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Www h&rblock 37. Www h&rblock   Other Credits Table of Contents What's New Introduction Useful Items - You may want to see: Nonrefundable CreditsAdoption Credit Alternative Motor Vehicle Credit Alternative Fuel Vehicle Refueling Property Credit Credit to Holders of Tax Credit Bonds Foreign Tax Credit Mortgage Interest Credit Nonrefundable Credit for Prior Year Minimum Tax Plug-in Electric Drive Motor Vehicle Credit Residential Energy Credits Retirement Savings Contributions Credit (Saver's Credit) Refundable CreditsCredit for Tax on Undistributed Capital Gain Health Coverage Tax Credit Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld What's New Adoption credit. Www h&rblock  The maximum adoption credit is $12,970 for 2013. Www h&rblock See Adoption Credit . Www h&rblock Plug-in electric vehicle credit. Www h&rblock  This credit has expired. Www h&rblock Credit for prior year minimum tax. Www h&rblock  The refundable portion of the credit for prior year minimum tax has expired. Www h&rblock Excess withholding of social security and railroad retirement tax. Www h&rblock  Social security tax and tier 1 railroad retirement (RRTA) tax were both withheld during 2013 at a rate of 6. Www h&rblock 2% of wages up to $113,700. Www h&rblock If you worked for more than one employer and had too much social security or RRTA tax withheld during 2013, you may be entitled to a credit for the excess withholding. Www h&rblock See Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld . Www h&rblock Introduction This chapter discusses the following nonrefundable credits. Www h&rblock Adoption credit. Www h&rblock Alternative motor vehicle credit. Www h&rblock Alternative fuel vehicle refueling property credit. Www h&rblock Credit to holders of tax credit bonds. Www h&rblock Foreign tax credit. Www h&rblock Mortgage interest credit. Www h&rblock Nonrefundable credit for prior year minimum tax. Www h&rblock Plug-in electric drive motor vehicle credit. Www h&rblock Residential energy credits. Www h&rblock Retirement savings contributions credit. Www h&rblock This chapter also discusses the following refundable credits. Www h&rblock Credit for tax on undistributed capital gain. Www h&rblock Health coverage tax credit. Www h&rblock Credit for excess social security tax or railroad retirement tax withheld. Www h&rblock Several other credits are discussed in other chapters in this publication. Www h&rblock Child and dependent care credit (chapter 32). Www h&rblock Credit for the elderly or the disabled (chapter 33). Www h&rblock Child tax credit (chapter 34). Www h&rblock Education credits (chapter 35). Www h&rblock Earned income credit (chapter 36). Www h&rblock Nonrefundable credits. Www h&rblock   The first part of this chapter, Nonrefundable Credits , covers ten credits that you subtract from your tax. Www h&rblock These credits may reduce your tax to zero. Www h&rblock If these credits are more than your tax, the excess is not refunded to you. Www h&rblock Refundable credits. Www h&rblock   The second part of this chapter, Refundable Credits , covers three credits that are treated as payments and are refundable to you. Www h&rblock These credits are added to the federal income tax withheld and any estimated tax payments you made. Www h&rblock If this total is more than your total tax, the excess will be refunded to you. Www h&rblock Useful Items - You may want to see: Publication 502 Medical and Dental Expenses 514 Foreign Tax Credit for  Individuals 530 Tax Information for Homeowners 590 Individual Retirement Arrangements (IRAs) Form (and Instructions) 1116 Foreign Tax Credit 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 5695 Residential Energy Credits 8396 Mortgage Interest Credit 8801 Credit For Prior Year Minimum Tax — Individuals, Estates, and Trusts 8828 Recapture of Federal Mortgage Subsidy 8839 Qualified Adoption Expenses 8880 Credit for Qualified Retirement Savings Contributions 8885 Health Coverage Tax Credit 8910 Alternative Motor Vehicle Credit 8911 Alternative Fuel Vehicle Refueling Property Credit 8912 Credit to Holders of Tax Credit Bonds 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit Nonrefundable Credits The credits discussed in this part of the chapter can reduce your tax. Www h&rblock However, if the total of these credits is more than your tax, the excess is not refunded to you. Www h&rblock Adoption Credit You may be able to take a tax credit of up to $12,970 for qualified expenses paid to adopt an eligible child. Www h&rblock The credit may be allowed for the