline Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Income tax deadline NIIT is a 3. Income tax deadline 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income over a threshold amount. Income tax deadline For more information, see the Instructions for Form 1040, line 60 and Form 8960. Income tax deadline Recapture taxes. Income tax deadline You may have to pay these taxes if you previously claimed an investment credit, a low-income housing credit, a new markets credit, a qualified plug-in electric drive motor vehicle credit, an alternative motor vehicle credit, a credit for employer-provided child care facilities, an Indian employment credit, or other credits listed in the instructions for Form 1040, line 60. Income tax deadline For more information, see the instructions for Form 1040, line 60. Income tax deadline Section 72(m)(5) excess benefits tax. Income tax deadline If you are (or were) a 5% owner of a business and you received a distribution that exceeds the benefits provided for you under the qualified pension or annuity plan formula, you may have to pay this additional tax. Income tax deadline See Tax on Excess Benefits in chapter 4 of Publication 560, Retirement Plans for Small Business. Income tax deadline Uncollected social security and Medicare tax on group-term life insurance. Income tax deadline If your former employer provides you with more than $50,000 of group-term life insurance coverage, you must pay the employee part of social security and Medicare taxes on those premiums. Income tax deadline The amount should be shown in box 12 of your Form W-2 with codes M and N. Income tax deadline Tax on golden parachute payments. Income tax deadline This tax applies if you received an “excess parachute payment” (EPP) due to a change in a corporation's ownership or control. Income tax deadline The amount should be shown in box 12 of your Form W-2 with code K. Income tax deadline See the instructions for Form 1040, line 60. Income tax deadline Tax on accumulation distribution of trusts. Income tax deadline This applies if you are the beneficiary of a trust that accumulated its income instead of distributing it currently. Income tax deadline See Form 4970 and its instructions. Income tax deadline Additional tax on HSAs or MSAs. Income tax deadline If amounts contributed to, or distributed from, your health savings account or medical savings account do not meet the rules for these accounts, you may have to pay additional taxes. Income tax deadline See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans; Form 8853, Archer MSAs and Long-Term Care Insurance Contracts; Form 8889, Health Savings Accounts (HSAs); and Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Income tax deadline Additional tax on Coverdell ESAs. Income tax deadline This applies if amounts contributed to, or distributed from, your Coverdell ESA do not meet the rules for these accounts. Income tax deadline See Publication 970, Tax Benefits for Education, and Form 5329. Income tax deadline Additional tax on qualified tuition programs. Income tax deadline This applies to amounts distributed from qualified tuition programs that do not meet the rules for these accounts. Income tax deadline See Publication 970 and Form 5329. Income tax deadline Excise tax on insider stock compensation from an expatriated corporation. Income tax deadline You may owe a 15% excise tax on the value of nonstatutory stock options and certain other stock-based compensation held by you or a member of your family from an expatriated corporation or its expanded affiliated group in which you were an officer, director, or more-than-10% owner. Income tax deadline For more information, see the instructions for Form 1040, line 60. Income tax deadline Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements. Income tax deadline This income should be shown in Form W-2, box 12, with code Z, or in Form 1099-MISC, box 15b. Income tax deadline For more information, see the instructions for Form 1040, line 60. Income tax deadline Interest on the tax due on installment income from the sale of certain residential lots and timeshares. Income tax deadline For more information, see the instructions for Form 1040, line 60. Income tax deadline Interest on the deferred tax on gain from certain installment sales with a sales price over $150,000. Income tax deadline For more information, see the instructions for Form 1040, line 60. Income tax deadline Repayment of first-time homebuyer credit. Income tax deadline For more information, see Form 5405, Repayment of the First-Time Homebuyer Credit, and its instructions. Income tax deadline Also see the instructions for Form 1040, line 59b. Income tax deadline Payments. Income tax deadline   After you determine your total tax, figure the total payments you have already made for the year. Income tax deadline Include credits that are treated as payments. Income tax deadline This chapter does not explain these payments and credits. Income tax deadline You can find that information in other chapters of this publication and your form instructions. Income tax deadline See the following table for amounts you can include in your total payments. Income tax deadline PAYMENTS For information on: See  chapter: Child tax credit (additional) 34 Earned income credit 36 Estimated tax paid 4 Excess social security   and RRTA tax withheld 37 Federal income tax withheld 4 Health coverage tax credit 37 Credit for tax on   undistributed capital gain 37 Tax paid with extension 1   Another credit that is treated as a payment is the credit for federal excise tax paid on fuels. Income tax deadline This credit is for persons who have a nontaxable use of certain fuels, such as diesel fuel and kerosene. Income tax deadline It is claimed on Form 1040, line 70. Income tax deadline See Form 4136, Credit for Federal Tax Paid on Fuels. Income tax deadline Refund or balance due. Income tax deadline   To