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Irs Electronic Filing

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Irs Electronic Filing

Irs electronic filing 4. Irs electronic filing   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Irs electronic filing However, the information shown on the filled-in forms is not from any actual person or scenario. Irs electronic filing Example 1—Mortgage loan modification. Irs electronic filing    In 2007, Nancy Oak bought a main home for $435,000. Irs electronic filing Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Irs electronic filing The loan was secured by the home. Irs electronic filing The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Irs electronic filing In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Irs electronic filing    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Irs electronic filing The FMV of Nancy's home at the time of the refinancing was $500,000. Irs electronic filing Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Irs electronic filing After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Irs electronic filing   In 2013, Nancy was unable to make her mortgage loan payments. Irs electronic filing On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Irs electronic filing Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Irs electronic filing   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Irs electronic filing Identifiable event code "F" appears in box 6. Irs electronic filing This box shows the reason the creditor has filed Form 1099-C. Irs electronic filing To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Irs electronic filing Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Irs electronic filing   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Irs electronic filing Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Irs electronic filing Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Irs electronic filing Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Irs electronic filing   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Irs electronic filing Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Irs electronic filing Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Irs electronic filing You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Irs electronic filing Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Irs electronic filing Please click the link to view the image. Irs electronic filing Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Irs electronic filing Please click the link to view the image. Irs electronic filing Form 1040, U. Irs electronic filing S. Irs electronic filing Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Irs electronic filing Please click the link to view the image. Irs electronic filing Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Irs electronic filing    In 2005, John and Mary Elm bought a main home for $335,000. Irs electronic filing John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Irs electronic filing The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Irs electronic filing   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Irs electronic filing Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Irs electronic filing   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Irs electronic filing Identifiable event code "D" appears in box 6. Irs electronic filing This box shows the reason the creditor has filed Form 1099-C. Irs electronic filing In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Irs electronic filing In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Irs electronic filing Their sample Form 1099-C is shown on this page. Irs electronic filing   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Irs electronic filing However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Irs electronic filing   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Irs electronic filing Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Irs electronic filing Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Irs electronic filing As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Irs electronic filing Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Irs electronic filing Thus, John and Mary leave line 10b of Form 982 blank. Irs electronic filing   John and Mary must also determine whether they have a gain or loss from the foreclosure. Irs electronic filing John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Irs electronic filing Because this loss relates to their home, it is a nondeductible loss. Irs electronic filing   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Irs electronic filing John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Irs electronic filing Please click the link to view the image. Irs electronic filing Form 1099-C, Cancellation of Debt Table 1-1. Irs electronic filing Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Irs electronic filing Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Irs electronic filing Otherwise, go to Part 2. Irs electronic filing 1. Irs electronic filing Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Irs electronic filing 00 2. Irs electronic filing Enter the fair market value of the transferred property $290,000. Irs electronic filing 00 3. Irs electronic filing Ordinary income from the cancellation of debt upon foreclosure or repossession. Irs electronic filing * Subtract line 2 from line 1. Irs electronic filing If less than zero, enter zero. Irs electronic filing Next, go to Part 2 $ 25,000. Irs electronic filing 00 Part 2. Irs electronic filing Gain or loss from foreclosure or repossession. Irs electronic filing   4. Irs electronic filing Enter the smaller of line 1 or line 2. Irs electronic filing If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Irs electronic filing 00 5. Irs electronic filing Enter any proceeds you received from the foreclosure sale   6. Irs electronic filing Add line 4 and line 5 $290,000. Irs electronic filing 00 7. Irs electronic filing Enter the adjusted basis of the transferred property $335,000. Irs electronic filing 00 8. Irs electronic filing Gain or loss from foreclosure or repossession. Irs electronic filing Subtract line 7 from line 6 ($ 45,000. Irs electronic filing 00) * The income may not be taxable. Irs electronic filing See chapter 1 for more details. Irs electronic filing Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Irs electronic filing Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Irs electronic filing Credit card debt $ 5,500 2. Irs electronic filing Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Irs electronic filing Car and other vehicle loans $ 4. Irs electronic filing Medical bills owed $ 5. Irs electronic filing Student loans $ 6. Irs