adoption of a child with special needs even if you do not have any qualified expenses. Www h&rblock If your modified adjusted gross income (AGI) is more than $194,580, your credit is reduced. Www h&rblock If your modified AGI is $234,580 or more, you cannot take the credit. Www h&rblock Qualified adoption expenses. Www h&rblock   Qualified adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. Www h&rblock These expenses include: Adoption fees, Court costs, Attorney fees, Travel expenses (including amounts spent for meals and lodging) while away from home, and Re-adoption expenses to adopt a foreign child. Www h&rblock Nonqualified expenses. Www h&rblock   Qualified adoption expenses do not include expenses: That violate state or federal law, For carrying out any surrogate parenting arrangement, For the adoption of your spouse's child, For which you received funds under any federal, state, or local program, Allowed as a credit or deduction under any other federal income tax rule, or Paid or reimbursed by your employer or any other person or organization. Www h&rblock Eligible child. Www h&rblock   The term “eligible child” means any individual: Under 18 years old, or Physically or mentally incapable of caring for himself or herself. Www h&rblock Child with special needs. Www h&rblock   An eligible child is a child with special needs if all three of the following apply. Www h&rblock The child was a citizen or resident of the United States (including U. Www h&rblock S. Www h&rblock possessions) at the time the adoption process began. Www h&rblock A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents' home. Www h&rblock The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Www h&rblock Factors used by states to make this determination include: The child's ethnic background, The child's age, Whether the child is a member of a minority or sibling group, and Whether the child has a medical condition or a physical, mental, or emotional handicap. Www h&rblock When to take the credit. Www h&rblock   Generally, until the adoption becomes final, you take the credit in the year after your qualified expenses were paid or incurred. Www h&rblock If the adoption becomes final, you take the credit in the year your expenses were paid or incurred. Www h&rblock See the Instructions for Form 8839 for more specific information on when to take the credit. Www h&rblock Foreign child. Www h&rblock   If the child is not a U. Www h&rblock S. Www h&rblock citizen or resident at the time the adoption process began, you cannot take the credit unless the adoption becomes final. Www h&rblock You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final. Www h&rblock How to take the credit. Www h&rblock   Figure your 2013 nonrefundable credit and any carryforward to 2014 on Form 8839 and attach it to your Form 1040. Www h&rblock Include the credit in your total for Form 1040, line 53. Www h&rblock Check box c and enter “8839” on the line next to that box. Www h&rblock More information. Www h&rblock   For more information, see the Instructions for Form 8839. Www h&rblock Alternative Motor Vehicle Credit You may be able to take this credit if you place a qualified fuel cell vehicle in service in 2013. Www h&rblock Amount of credit. Www h&rblock   Generally, you can rely on the manufacturer's certification to the IRS that a specific make, model, and model year vehicle qualifies for the credit and the amount of the credit for which it qualifies. Www h&rblock In the case of a foreign manufacturer, you generally can rely on its domestic distributor's certification to the IRS. Www h&rblock   Ordinarily the amount of the credit is 100% of the manufacturer's (or domestic distributor's) certification to the IRS of the maximum credit allowable. Www h&rblock How to take the credit. Www h&rblock   To take the credit, you must complete Form 8910 and attach it to your Form 1040. Www h&rblock Include the credit in your total for Form 1040, line 53. Www h&rblock Check box c and enter “8910” on the line next to that box. Www h&rblock More information. Www h&rblock   For more information on the credit, see the Instructions for Form 8910. Www h&rblock Alternative Fuel Vehicle Refueling Property Credit You may be able to take a credit if you place qualified alternative fuel vehicle refueling property in service in 2013. Www h&rblock Qualified alternative fuel vehicle refueling property. Www h&rblock   Qualified alternative fuel vehicle refueling property is any property (other than a building or its structural components) used for either of the following. Www h&rblock To store or