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Taxact 2013

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Taxact 2013

Taxact 2013 Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Taxact 2013 S. Taxact 2013 Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Taxact 2013 Full-time student. Taxact 2013 Adjusted gross income. Taxact 2013 More information. Taxact 2013 Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Taxact 2013 Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Taxact 2013 Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Taxact 2013 You are a member of a religious order who has taken a vow of poverty. Taxact 2013 You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Taxact 2013 See Exemption From Self-Employment (SE) Tax , later. Taxact 2013 You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Taxact 2013 For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Taxact 2013 Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Taxact 2013 See Ministerial Services , later. Taxact 2013 Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Taxact 2013 However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Taxact 2013 For the specific services covered, see Ministerial Services , later. Taxact 2013 Ministers defined. Taxact 2013   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Taxact 2013 Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Taxact 2013   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Taxact 2013 Employment status for other tax purposes. Taxact 2013   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Taxact 2013 For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Taxact 2013 Common-law employee. Taxact 2013   Under common-law rules, you are considered either an employee or a self-employed person. Taxact 2013 Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Taxact 2013 For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Taxact 2013   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Taxact 2013 However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Taxact 2013 Example. Taxact 2013 A church hires and pays you a salary to perform ministerial services subject to its control. Taxact 2013 Under the common-law rules, you are an employee of the church while performing those services. Taxact 2013 Form SS-8. Taxact 2013   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Taxact 2013 Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Taxact 2013 See Ministerial Services , later. Taxact 2013 However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Taxact 2013 Vow of poverty. Taxact 2013   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Taxact 2013 You do not need to request a separate exemption. Taxact 2013 For income tax purposes, the earnings are tax free to you. Taxact 2013 Your earnings are considered the income of the religious order. Taxact 2013 Services covered under FICA at the election of the order. Taxact 2013   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Taxact 2013 Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Taxact 2013   The order or subdivision elects coverage by filing Form SS-16. Taxact 2013 The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Taxact 2013 If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Taxact 2013 You do not pay any of the FICA tax. Taxact 2013 Services performed outside the order. Taxact 2013   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Taxact 2013   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Taxact 2013 You may, however, be able to take a charitable deduction for the amount you turn over to the order. Taxact 2013 See Publication 526, Charitable Contributions. Taxact 2013 Rulings. Taxact 2013   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Taxact 2013 To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Taxact 2013 R. Taxact 2013 B. Taxact 2013 1, available at www. Taxact 2013 irs. Taxact 2013 gov/irb/2014-1_IRB/ar05. Taxact 2013 html. Taxact 2013 Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Taxact 2013 However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Taxact 2013 Practitioners. Taxact 2013   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Taxact 2013 State law specifically exempts Christian Science practitioners from licensing requirements. Taxact 2013   Some Christian Science practitioners also are Christian Science teachers or lecturers. Taxact 2013 Income from teaching or lecturing is considered the same as income from their work as practitioners. Taxact 2013 Readers. Taxact 2013   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Taxact 2013 Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Taxact 2013 Some exceptions are discussed next. Taxact 2013 Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Taxact 2013 If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Taxact 2013 Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Taxact 2013 28 during the tax year. Taxact 2013 However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Taxact 2013 Churches and church organizations make this election by filing two copies of Form 8274. Taxact 2013 For more information about making this election, see Form 8274. Taxact 2013 Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Taxact 2013 This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Taxact 2013 Make this choice by filing Form 4029. Taxact 2013 See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Taxact 2013 U. Taxact 2013 S. Taxact 2013 Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Taxact 2013 Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Taxact 2013 S. Taxact 2013 social security system. Taxact 2013 To determine your alien status, see Publication 519, U. Taxact 2013 S. Taxact 2013 Tax Guide for Aliens. Taxact 2013 Residents of Puerto Rico, the U. Taxact 2013 S. Taxact 2013 Virgin Islands, Guam, the CNMI, and American Samoa. Taxact 2013   If you are a resident of one of these U. Taxact 2013 S. Taxact 2013 possessions but not a U. Taxact 2013 S. Taxact 2013 citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Taxact 2013 For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Taxact 2013 Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Taxact 2013 Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Taxact 2013 Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Taxact 2013 The exemption does not apply to any other income. Taxact 2013 The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Taxact 2013 Ministers Most services you perform as a minister, priest, rabbi, etc. Taxact 2013 , are ministerial services. Taxact 2013 These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Taxact 2013 You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Taxact 2013 A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. Taxact 2013 Services for nonreligious organizations. Taxact 2013   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Taxact 2013 Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Taxact 2013   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Taxact 2013 Services that are not part of your ministry. Taxact 2013   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Taxact 2013 The following are not ministerial services. Taxact 2013 Services you perform for nonreligious organizations other than the services stated above. Taxact 2013 Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. Taxact 2013 These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Taxact 2013 (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Taxact 2013 ) Services you perform in a government-owned and operated hospital. Taxact 2013 (These services are considered performed by a government employee, not by a minister as part of the ministry. Taxact 2013 ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. Taxact 2013 Books or articles. Taxact 2013   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Taxact 2013   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Taxact 2013 Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Taxact 2013 The services are considered ministerial because you perform them as an agent of the order. Taxact 2013 For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. Taxact 2013 However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. Taxact 2013 Effect of employee status. Taxact 2013   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. Taxact 2013 In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Taxact 2013 This result is true even if you have taken a vow of poverty. Taxact 2013 Example. Taxact 2013 Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Taxact 2013 They renounce all claims to their earnings. Taxact 2013 The earnings belong to the order. Taxact 2013 Pat is a licensed attorney. Taxact 2013 The superiors of the order instructed her to get a job with a law firm. Taxact 2013 Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Taxact 2013 Chris is a secretary. Taxact 2013 The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Taxact 2013 Chris took the job and gave all his earnings to the order. Taxact 2013 Pat's services are not duties required by the order. Taxact 2013 Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Taxact 2013 Chris' services are duties required by the order. Taxact 2013 He is acting as an agent of the order and not as an employee of a third party. Taxact 2013 He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Taxact 2013 Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Taxact 2013 Amounts you receive for performing these services are generally subject to SE tax. Taxact 2013 You may request an exemption from SE tax, discussed next, which applies only to those services. Taxact 2013 Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Taxact 2013 Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Taxact 2013 They do not have to request the exemption. Taxact 2013 Who cannot be exempt. Taxact 2013   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Taxact 2013 These elections are irrevocable. Taxact 2013 You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Taxact 2013 You elected before 1968 to be covered under social security for your ministerial services. Taxact 2013 Requesting exemption. Taxact 2013    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Taxact 2013 More detailed explanations follow. Taxact 2013 If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Taxact 2013 It does not apply to any other self-employment income. Taxact 2013 Table 2. Taxact 2013 The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Taxact 2013 You file Form 4361, described below under Requesting Exemption—Form 4361 . Taxact 2013 You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Taxact 2013 You file for other than economic reasons. Taxact 2013 You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Taxact 2013 This requirement does not apply to Christian Science practitioners or readers. Taxact 2013 You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Taxact 2013 You establish that the organization is a church or a convention or association of churches. Taxact 2013 You did not make an election discussed earlier under Who cannot be exempt . Taxact 2013 You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Taxact 2013 Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Taxact 2013 The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Taxact 2013 If it is approved, keep the approved copy of Form 4361 in your permanent records. Taxact 2013 When to file. Taxact 2013   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Taxact 2013 You have net earnings from self-employment of at least $400. Taxact 2013 Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Taxact 2013 The 2 years do not have to be consecutive tax years. Taxact 2013    The approval process can take some time, so you should file Form 4361 as soon as possible. Taxact 2013 Example 1. Taxact 2013 Rev. Taxact 2013 Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Taxact 2013 He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Taxact 2013 However, if Rev. Taxact 2013 Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Taxact 2013 Example 2. Taxact 2013 Rev. Taxact 2013 Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Taxact 2013 She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Taxact 2013 However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Taxact 2013 Example 3. Taxact 2013 In 2011, Rev. Taxact 2013 David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Taxact 2013 In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Taxact 2013 Therefore, he had no net self-employment earnings as a minister in 2012. Taxact 2013 Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Taxact 2013 In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Taxact 2013 Rev. Taxact 2013 Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Taxact 2013 Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Taxact 2013 Death of individual. Taxact 2013   The right to file an application for exemption ends with an individual's death. Taxact 2013 A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Taxact 2013 Effective date of exemption. Taxact 2013   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Taxact 2013 Once the exemption is approved, it is irrevocable. Taxact 2013 Example. Taxact 2013 Rev. Taxact 2013 Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Taxact 2013 She files an application for exemption on February 20, 2014. Taxact 2013 If an exemption is granted, it is effective for 2010 and the following years. Taxact 2013 Refunds of SE tax. Taxact 2013   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Taxact 2013 Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Taxact 2013 A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Taxact 2013   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Taxact 2013 Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Taxact 2013 Exception. Taxact 2013   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Taxact 2013 However, if you pay your benefits back, you may be considered for exemption. Taxact 2013 Contact your local Social Security Administration office to find out the amount you must pay back. Taxact 2013 Eligibility requirements. Taxact 2013   To claim this exemption from SE tax, all the following requirements must be met. Taxact 2013 You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Taxact 2013 As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Taxact 2013 You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Taxact 2013 The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Taxact 2013 Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Taxact 2013 The sect or