electronic filing Accrued or past-due mortgage interest $ 7. Irs electronic filing Accrued or past-due real estate taxes $ 8. Irs electronic filing Accrued or past-due utilities (water, gas, electric) $ 9. Irs electronic filing Accrued or past-due child care costs $ 10. Irs electronic filing Federal or state income taxes remaining due (for prior tax years) $ 11. Irs electronic filing Judgments $ 12. Irs electronic filing Business debts (including those owed as a sole proprietor or partner) $ 13. Irs electronic filing Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Irs electronic filing Other liabilities (debts) not included above $ 15. Irs electronic filing Total liabilities immediately before the cancellation. Irs electronic filing Add lines 1 through 14. Irs electronic filing $ 320,500 Part II. Irs electronic filing Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Irs electronic filing Cash and bank account balances $ 6,000 17. Irs electronic filing Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Irs electronic filing Cars and other vehicles $ 19. Irs electronic filing Computers $ 20. Irs electronic filing Household goods and furnishings (for example, appliances, electronics, furniture, etc. Irs electronic filing ) $ 21. Irs electronic filing Tools $ 22. Irs electronic filing Jewelry $ 23. Irs electronic filing Clothing $ 24. Irs electronic filing Books $ 25. Irs electronic filing Stocks and bonds $ 26. Irs electronic filing Investments in coins, stamps, paintings, or other collectibles $ 27. Irs electronic filing Firearms, sports, photographic, and other hobby equipment $ 28. Irs electronic filing Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Irs electronic filing Interest in a pension plan $ 30. Irs electronic filing Interest in education accounts $ 31. Irs electronic filing Cash value of life insurance $ 32. Irs electronic filing Security deposits with landlords, utilities, and others $ 33. Irs electronic filing Interests in partnerships $ 34. Irs electronic filing Value of investment in a business $ 35. Irs electronic filing Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Irs electronic filing Other assets not included above $ 37. Irs electronic filing FMV of total assets immediately before the cancellation. Irs electronic filing Add lines 16 through 36. Irs electronic filing $ 309,000 Part III. Irs electronic filing Insolvency 38. Irs electronic filing Amount of Insolvency. Irs electronic filing Subtract line 37 from line 15. Irs electronic filing If zero or less, you are not insolvent. Irs electronic filing $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Irs electronic filing Please click the link to view the image. Irs electronic filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Irs electronic filing    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Irs electronic filing Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Irs electronic filing Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Irs electronic filing   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Irs electronic filing The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Irs electronic filing On December 26, 2013, the lender canceled the remaining debt. Irs electronic filing Kathy and Frank have no tax attributes other than basis of personal-use property. Irs electronic filing   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Irs electronic filing Identifiable event code "D" appears in box 6. Irs electronic filing This box shows the reason the creditor has filed Form 1099-C. Irs electronic filing Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Irs electronic filing Kathy and Frank are filing a joint return for 2013. Irs electronic filing   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Irs electronic filing Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Irs electronic filing Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Irs electronic filing Because this loss relates to their home, it is a nondeductible loss. Irs electronic filing   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Irs electronic filing Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Irs electronic filing Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Irs electronic filing The household furnishings originally cost $30,000. Irs electronic filing The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Irs electronic filing Kathy and Frank had no adjustments to the cost basis of the car. Irs electronic filing Kathy and Frank had no other assets or liabilities at the time of the cancellation. Irs electronic filing Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Irs electronic filing   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Irs electronic filing Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Irs electronic filing Kathy and Frank had no other assets or liabilities at that time. Irs electronic filing Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Irs electronic filing   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Irs electronic filing The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Irs electronic filing The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Irs electronic filing Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Irs electronic filing Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Irs electronic filing This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Irs electronic filing   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Irs electronic filing Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Irs electronic filing Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Irs electronic filing Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Irs electronic filing   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Irs electronic filing Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Irs electronic filing Thus, Kathy and Frank leave line 10b of Form 982 blank. Irs electronic filing However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Irs electronic filing As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Irs electronic filing Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Irs electronic filing Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Irs electronic filing Kathy and Frank reduce the basis in the car by $14,956. Irs electronic filing 52 ($43,000 x $16,000/$46,000). Irs electronic filing And they reduce the basis in the household furnishings by $28,043. Irs electronic filing 48 ($43,000 x $30,000/$46,000). Irs electronic filing   Following are Kathy and Frank's sample forms and worksheets. Irs electronic filing Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Irs electronic filing Please click the link to view the image. Irs electronic filing Form 1099-C, Cancellation of Debt Table 