dispense alternative fuel into the fuel tank of a motor vehicle propelled by the fuel, but only if the storage or dispensing is at the point where the fuel is delivered into that tank. Www h&rblock To recharge an electric vehicle, but only if the recharging property is located at the point where the vehicle is recharged. Www h&rblock   The following are alternative fuels. Www h&rblock Any fuel at least 85% of the volume of which consists of one or more of the following: ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen. Www h&rblock Any mixture which consists of two or more of the following: biodiesel, diesel fuel, or kerosene, and at least 20% of the volume of which consists of biodiesel determined without regard to any kerosene. Www h&rblock Electricity. Www h&rblock Amount of the credit. Www h&rblock   For personal use property, the credit is generally the smaller of 30% of the property's cost or $1,000. Www h&rblock For business use property, the credit is generally the smaller of 30% of the property's cost or $30,000. Www h&rblock How to take the credit. Www h&rblock   To take the credit, you must complete Form 8911 and attach it to your Form 1040. Www h&rblock Include the credit in your total for Form 1040, line 53. Www h&rblock Check box c and enter “8911” on the line next to that box. Www h&rblock More information. Www h&rblock   For more information on the credit, see the Form 8911 instructions. Www h&rblock Credit to Holders of Tax Credit Bonds Tax credit bonds are bonds in which the holder receives a tax credit in lieu of some or all of the interest on the bond. Www h&rblock You may be able to take a credit if you are a holder of one of the following bonds. Www h&rblock Clean renewable energy bonds (issued before 2010). Www h&rblock New clean renewable energy bonds. Www h&rblock Qualified energy conservation bonds. Www h&rblock Qualified school construction bonds. Www h&rblock Qualified zone academy bonds. Www h&rblock Build America bonds. Www h&rblock In some instances, an issuer may elect to receive a credit for interest paid on the bond. Www h&rblock If the issuer makes this election, you cannot also claim a credit. Www h&rblock Interest income. Www h&rblock   The amount of any tax credit allowed (figured before applying tax liability limits) must be included as interest income on your tax return. Www h&rblock How to take the credit. Www h&rblock   Complete Form 8912 and attach it to your Form 1040. Www h&rblock Include the credit in your total for Form 1040, line 53. Www h&rblock Check box c and enter “8912” on the line next to that box. Www h&rblock More information. Www h&rblock   For more information, see the Instructions for Form 8912. Www h&rblock Foreign Tax Credit You generally can choose to take income taxes you paid or accrued during the year to a foreign country or U. Www h&rblock S. Www h&rblock possession as a credit against your U. Www h&rblock S. Www h&rblock income tax. Www h&rblock Or, you can deduct them as an itemized deduction (see chapter 22). Www h&rblock You cannot take a credit (or deduction) for foreign income taxes paid on income that you exclude from U. Www h&rblock S. Www h&rblock tax under any of the following. Www h&rblock Foreign earned income exclusion. Www h&rblock Foreign housing exclusion. Www h&rblock Income from Puerto Rico exempt from U. Www h&rblock S. Www h&rblock tax. Www h&rblock Possession exclusion. Www h&rblock Limit on the credit. Www h&rblock   Unless you can elect not to file Form 1116 (see Exception , later), your foreign tax credit cannot be more than your U. Www h&rblock S. Www h&rblock tax liability (Form 1040, line 44), multiplied by a fraction. Www h&rblock The numerator of the fraction is your taxable income from sources outside the United States. Www h&rblock The denominator is your total taxable income from U. Www h&rblock S. Www h&rblock and foreign sources. Www h&rblock See Publication 514 for more information. Www h&rblock How to take the credit. Www h&rblock   Complete Form 1116 and attach it to your Form 1040. Www h&rblock Enter the credit on Form 1040, line 47. Www h&rblock Exception. Www h&rblock   You do not have to complete Form 1116 to take the credit if all of the following apply. Www h&rblock All of your gross foreign source income was from interest and dividends and all of that income and the foreign tax paid on it were reported to you on Form 1099-INT, Form 1099-DIV, or Schedule K-1 (or substitute statement). Www h&rblock If you had dividend income from shares of stock, you held those shares for at least 16 days. Www h&rblock You are not filing