division must complete part of the form. Taxact 2013 The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Taxact 2013 If it is approved, keep the approved copy of Form 4029 in your permanent records. Taxact 2013 When to file. Taxact 2013   You can file Form 4029 at any time. Taxact 2013   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Taxact 2013 See Effective date of exemption next for information on when the newly approved exemption would become effective. Taxact 2013    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Taxact 2013 Effective date of exemption. Taxact 2013   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Taxact 2013 (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Taxact 2013 )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Taxact 2013 You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Taxact 2013 The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Taxact 2013 Refunds of SE tax paid. Taxact 2013    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Taxact 2013 For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Taxact 2013 Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Taxact 2013 Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Taxact 2013 A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Taxact 2013 If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Taxact 2013 Information for employers. Taxact 2013   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Taxact 2013   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Taxact 2013 Form W-2. Taxact 2013   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Taxact 2013 ” Do not make any entries in boxes 3, 4, 5, or 6. Taxact 2013 Forms 941, 943, and 944. Taxact 2013   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Taxact 2013 Instead, follow the instructions given below. Taxact 2013 Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Taxact 2013 Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Taxact 2013 Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Taxact 2013 Effective date. Taxact 2013   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Taxact 2013 The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Taxact 2013 Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Taxact 2013 Regular method. Taxact 2013 Nonfarm optional method. Taxact 2013 You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Taxact 2013 Blank worksheets are in the back of this publication, after the Comprehensive Example. Taxact 2013 Regular Method Most people use the regular method. Taxact 2013 Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Taxact 2013 Then, subtract your allowable business deductions and multiply the difference by 92. Taxact 2013 35% (. Taxact 2013 9235). Taxact 2013 Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Taxact 2013 If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. Taxact 2013 35% (. Taxact 2013 9235). Taxact 2013 Do not reduce your wages by any business deductions when making this computation. Taxact 2013 Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Taxact 2013 If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Taxact 2013 Amounts included in gross income. Taxact 2013   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Taxact 2013 , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. Taxact 2013 This amount is also subject to income tax. Taxact 2013   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Taxact 2013 Example. Taxact 2013 Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Taxact 2013 The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Taxact 2013 His church owns a parsonage that has a fair rental value of $12,000 per year. Taxact 2013 The church gives Pastor Adams the use of the parsonage. Taxact 2013 He is not exempt from SE tax. Taxact 2013 He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Taxact 2013 The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Taxact 2013 Overseas duty. Taxact 2013   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. Taxact 2013 S. Taxact 2013 citizen or resident alien serving abroad and living in a foreign country. Taxact 2013   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Taxact 2013 Example. Taxact 2013 Diane Jones was the minister of a U. Taxact 2013 S. Taxact 2013 church in Mexico. Taxact 2013 She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Taxact 2013 The United States does not have a social security agreement with Mexico, so Mrs. Taxact 2013 Jones is subject to U. Taxact 2013 S. Taxact 2013 SE tax and must include $35,000 when figuring net earnings from self-employment. Taxact 2013 Specified U. Taxact 2013 S. Taxact 2013 possessions. Taxact 2013    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Taxact 2013 Also see Residents of Puerto Rico, the U. Taxact 2013 S. Taxact 2013 Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Taxact 2013 S. Taxact 2013 Citizens and Resident and Nonresident Aliens. Taxact 2013 Amounts not included in gross income. Taxact 2013   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Taxact 2013 Offerings that others made to the church. Taxact 2013 Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. Taxact 2013 Pension payments or retirement allowances you receive for your past ministerial services. Taxact 2013 The rental value of a parsonage or a parsonage allowance provided to you after you retire. Taxact 2013 Allowable deductions. Taxact 2013   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Taxact 2013 These are ministerial expenses you incurred while working other than as a common-law employee of the church. Taxact 2013 They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Taxact 2013 Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Taxact 2013   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Taxact 2013 Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Taxact 2013 Do not complete Schedule C or C-EZ (Form 1040). Taxact 2013 However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Taxact 2013 Employee reimbursement arrangements. Taxact 2013   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Taxact 2013 Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Taxact 2013 Accountable plans. Taxact 2013   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Taxact 2013 Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Taxact 2013 You must adequately account to your employer for these expenses within a reasonable period of time. Taxact 2013 You must return any excess reimbursement or allowance within a reasonable period of time. Taxact 2013   The reimbursement is not reported on your Form W-2. Taxact 2013 Generally, if your expenses equal your reimbursement, you have no deduction. Taxact 2013 If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Taxact 2013 Nonaccountable plan. Taxact 2013   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Taxact 2013 In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Taxact 2013 Excess reimbursements you fail to return to your employer. Taxact 2013 Reimbursement of nondeductible expenses related to your employer's business. Taxact 2013   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Taxact 2013 Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Taxact 2013   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Taxact 2013 Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. Taxact 