1-1. Irs electronic filing Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Irs electronic filing Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Irs electronic filing Otherwise, go to Part 2. Irs electronic filing 1. Irs electronic filing Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Irs electronic filing 00 2. Irs electronic filing Enter the fair market value of the transferred property $1,750,000. Irs electronic filing 00 3. Irs electronic filing Ordinary income from the cancellation of debt upon foreclosure or repossession. Irs electronic filing * Subtract line 2 from line 1. Irs electronic filing If less than zero, enter zero. Irs electronic filing Next, go to Part 2 $0. Irs electronic filing 00 Part 2. Irs electronic filing Gain or loss from foreclosure or repossession. Irs electronic filing   4. Irs electronic filing Enter the smaller of line 1 or line 2. Irs electronic filing If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Irs electronic filing $1,750,000. Irs electronic filing 00 5. Irs electronic filing Enter any proceeds you received from the foreclosure sale   6. Irs electronic filing Add line 4 and line 5 $1,750,000. Irs electronic filing 00 7. Irs electronic filing Enter the adjusted basis of the transferred property $3,000,000. Irs electronic filing 00 8. Irs electronic filing Gain or loss from foreclosure or repossession. Irs electronic filing Subtract line 7 from line 6 ($1,250,000. Irs electronic filing 00) * The income may not be taxable. Irs electronic filing See chapter 1 for more details. Irs electronic filing    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Irs electronic filing Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Irs electronic filing Credit card debt $ 18,000 2. Irs electronic filing Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Irs electronic filing Car and other vehicle loans $ 4. Irs electronic filing Medical bills owed $ 5. Irs electronic filing Student loans $ 6. Irs electronic filing Accrued or past-due mortgage interest $ 7. Irs electronic filing Accrued or past-due real estate taxes $ 8. Irs electronic filing Accrued or past-due utilities (water, gas, electric) $ 9. Irs electronic filing Accrued or past-due child care costs $ 10. Irs electronic filing Federal or state income taxes remaining due (for prior tax years) $ 11. Irs electronic filing Judgments $ 12. Irs electronic filing Business debts (including those owed as a sole proprietor or partner) $ 13. Irs electronic filing Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Irs electronic filing Other liabilities (debts) not included above $ 15. Irs electronic filing Total liabilities immediately before the cancellation. Irs electronic filing Add lines 1 through 14. Irs electronic filing $ 768,000 Part II. Irs electronic filing Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Irs electronic filing Cash and bank account balances $ 15,000 17. Irs electronic filing Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Irs electronic filing Cars and other vehicles $ 10,000 19. Irs electronic filing Computers $ 20. Irs electronic filing Household goods and furnishings (for example, appliances, electronics, furniture, etc. Irs electronic filing ) $ 17,000 21. Irs electronic filing Tools $ 22. Irs electronic filing Jewelry $ 23. Irs electronic filing Clothing $ 24. Irs electronic filing Books $ 25. Irs electronic filing Stocks and bonds $ 26. Irs electronic filing Investments in coins, stamps, paintings, or other collectibles $ 27. Irs electronic filing Firearms, sports, photographic, and other hobby equipment $ 28. Irs electronic filing Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Irs electronic filing Interest in a pension plan $ 30. Irs electronic filing Interest in education accounts $ 31. Irs electronic filing Cash value of life insurance $ 32. Irs electronic filing Security deposits with landlords, utilities, and others $ 33. Irs electronic filing Interests in partnerships $ 34. Irs electronic filing Value of investment in a business $ 35. Irs electronic filing Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Irs electronic filing Other assets not included above $ 37. Irs electronic filing FMV of total assets immediately before the cancellation. Irs electronic filing Add lines 16 through 36. Irs electronic filing $ 42,000 Part III. Irs electronic filing Insolvency 38. Irs electronic filing Amount of Insolvency. Irs electronic filing Subtract line 37 from line 15. Irs electronic filing If zero or less, you are not insolvent. Irs electronic filing $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Irs electronic filing Please click the link to view the image. Irs electronic filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications
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Irs electronic filing 5. Irs electronic filing   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. Irs electronic filing Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. Irs electronic filing When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. Irs electronic filing Otherwise, these are capital expenses that must be added to the basis of the land. Irs electronic filing (See chapter 6 for information on determining basis. Irs electronic filing ) Conservation expenses for land in a foreign country do not qualify for this special treatment. Irs electronic filing The deduction for conservation expenses cannot be more than 25% of your gross income from farming. Irs electronic filing See 25% Limit on Deduction , later. Irs electronic filing Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. Irs electronic filing These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. Irs electronic filing You must include in income most government payments for approved conservation practices. Irs electronic filing However, you can exclude some payments you receive under certain cost-sharing conservation programs. Irs electronic filing For more information, see Agricultural Program Payments in chapter 3. Irs electronic filing To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. Irs electronic filing Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. Irs electronic filing You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. Irs electronic filing You are not farming if you are engaged only in forestry or the growing of timber. Irs electronic filing Farm defined. Irs electronic filing   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Irs electronic filing It also includes plantations, ranches, ranges, and orchards. Irs electronic filing A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. Irs electronic filing It does not include an area where they are merely caught or harvested. Irs electronic filing A plant nursery is a farm for purposes of deducting soil and