Form 4563 or excluding income from sources within Puerto Rico. Www h&rblock The total of your foreign taxes was not more than $300 (not more than $600 if married filing jointly). Www h&rblock All of your foreign taxes were: Legally owed and not eligible for a refund, and Paid to countries that are recognized by the United States and do not support terrorism. Www h&rblock More information. Www h&rblock   For more information on the credit and these requirements, see the Instructions for Form 1116. Www h&rblock Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals own a home. Www h&rblock If you qualify, you can take the credit each year for part of the home mortgage interest you pay. Www h&rblock Who qualifies. Www h&rblock   You may be eligible for the credit if you were issued a qualified mortgage credit certificate (MCC) from your state or local government. Www h&rblock Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Www h&rblock Amount of credit. Www h&rblock   Figure your credit on Form 8396. Www h&rblock If your mortgage loan amount is equal to (or smaller than) the certified indebtedness (loan) amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Www h&rblock   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Www h&rblock To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Www h&rblock      Certified indebtedness amount on your MCC     Original amount of your mortgage   Limit based on credit rate. Www h&rblock   If the certificate credit rate is more than 20%, the credit you are allowed cannot be more than $2,000. Www h&rblock If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, this $2,000 limit must be divided based on the interest held by each person. Www h&rblock See Publication 530 for more information. Www h&rblock Carryforward. Www h&rblock   Your credit (after applying the limit based on the credit rate) is also subject to a limit based on your tax that is figured using Form 8396. Www h&rblock If your allowable credit is reduced because of this tax liability limit, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Www h&rblock   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Www h&rblock How to take the credit. Www h&rblock    Figure your 2013 credit and any carryforward to 2014 on Form 8396, and attach it to your Form 1040. Www h&rblock Be sure to include any credit carryforward from 2010, 2011, and 2012. Www h&rblock   Include the credit in your total for Form 1040, line 53. Www h&rblock Check box c and enter “8396” on the line next to that box. Www h&rblock Reduced home mortgage interest deduction. Www h&rblock   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Www h&rblock You must do this even if part of that amount is to be carried forward to 2014. Www h&rblock For more information about the home mortgage interest deduction, see chapter 23. Www h&rblock Recapture of federal mortgage subsidy. Www h&rblock   If you received an MCC with your mortgage loan, you may have to recapture (pay back) all or part of the benefit you received from that program. Www h&rblock The recapture may be required if you sell or dispose of your home at a gain during the first 9 years after the date you closed your mortgage loan. Www h&rblock See the Instructions for Form 8828 and chapter 15 for more information. Www h&rblock More information. Www h&rblock   For more information on the credit, see the Form 8396 instructions. Www h&rblock Nonrefundable Credit for Prior Year Minimum Tax The tax laws give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. Www h&rblock If you benefit from these laws, you may have to pay at least a minimum amount of tax in addition to any other tax on these items. Www h&rblock This is called the alternative minimum tax. Www h&rblock The special treatment of some items of income and expenses only allows you to postpone paying tax until a later year. Www h&rblock If in prior years you paid alternative minimum tax because of these tax postponement items, you may be able to take a credit for prior year minimum tax against your current year's regular tax. Www h&rblock You may be able to take a credit against your regular tax if for 2012 you had: An alternative minimum tax liability and adjustments or preferences other than exclusion items, A minimum tax credit that you are carrying forward to 2013, or An unallowed qualified electric vehicle credit. Www h&rblock How to take the credit. Www h&rblock    Figure your 2013 nonrefundable credit (if any), and any carryforward to 2014 on Form 8801, and attach it to your Form 1040. Www h&rblock Include the credit in your total for Form 1040, line 