2013 If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. Taxact 2013 Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Taxact 2013 The tax rate for the social security part is 12. Taxact 2013 4%. Taxact 2013 In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Taxact 2013 This tax rate is 2. Taxact 2013 9%. Taxact 2013 The combined self-employment tax rate is 15. Taxact 2013 3%. Taxact 2013 Additional Medicare Tax. Taxact 2013   Beginning in 2013, a 0. Taxact 2013 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Taxact 2013 Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Taxact 2013 A self-employment loss is not considered for purposes of this tax. Taxact 2013 RRTA compensation is separately compared to the threshold. Taxact 2013 For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Taxact 2013 Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Taxact 2013 In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. Taxact 2013 You may use the nonfarm optional method if you meet all the following tests. Taxact 2013 You are self-employed on a regular basis. Taxact 2013 You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Taxact 2013 The net earnings can be from either farm or nonfarm earnings or both. Taxact 2013 You have used this method less than 5 prior years. Taxact 2013 (There is a 5-year lifetime limit. Taxact 2013 ) The years do not have to be consecutive. Taxact 2013 Your net nonfarm profits were: Less than $5,024, and Less than 72. Taxact 2013 189% of your gross nonfarm income. Taxact 2013 If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Taxact 2013 Table 3. Taxact 2013 Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Taxact 2013 . Taxact 2013 . Taxact 2013 THEN your net earnings are equal to . Taxact 2013 . Taxact 2013 . Taxact 2013 $6,960 or less Two-thirds of your gross nonfarm income. Taxact 2013 More than $6,960 $4,640. Taxact 2013 Actual net earnings. Taxact 2013   Multiply your total earnings subject to SE tax by 92. Taxact 2013 35% (. Taxact 2013 9235) to get actual net earnings. Taxact 2013 Actual net earnings are equivalent to net earnings under the “Regular Method. Taxact 2013 ” More information. Taxact 2013   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Taxact 2013 Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Taxact 2013 Note. Taxact 2013 For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Taxact 2013 Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Taxact 2013 Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Taxact 2013 , in addition to your salary. Taxact 2013 If the offering is made to the religious institution, it is not taxable to you. Taxact 2013 Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Taxact 2013 However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Taxact 2013 For more information, see Publication 526. Taxact 2013 Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Taxact 2013 Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Taxact 2013 This exclusion applies only for income tax purposes. Taxact 2013 It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Taxact 2013 Designation requirement. Taxact 2013   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Taxact 2013 It must designate a definite amount. Taxact 2013 It cannot determine the amount of the housing allowance at a later date. Taxact 2013 If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Taxact 2013   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Taxact 2013 The local congregation must officially designate the part of your salary that is a housing allowance. Taxact 2013 However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Taxact 2013 Rental allowances. Taxact 2013   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Taxact 2013   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Taxact 2013 Fair rental value of parsonage. Taxact 2013   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Taxact 2013 However, the exclusion cannot be more than the reasonable pay for your services. Taxact 2013 If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Taxact 2013 Example. Taxact 2013 Rev. Taxact 2013 Joanna Baker is a full-time minister. Taxact 2013 The church allows her to use a parsonage that has an annual fair rental value of $24,000. Taxact 2013 The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Taxact 2013 Her actual utility costs during the year were $7,000. Taxact 2013 For income tax purposes, Rev. Taxact 2013 Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Taxact 2013 She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Taxact 2013 Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Taxact 2013 Home ownership. Taxact 2013   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Taxact 2013 Excess rental allowance. Taxact 2013   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Taxact 2013   Include in the total on Form 1040, line 7. Taxact 2013 On the dotted line next to line 7, enter “Excess allowance” and the amount. Taxact 2013 You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Taxact 2013 However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Taxact 2013 Retired ministers. Taxact 2013   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Taxact 2013 However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Taxact 2013 Teachers or administrators. Taxact 2013   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Taxact 2013 However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Taxact 2013    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Taxact 2013 In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Taxact 2013   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Taxact 2013 Theological students. Taxact 2013   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Taxact 2013 Traveling evangelists. Taxact 2013   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Taxact 2013 You are an ordained minister. Taxact 2013 You perform ministerial services at churches located away from your community. Taxact 2013 You actually use the rental allowance to maintain your permanent home. Taxact 2013 Cantors. Taxact 2013   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Taxact 2013 Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Taxact 2013 See Members of Religious Orders , earlier, under Social Security Coverage. Taxact 2013 Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Taxact 2013 S. Taxact 2013 possession. Taxact 2013 Publication 54 discusses the foreign earned income exclusion. Taxact 2013 Publication 570, Tax Guide for Individuals With Income From U. Taxact 2013 S. Taxact 2013 Possessions, covers the rules for taxpayers with income from U. Taxact 2013 S. Taxact 2013 possessions. Taxact 2013 You can get these free publications from the Internal Revenue Service at IRS. Taxact 2013 gov or from most U. Taxact 2013 S. Taxact 2013 Embassies or consulates. Taxact 2013 Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Taxact 2013 Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Taxact 2013 You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Taxact 2013 You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Taxact 2013 See Publication 529 for more information on this limit. Taxact 2013 However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Taxact 2013 Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Taxact 2013 You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Taxact 2013 Exception. Taxact 2013   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Taxact 2013 Figuring the allocation. Taxact 2013   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Taxact 2013    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Taxact 2013 Example. Taxact 2013 Rev. Taxact 2013 Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Taxact 2013 He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Taxact 2013 $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Taxact 2013 Rev. Taxact 2013 Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Taxact 2013 Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Taxact 2013   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Taxact 2013 The statement must contain all of the following information. Taxact 2013 A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Taxact 2013 ) plus the amount. Taxact 2013 A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Taxact 2013 A list of each item of otherwise deductible ministerial expenses plus the amount. Taxact 2013 How you figured the nondeductible part of your otherwise deductible expenses. Taxact 2013 A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Taxact 2013   See the attachments prepared for the Comprehensive Example , later. Taxact 2013 Following the example, you will find blank worksheets for your own use. Taxact 2013 Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Taxact 2013 If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Taxact 2013 See the Instructions for Form 1040 to figure your deduction. Taxact 2013 The following special rules apply to the self-employed health insurance deduction. Taxact 2013 You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Taxact 2013 You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Taxact 2013 The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Taxact 2013 Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Taxact 2013 More information. Taxact 2013   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Taxact 2013 Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Taxact 2013 This is an income tax deduction only, on Form 1040, line 27. Taxact 2013 Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Taxact 2013 Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Taxact 2013 You must pay the tax as you earn or receive income during the year. Taxact 2013 An employee usually has income tax withheld from his or her wages or salary. Taxact 2013 However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Taxact 2013 You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Taxact 2013 Your salary is for ministerial services (see Ministerial Services , earlier). Taxact 2013 If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Taxact 2013 You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Taxact 2013 Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Taxact 2013 Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Taxact 2013 See Form 1040-ES for the different payment methods. Taxact 2013 The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Taxact 2013 For more information, see chapter 2 of Publication 505. Taxact 2013 If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Taxact 2013 Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Taxact 2013 Table 4. Taxact 2013 2013 Filing Requirements for Most Taxpayers IF your filing status is . Taxact 2013 . Taxact 2013 . Taxact 2013 AND at the end of 2013 you were* . Taxact 2013 . Taxact 2013 . Taxact 2013 THEN file a return if your gross income** was at least . Taxact 2013 . Taxact 2013 . Taxact 2013 single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Taxact 2013 ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Taxact 2013 Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Taxact 2013 If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Taxact 2013 Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Taxact 2013 Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Taxact 2013 But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Taxact 2013 *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Taxact 2013 Additional requirements. Taxact 2013   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Taxact 2013 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Taxact 2013 Self-employment tax. Taxact 2013   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Taxact 2013   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Taxact 2013 You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Taxact 2013 You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Taxact 2013 However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Taxact 2013 Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Taxact 2013 Note. Taxact 2013 For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Taxact 2013 You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Taxact 2013 Exemption from SE tax. Taxact 2013   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Taxact 2013 Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Taxact 2013 However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Taxact 2013    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Taxact 2013 Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Taxact 2013 More information. Taxact 2013   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Taxact 2013 Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Taxact 2013 You generally can deduct your contributions to the plan. Taxact 2013 Your contributions and the earnings on them are not taxed until they are distributed. Taxact 2013 Retirement plans for the self-employed. Taxact 2013   To set up one of the following plans you must be self-employed. Taxact 2013 SEP (simplified employee pension) plan. Taxact 2013 SIMPLE (savings incentive match plan for employees) plan. Taxact 2013 Qualified retirement plan (also called a Keogh or H. Taxact 2013 R. Taxact 2013 10 plan). Taxact 2013   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Taxact 2013 See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Taxact 2013 This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Taxact 2013   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Taxact 2013 You are not a self-employed person for purposes of setting up a retirement plan. Taxact 2013 This result is true even if your salary is subject to SE tax. Taxact 2013   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Taxact 2013   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Taxact 2013 Individual retirement arrangements (IRAs). Taxact 2013   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Taxact 2013 Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Taxact 2013   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Taxact 2013 You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. Taxact 2013   If you contribute to a traditional IRA, your contribution may be deductible. Taxact 2013 However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Taxact 2013   For more information on IRAs, see Publication 590. Taxact 2013 Tax-sheltered annuity plans. Taxact 2013   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. Taxact 2013 For more
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Get the Facts About Renting