water conservation expenses. Irs electronic filing Farm rental. Irs electronic filing   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. Irs electronic filing If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. Irs electronic filing   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. Irs electronic filing Example. Irs electronic filing You own a farm in Iowa and live in California. Irs electronic filing You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. Irs electronic filing You cannot deduct your soil conservation expenses for this farm. Irs electronic filing You must capitalize the expenses and add them to the basis of the land. Irs electronic filing     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. Irs electronic filing Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. Irs electronic filing If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. Irs electronic filing Keep a copy of the plan with your books and records to support your deductions. Irs electronic filing Conservation plan. Irs electronic filing   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. Irs electronic filing There are three types of approved plans. Irs electronic filing NRCS individual site plans. Irs electronic filing These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. Irs electronic filing NRCS county plans. Irs electronic filing These plans include a listing of farm conservation practices approved for the county where the farmland is located. Irs electronic filing You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. Irs electronic filing Comparable state agency plans. Irs electronic filing These plans are approved by state agencies and can be approved individual site plans or county plans. Irs electronic filing   A list of NRCS conservation programs is available at www. Irs electronic filing nrcs. Irs electronic filing usda. Irs electronic filing gov/programs. Irs electronic filing Individual site plans can be obtained from NRCS offices and the comparable state agencies. Irs electronic filing Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. Irs electronic filing These expenses include, but are not limited to, the following. Irs electronic filing The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. Irs electronic filing The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. Irs electronic filing The eradication of brush. Irs electronic filing The planting of windbreaks. Irs electronic filing You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. Irs electronic filing These expenses are added to the basis of the land. Irs electronic filing If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. Irs electronic filing See chapter 3 for information about payments eligible for the cost-sharing exclusion. Irs electronic filing New farm or farmland. Irs electronic filing   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. Irs electronic filing You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. Irs electronic filing The new farming activity does not have to be the same as the old farming activity. Irs electronic filing For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. Irs electronic filing Land not used for farming. Irs electronic filing   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. Irs electronic filing For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. Irs electronic filing You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. Irs electronic filing Depreciable conservation assets. Irs electronic filing   You generally cannot deduct your expenses for depreciable conservation assets. Irs electronic filing However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. Irs electronic filing See Assessment for Depreciable Property , later. Irs electronic filing   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. Irs electronic filing These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. Irs electronic filing You recover your capital investment through annual allowances for depreciation. Irs electronic filing   You can deduct soil and water conservation expenses for nondepreciable earthen items. Irs electronic filing Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. Irs electronic filing Water well. Irs electronic filing   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. Irs electronic filing It is a capital expense. Irs electronic filing You recover your cost through depreciation. Irs electronic filing You also must capitalize your cost for drilling a test hole. Irs electronic filing If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. Irs electronic filing You can recover the total cost through depreciation deductions. Irs electronic filing   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. Irs electronic filing Abandonment means that all economic benefits from the well are terminated. Irs electronic filing For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. Irs electronic filing Endangered species recovery expenses. Irs electronic filing   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. Irs electronic filing Otherwise, these are capital expenses that must be added to the basis of the land. Irs electronic filing   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. Irs electronic filing See Internal Revenue Code section 175 for more information. Irs electronic filing Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. Irs electronic filing You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. Irs electronic filing Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. Irs electronic filing This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. Irs electronic filing The depreciable property must be used in the district's soil and water conservation activities. Irs electronic filing However, the following limits apply to these assessments. Irs electronic filing The total assessment limit. Irs electronic filing The yearly assessment limit. Irs electronic filing After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. Irs electronic filing The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. Irs electronic filing See Table 5-1 for a brief summary of these limits. Irs electronic filing Table 5-1. Irs electronic filing Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. Irs electronic filing Your deductible share of the cost to the district for the property. Irs electronic filing Your gross income from farming. Irs electronic filing No one taxpayer can deduct more than 10% of the total assessment. Irs electronic filing Any amount over 10% is a capital expense and is added to the basis of your land. Irs electronic filing If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Irs electronic filing If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. Irs electronic filing You