53, and check box b. Www h&rblock You can carry forward any unused credit for prior year minimum tax to later years until it is completely used. Www h&rblock More information. Www h&rblock   For more information on the credit, see the Instructions for Form 8801. Www h&rblock Plug-in Electric Drive Motor Vehicle Credit You may be able to take this credit if you placed in service for business or personal use a qualified plug-in electric drive motor vehicle or a qualified two- or three-wheeled plug-in electric vehicle in 2013 and you meet some other requirements. Www h&rblock Qualified plug-in electric drive motor vehicle. Www h&rblock   This is a new vehicle with at least four wheels that: Is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 4 kilowatt hours and is capable of being recharged from an external source of electricity, and Has a gross vehicle weight of less than 14,000 pounds. Www h&rblock Qualified two- or three-wheeled plug-in electric vehicle. Www h&rblock   This is a new vehicle with two or three wheels that: Is capable of achieving a speed of 45 miles per hour or greater, Is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 2. Www h&rblock 5 kilowatt hours and is capable of being recharged from an external source of electricity, and Has a gross vehicle weight of less than 14,000 pounds. Www h&rblock Certification and other requirements. Www h&rblock   Generally, you can rely on the manufacturer's (or, in the case of a foreign manufacturer, its domestic distributor's) certification to the IRS that a specific make, model, and model year vehicle qualifies for the credit and, if applicable, the amount of the credit for which it qualifies. Www h&rblock However, if the IRS publishes an announcement that the certification for any specific make, model, and model year vehicle has been withdrawn, you cannot rely on the certification for such a vehicle purchased after the date of publication of the withdrawal announcement. Www h&rblock   The following requirements must also be met to qualify for the credit. Www h&rblock You are the owner of the vehicle. Www h&rblock If the vehicle is leased, only the lessor, and not the lessee, is entitled to the credit. Www h&rblock You placed the vehicle in service during 2013. Www h&rblock The vehicle is manufactured primarily for use on public streets, roads, and highways. Www h&rblock The original use of the vehicle began with you. Www h&rblock You acquired the vehicle for your use or to lease to others, and not for resale. Www h&rblock In the case of the qualified two- or three-wheeled plug-in electric vehicle, the vehicle is acquired after 2011 and before 2014. Www h&rblock You use the vehicle primarily in the United States. Www h&rblock How to take the credit. Www h&rblock   To take the credit, you must complete Form 8936 and attach it to your Form 1040. Www h&rblock Include the credit in your total for Form 1040, line 53. Www h&rblock Check box c and enter “8936” on the line next to that box. Www h&rblock More information. Www h&rblock   For more information on the credit, see the Form 8936 instructions. Www h&rblock Residential Energy Credits You may be able to take one or both of the following credits if you made energy saving improvements to your home located in the United States in 2013. Www h&rblock Nonbusiness energy property credit. Www h&rblock Residential energy efficient property credit. Www h&rblock If you are a member of a condominium management association for a condominium you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any costs of the association or corporation for purposes of these credits. Www h&rblock Nonbusiness energy property credit. Www h&rblock   You may be able to take a credit equal to the sum of: 10% of the amount paid or incurred for qualified energy efficiency improvements installed during 2013, and Any residential energy property costs paid or incurred in 2013. Www h&rblock   There is a lifetime limit of $500 for all years after 2005, of which only $200 can be for windows; $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property. Www h&rblock    If the total of nonbusiness energy property credits you have taken in previous years (after 2005) is more than $500, you cannot take this credit in 2013. Www h&rblock   Qualified energy efficiency improvements are the following improvements that are new, can be expected to remain in use at least 5 years, and meet certain requirements for energy efficiency. Www h&rblock Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home. Www h&rblock Exterior window (including skylights). Www h&rblock