determine whether you are entitled to a refund or whether you must make a payment, compare your total payments with your total tax. Income tax deadline If you are entitled to a refund, see your form instructions for information on having it directly deposited into one or more of your accounts, or to purchase U. Income tax deadline S. Income tax deadline savings bonds instead of receiving a paper check. Income tax deadline Alternative Minimum Tax (AMT) This section briefly discusses an additional tax you may have to pay. Income tax deadline The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Income tax deadline Taxpayers who benefit from this special treatment may have to pay at least a minimum amount of tax through an additional tax called AMT. Income tax deadline You may have to pay the AMT if your taxable income for regular tax purposes, combined with certain adjustments and tax preference items, is more than a certain amount. Income tax deadline See Form 6251, Alternative Minimum Tax — Individuals. Income tax deadline Adjustments and tax preference items. Income tax deadline   The more common adjustments and tax preference items include: Addition of personal exemptions, Addition of the standard deduction (if claimed), Addition of itemized deductions claimed for state and local taxes, certain interest, most miscellaneous deductions, and part of medical expenses, Subtraction of any refund of state and local taxes included in gross income, Changes to accelerated depreciation of certain property, Difference between gain or loss on the sale of property reported for regular tax purposes and AMT purposes, Addition of certain income from incentive stock options, Change in certain passive activity loss deductions, Addition of certain depletion that is more than the adjusted basis of the property, Addition of part of the deduction for certain intangible drilling costs, and Addition of tax-exempt interest on certain private activity bonds. Income tax deadline More information. Income tax deadline   For more information about the AMT, see the instructions for Form 6251. Income tax deadline Tax Figured by IRS If you file by April 15, 2014, you can have the IRS figure your tax for you on Form 1040EZ, Form 1040A, or Form 1040. Income tax deadline If the IRS figures your tax and you paid too much, you will receive a refund. Income tax deadline If you did not pay enough, you will receive a bill for the balance. Income tax deadline To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later. Income tax deadline The IRS can also figure the credit for the elderly or the disabled and the earned income credit for you. Income tax deadline When the IRS cannot figure your tax. Income tax deadline   The IRS cannot figure your tax for you if any of the following apply. Income tax deadline You want your refund directly deposited into your accounts. Income tax deadline You want any part of your refund applied to your 2014 estimated tax. Income tax deadline You had income for the year from sources other than wages, salaries, tips, interest, dividends, taxable social security benefits, unemployment compensation, IRA distributions, pensions, and annuities. Income tax deadline Your taxable income is $100,000 or more. Income tax deadline You itemize deductions. Income tax deadline You file any of the following forms. Income tax deadline Form 2555, Foreign Earned Income. Income tax deadline Form 2555-EZ, Foreign Earned Income Exclusion. Income tax deadline Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Income tax deadline Form 4970, Tax on Accumulation Distribution of Trusts. Income tax deadline Form 4972, Tax on Lump-Sum Distributions. Income tax deadline Form 6198, At-Risk Limitations. Income tax deadline Form 6251, Alternative Minimum Tax—Individuals. Income tax deadline Form 8606, Nondeductible IRAs. Income tax deadline Form 8615, Tax for Certain Children Who Have Unearned Income. Income tax deadline Form 8814, Parents' Election To Report Child's Interest and Dividends. Income tax deadline Form 8839, Qualified Adoption Expenses. Income tax deadline Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Income tax deadline Form 8889, Health Savings Accounts (HSAs). Income tax deadline Form 8919, Uncollected Social Security and Medicare Tax on Wages. Income tax deadline Filing the Return After you complete the line entries for the tax form you are filing, fill in your name and address. Income tax deadline Enter your social security number in the space provided. Income tax deadline If you are married, enter the social security numbers of you and your spouse even if you file separately. Income tax deadline Sign and date your return and enter your occupation(s). Income tax deadline If you are filing a joint return, both you and your spouse must sign it. Income tax deadline Enter your daytime phone number in the space provided. Income tax deadline This may help speed the processing of your return if we have a question that can be answered over the phone. Income tax deadline If you are filing a joint return, you may enter either your or your spouse's daytime phone number. Income tax deadline If you want to allow a friend, family member, or any other person you choose to discuss your 2013 tax return with the IRS, check the “Yes” box in the “Third party designee” area on your return. Income tax deadline Also enter the designee's name, phone number, and any five digits the designee chooses as his or her personal identification number (PIN). Income tax deadline If you check the “Yes” box, you, and your spouse if filing a joint return, are authorizing the IRS to call the designee to answer any questions that may arise during the processing of your return. Income tax deadline Fill in and attach any schedules and forms asked for on the lines you completed to your paper return. Income tax deadline Attach a copy of each of your Forms W-2 to your paper return. Income tax deadline Also attach