can deduct the remainder in equal amounts over the next 9 tax years. Irs electronic filing Limit for all conservation expenses, including assessments for depreciable property. Irs electronic filing Amounts greater than 25% can be carried to the following year and added to that year's expenses. Irs electronic filing The total is then subject to the 25% of gross income from farming limit in that year. Irs electronic filing To ensure your deduction is within the deduction limits, keep records to show the following. Irs electronic filing The total assessment against all members of the district for the depreciable property. Irs electronic filing Your deductible share of the cost to the district for the depreciable property. Irs electronic filing Your gross income from farming. Irs electronic filing Total assessment limit. Irs electronic filing   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. Irs electronic filing This applies whether you pay the assessment in one payment or in installments. Irs electronic filing If your assessment is more than 10% of the total amount assessed, both the following rules apply. Irs electronic filing The amount over 10% is a capital expense and is added to the basis of your land. Irs electronic filing If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Irs electronic filing Yearly assessment limit. Irs electronic filing   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. Irs electronic filing If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. Irs electronic filing If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. Irs electronic filing You can deduct the remainder in equal amounts over the next 9 tax years. Irs electronic filing Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. Irs electronic filing Example 1. Irs electronic filing This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. Irs electronic filing Of the assessment, $1,500 is for digging drainage ditches. Irs electronic filing You can deduct this part as a soil or conservation expense as if you had paid it directly. Irs electronic filing The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. Irs electronic filing The total amount assessed by the district against all its members for the depreciable equipment is $7,000. Irs electronic filing The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. Irs electronic filing The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. Irs electronic filing To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. Irs electronic filing Add $500 to the result for a total of $570. Irs electronic filing Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). Irs electronic filing You can deduct the balance at the rate of $70 a year over the next 9 years. Irs electronic filing You add $70 to the $1,500 portion of the assessment for drainage ditches. Irs electronic filing You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. Irs electronic filing Example 2. Irs electronic filing Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. Irs electronic filing The total amount assessed by the district against all its members for depreciable equipment is $5,500. Irs electronic filing The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. Irs electronic filing The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). Irs electronic filing Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. Irs electronic filing You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. Irs electronic filing Sale or other disposal of land during 9-year period. Irs electronic filing   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. Irs electronic filing Death of farmer during 9-year period. Irs electronic filing   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. Irs electronic filing 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. Irs electronic filing Gross income from farming. Irs electronic filing   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. Irs electronic filing Gains from sales of draft, breeding, or dairy livestock are included. Irs electronic filing Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. Irs electronic filing Carryover of deduction. Irs electronic filing   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. Irs electronic filing However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. Irs electronic filing Example. Irs electronic filing In 2012, you have gross income of $32,000 from two farms. Irs electronic filing During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. Irs electronic filing However, your deduction is limited to 25% of $32,000, or $8,000. Irs electronic filing The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. Irs electronic filing The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. Irs electronic filing Any expenses over the limit in that year are carried to 2014 and later years. Irs electronic filing Net operating loss. Irs electronic filing   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. Irs electronic filing If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. Irs electronic filing When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. Irs electronic filing If you do not choose to deduct the expenses, you must capitalize them. Irs electronic filing Change of method. Irs electronic filing   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. Irs electronic filing To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. Irs electronic filing You or your authorized representative must sign the request. Irs electronic filing   The request must include the following information. Irs electronic filing Your name and address. Irs electronic filing The first tax year the method or change of method is to apply. Irs electronic filing Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. Irs electronic filing If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. Irs electronic filing The total expenses you paid or incurred in the first tax year the method or change of method is to apply. Irs electronic filing A statement that you will account separately in your books for the expenses to which this method or change of method relates. Irs electronic filing Send your request to the following  address. Irs electronic filing  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. Irs electronic filing Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). Irs electronic filing However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. Irs electronic filing Gain on sale of farmland. Irs electronic filing   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. Irs electronic filing If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. Irs electronic filing See Section 1252 property under Other Gains in chapter 9. 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