Exterior doors. Www h&rblock Any metal or asphalt roof that has appropriate pigmented coatings or cooling granules specifically and primarily designed to reduce heat gain of the home. Www h&rblock   Residential energy property is any of the following. Www h&rblock Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heater; and stoves that use biomass fuel. Www h&rblock Qualified natural gas, propane, or oil furnaces; and qualified natural gas, propane, or oil hot water boilers. Www h&rblock Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces. Www h&rblock Residential energy efficient property credit. Www h&rblock   You may be able to take a credit of 30% of your costs of qualified solar electric property, solar water heating property, fuel cell property, small wind energy property, and geothermal heat pump property. Www h&rblock The credit amount for costs paid for qualified fuel cell property is limited to $500 for each one-half kilowatt of capacity of the property. Www h&rblock Basis reduction. Www h&rblock   You must reduce the basis of your home by the amount of any credit allowed. Www h&rblock How to take the credit. Www h&rblock   Complete Form 5695 and attach it to your Form 1040. Www h&rblock Enter the credit on Form 1040, line 52. Www h&rblock More information. Www h&rblock   For more information on these credits, see the Form 5695 instructions. Www h&rblock Retirement Savings Contributions Credit (Saver's Credit) You may be able to take this credit if you, or your spouse if filing jointly, made: Contributions (other than rollover contributions) to a traditional or Roth IRA, Elective deferrals to a 401(k) or 403(b) plan (including designated Roth contributions) or to a governmental 457, SEP, or SIMPLE plan, Voluntary employee contributions to a qualified retirement plan (including the federal Thrift Savings Plan), or Contributions to a 501(c)(18)(D) plan. Www h&rblock However, you cannot take the credit if either of the following applies. Www h&rblock The amount on Form 1040, line 38, or Form 1040A, line 22, is more than $29,500 ($44,250 if head of household; $59,000 if married filing jointly). Www h&rblock The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 1996, (b) is claimed as a dependent on someone else's 2013 tax return, or (c) was a student (defined next). Www h&rblock Student. Www h&rblock   You were a student if during any part of 5 calendar months of 2013 you: Were enrolled as a full-time student at a school, or Took a full-time, on-farm training course given by a school or a state, county, or local government agency. Www h&rblock School. Www h&rblock   A school includes a technical, trade, or mechanical school. Www h&rblock It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Www h&rblock How to take the credit. Www h&rblock   Figure the credit on Form 8880. Www h&rblock Enter the credit on your Form 1040, line 50, or your Form 1040A, line 32, and attach Form 8880 to your return. Www h&rblock More information. Www h&rblock   For more information on the credit, see the Form 8880 instructions. Www h&rblock Refundable Credits The credits discussed in this part of the chapter are treated as payments of tax. Www h&rblock If the total of these credits, withheld federal income tax, and estimated tax payments is more than your total tax, the excess can be refunded to you. Www h&rblock Credit for Tax on Undistributed Capital Gain You must include in your income any amounts that regulated investment companies (commonly called mutual funds) or real estate investment trusts (REITs) allocated to you as capital gain distributions, even if you did not actually receive them. Www h&rblock If the mutual fund or REIT paid a tax on the capital gain, you are allowed a credit for the tax since it is considered paid by you. Www h&rblock The mutual fund or REIT will send you Form 2439 showing your share of the undistributed capital gains and the tax paid, if any. Www h&rblock How to take the credit. Www h&rblock   To take the credit, attach Copy B of Form 2439 to your Form 1040. Www h&rblock Include the amount from box 2 of your Form 2439 in the total for Form 1040, line 71, and check box a. Www h&rblock More information. Www h&rblock   See Capital Gain Distributions in chapter 8 for more information on undistributed capital gains. Www h&rblock Health Coverage Tax Credit You may be able to take this credit for any month in which all the following statements were true on the first day of the month. Www h&rblock You were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, reemployment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient (defined later); or you were a qualified family member of one of these individuals when the individual died or you finalized a divorce with one of these individuals. Www h&rblock You and/or your family members were covered by a qualified health insurance plan for which you paid the entire premiums, or your portion of the premiums, directly to your health plan or to “U. Www h&rblock S. Www h&rblock Treasury–HCTC. Www h&rblock ” You were not enrolled in Medicare Part A, B, or C, or you were enrolled in Medicare but your family member(s) qualified for the HCTC. Www h&rblock You were not enrolled in Medicaid or the Children's Health Insurance Program (CHIP). Www h&rblock You were not enrolled in the Federal Employees Health Benefits program (FEHBP) or eligible to receive benefits under the U. Www h&rblock S. Www h&rblock military health system (TRICARE). Www h&rblock You were not imprisoned under federal, state, or local authority. Www h&rblock Your employer did not pay 50% or more of the cost of coverage. Www h&rblock You did not receive a 65% COBRA premium reduction from your former employer or COBRA administrator. Www h&rblock But, you cannot take the credit if you can be claimed as a dependent on someone else's 2013 tax return. Www h&rblock If you meet all of these conditions, you may be able to take a credit of up to 72. Www h&rblock 5% of the amount you paid directly to a qualified health plan for you and any qualifying family members. Www h&rblock You cannot take the credit for insurance premiums on coverage that was actually paid for with a National Emergency Grant. Www h&rblock The amount you paid for qualified health insurance coverage must be reduced by any Archer MSA and health savings account distributions used to pay for the coverage. Www h&rblock You can take this credit on your tax return or have it paid on your behalf in advance to your insurance company. Www h&rblock If the credit is paid on your behalf in advance, that amount will reduce the amount of the credit you can take on your tax return. Www h&rblock TAA recipient. Www h&rblock   You were an eligible TAA recipient on the first day of the month if, for any day in that month or the prior month, you: Received a trade readjustment allowance, or Would have been entitled to receive such an allowance except that you had not exhausted all rights to any unemployment insurance (except additional compensation that is funded by a state and is not reimbursed from any federal funds) to which you were entitled (or would be entitled if you applied). Www h&rblock Example. Www h&rblock You received a trade adjustment allowance for January 2013. Www h&rblock You were an eligible TAA recipient on the first day of January and February. Www h&rblock Alternative TAA recipient. Www h&rblock   You were an eligible alternative TAA recipient on the first day of the month if, for that month or the prior month, you received benefits under an alternative trade adjustment assistance program for older workers established by the Department of Labor. Www h&rblock Example. Www h&rblock You received benefits under an alternative trade adjustment assistance program for older workers for October 2013. Www h&rblock The program was established by the Department of Labor. Www h&rblock You were an eligible alternative TAA recipient on the first day of October and November. Www h&rblock RTAA recipient. Www h&rblock   You were an eligible RTAA recipient on the first day of the month if, for that month or the prior month, you received benefits under a reemployment trade adjustment assistance program for older workers established by the Department of Labor. Www h&rblock PBGC pension recipient. Www h&rblock   You were an eligible PBGC pension recipient on the first day of the month, if both of the following apply. Www h&rblock You were age 55 or older on the first day of the month. Www h&rblock You received a benefit for that month paid by the PBGC under title IV of the Employee Retirement Income Security Act of 1974 (ERISA). Www h&rblock If you received a lump-sum payment from the PBGC after August 5, 2002, you meet item (2) above for any month that you would have received a PBGC benefit if you had not received the lump-sum payment. Www h&rblock How to take the credit. Www h&rblock   To take the credit, complete Form 8885 and attach it to your Form 1040. Www h&rblock Include your credit in the total for Form 1040, line 71, and check box c. Www h&rblock   You must attach health insurance bills (or COBRA payment coupons) and proof of payment for any amounts you include on Form 8885, line 2. Www