to your paper return any Form 1099-R you received that has withholding tax in box 4. Income tax deadline Mail your return to the Internal Revenue Service Center for the area where you live. Income tax deadline A list of Service Center addresses is in the instructions for your tax return. Income tax deadline Form 1040EZ Line Entries Read lines 1 through 8b and fill in the lines that apply to you. Income tax deadline Do not complete lines 9 through 12. Income tax deadline If you are filing a joint return, use the space to the left of line 6 to separately show your taxable income and your spouse's taxable income. Income tax deadline Payments. Income tax deadline   Enter any federal income tax withheld on line 7. Income tax deadline Federal income tax withheld is shown on Form W-2, box 2, or Form 1099, box 4. Income tax deadline Earned income credit. Income tax deadline   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. Income tax deadline Enter “EIC” in the space to the left of line 8a. Income tax deadline Enter the nontaxable combat pay you elect to include in earned income on line 8b. Income tax deadline   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. Income tax deadline For details, see the Form 1040EZ Instructions. Income tax deadline Form 1040A Line Entries Read lines 1 through 27 and fill in the lines that apply to you. Income tax deadline If you are filing a joint return, use the space to the left of the entry space for line 27 to separately show your taxable income and your spouse's taxable income. Income tax deadline Do not complete line 28. Income tax deadline Complete lines 29 through 33 and 36 through 40 if they apply to you. Income tax deadline However, do not fill in lines 30 and 38a if you want the IRS to figure the credits shown on those lines. Income tax deadline Also, enter any write-in information that applies to you in the space to the left of line 41. Income tax deadline Do not complete lines 34, 35, and 42 through 46. Income tax deadline Payments. Income tax deadline   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 36. Income tax deadline Enter any estimated tax payments you made on line 37. Income tax deadline Credit for child and dependent care expenses. Income tax deadline   If you can take this credit, as discussed in chapter 32, complete Form 2441, Child and Dependent Care Expenses, and attach it to your return. Income tax deadline Enter the amount of the credit on line 29. Income tax deadline The IRS will not figure this credit. Income tax deadline Credit for the elderly or the disabled. Income tax deadline   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. Income tax deadline Enter “CFE” in the space to the left of line 30 and attach Schedule R (Form 1040A or 1040), Credit for the Elderly or the Disabled, to your paper return. Income tax deadline On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. Income tax deadline Complete Part II and Part III, lines 11 and 13, if they apply. Income tax deadline Earned income credit. Income tax deadline   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. Income tax deadline Enter “EIC” to the left of the entry space for line 38a. Income tax deadline Enter the nontaxable combat pay you elect to include in earned income on line 38b. Income tax deadline    If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. Income tax deadline If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. Income tax deadline   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. Income tax deadline For details, see the Form 1040A Instructions. Income tax deadline Form 1040 Line Entries Read lines 1 through 43 and fill in the lines that apply to you. Income tax deadline Do not complete line 44. Income tax deadline If you are filing a joint return, use the space under the words “Adjusted Gross Income” on the front of your return to separately show your taxable income and your spouse's taxable income. Income tax deadline Read lines 45 through 71. Income tax deadline Fill in the lines that apply to you, but do not fill in lines 54, 61, and 72. Income tax deadline Also, do not complete line 55 and lines 73 through 77. Income tax deadline Do not fill in line 53, box “c,” if you are completing Schedule R (Form 1040A or 1040), or line 64a if you want the IRS to figure the credits shown on those lines. Income tax deadline Payments. Income tax deadline   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 62. Income tax deadline Enter any estimated tax payments you made on line 63. Income tax deadline Credit for child and dependent care expenses. Income tax deadline   If you can take this credit, as discussed in chapter 32, complete Form 2441 and attach it to your paper return. Income tax deadline Enter the amount of the credit on line 48. Income tax deadline The IRS will not figure this credit. Income tax deadline Credit for the elderly or the disabled. Income tax deadline   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. Income tax deadline Enter “CFE” on the line next to line 53, check box “c,” and attach Schedule R (Form 1040A or 1040) to your paper return. Income tax deadline On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. Income tax deadline Complete Part II and Part III, lines 11 and 13, if they apply. Income tax deadline Earned income credit. Income tax deadline   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. Income tax deadline Enter “EIC” on the dotted line next to Form 1040, line 64a. Income tax deadline Enter the nontaxable combat pay you elect to include in earned income on line 64b. Income tax deadline   If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. Income tax deadline If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. Income tax deadline   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. Income tax deadline For details, see the Form 1040 Instructions. Income tax deadline Prev  Up  Next   Home   More Online Publications