A lease is an agreement that outlines the obligations of the owner and the tenants of a house or apartment. It is a legally binding document that courts will generally uphold in legal proceedings, so it is important for you to know the exact terms of the lease agreement before you sign it. Before agreeing to lease a home to you, a landlord may review your credit report, so you may want to get a copy before you start your apartment search. Some things to look for in a lease:

  • Clauses that allow the landlord to change the terms of the lease after it is signed
  • Requirements/responsibilities of the tenants to do routine repairs such as lawn maintenance, cleaning or notification of repairs
  • Restrictions that would prevent you from living normally or comfortably in the home
  • Term of the lease and any important dates such as when the rent is due, or garbage pick up days
  • Extra fees for parking spaces or storage, garbage collection, and pets
  • Information regarding utility providers, how to arrange for service and whether you or the landlord is responsible for those bills.

Read the lease carefully and discuss anything you don't understand or issues you might have. All landlord responsibilities should be clearly stated. Always get a copy of the signed lease to keep in your records. Any clause or terms in the agreement affects ALL parties who sign.

Tenants who lease or rent property are protected against discrimination by The Fair Housing Act. If you think your rights have been violated, you may write a letter or telephone the HUD office nearest you. You have one year after the alleged violation to file a complaint with HUD, but you should file as soon as possible.

Each state has its own tenant rights, laws and protections. Contact HUD for a state-by-state directory. You can also find public housing that is available from the Department of Housing and Urban Development. The agency offers several housing assistance programs for tenants and landlords as well as information of displaced residents.

Ten Tips for Renters

  • The best way to win over a prospective landlord is to be prepared by bringing a completed rental application; written references from previous landlords, employers, friends and colleagues; and a current copy of your credit report with you.
  • Carefully review all the important conditions of the lease before you sign.
  • To avoid disputes or misunderstandings with your landlord, get everything in writing.
  • Know your rights to live in a habitable rental unit-and don't give them up.
  • Keep communication open with your landlord.
  • Ask about your privacy rights before you sign the lease.
  • Purchase renter's insurance to cover your valuables.
  • Make sure the security deposit refund procedures are spelled out in your lease or rental agreement.
  • Learn whether your building and neighborhood are safe, and what you can expect your landlord to do about it if they aren't.
  • Know when to fight an eviction notice and when to move. Unless you have the law and provable facts on your side, fighting an eviction notice is usually shortsighted.

The Taxact 2013

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