h&rblock For details, see Publication 502 or Form 8885. Www h&rblock More information. Www h&rblock   For definitions and special rules, including those relating to qualified health insurance plans, qualifying family members, the effect of certain life events, and employer-sponsored health insurance plans, see Publication 502 and the Form 8885 instructions. Www h&rblock Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld Most employers must withhold social security tax from your wages. Www h&rblock If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax. Www h&rblock If you worked for two or more employers in 2013, you may have had too much social security tax withheld from your pay. Www h&rblock If one or more of those employers was a railroad employer, too much tier 1 RRTA tax may also have been withheld at the 6. Www h&rblock 2% rate. Www h&rblock You can claim the excess social security or tier 1 RRTA tax as a credit against your income tax when you file your return. Www h&rblock For the tier 1 RRTA tax, only use the portion of the tier 1 RRTA tax that was taxed at the 6. Www h&rblock 2% rate when figuring if excess tier 1 RRTA tax was withheld; do not include any portion of the tier 1 RRTA tax that was withheld at the Medicare tax rate (1. Www h&rblock 45%) or the Additional Medicare Tax rate (. Www h&rblock 9%). Www h&rblock The following table shows the maximum amount of wages subject to tax and the maximum amount of tax that should have been withheld for 2013. Www h&rblock Type of tax Maximum  wages subject to tax Maximum tax that should have been withheld Social security or RRTA tier 1 $113,700 $7,049. Www h&rblock 40 RRTA tier 2 $84,300 $3,709. Www h&rblock 20 All wages are subject to Medicare tax withholding. Www h&rblock   Use Form 843, Claim for Refund and Request for Abatement, to claim a refund of excess tier 2 RRTA tax. Www h&rblock Be sure to attach a copy of all of your W-2 forms. Www h&rblock Use Worksheet 3-3 in Publication 505, Tax Withholding and Estimated Tax, to help you figure the excess amount. Www h&rblock Employer's error. Www h&rblock   If any one employer withheld too much social security or tier 1 RRTA tax, you cannot take the excess as a credit against your income tax. Www h&rblock The employer should adjust the tax for you. Www h&rblock If the employer does not adjust the overcollection, you can file a claim for refund using Form 843. Www h&rblock Joint return. Www h&rblock   If you are filing a joint return, you cannot add the social security or tier 1 RRTA tax withheld from your spouse's wages to the amount withheld from your wages. Www h&rblock Figure the withholding separately for you and your spouse to determine if either of you has excess withholding. Www h&rblock How to figure the credit if you did not work for a railroad. Www h&rblock   If you did not work for a railroad during 2013, figure the credit as follows: 1. Www h&rblock Add all social security tax withheld (but not more than $7,049. Www h&rblock 40 for each employer). Www h&rblock Enter the total here   2. Www h&rblock Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT”   3. Www h&rblock Add lines 1 and 2. Www h&rblock If $7,049. Www h&rblock 40 or less, stop here. Www h&rblock You cannot take  the credit   4. Www h&rblock Social security tax limit 7,049. Www h&rblock 40 5. Www h&rblock Credit. Www h&rblock Subtract line 4 from line 3. Www h&rblock Enter the result here and on Form 1040, line 69 (or Form 1040A, line 41) $ Example. Www h&rblock You are married and file a joint return with your spouse who had no gross income in 2013. Www h&rblock During 2013, you worked for the Brown Technology Company and earned $60,000 in wages. Www h&rblock Social security tax of $3,720 was withheld. Www h&rblock You also worked for another employer in 2013 and earned $55,000 in wages. Www h&rblock $3,410 of social security tax was withheld from these wages. Www h&rblock Because you worked for more than one employer and your total wages were more than $113,700, you can take a credit of $80. Www h&rblock 60 for the excess social security tax withheld. Www h&rblock 1. Www h&rblock Add all social security tax withheld (but not more than $7,049. Www h&rblock 40 for each employer). Www h&rblock Enter the total here $7,130. Www h&rblock 00 2. Www h&rblock Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT” -0- 3. Www h&rblock Add lines 1 and 2. Www h&rblock If $7,049. Www h&rblock 40 or less, stop here. Www h&rblock You cannot take the credit 7,130. Www h&rblock 00 4. Www h&rblock Social security tax limit 7,049. Www h&rblock 40 5. Www h&rblock Credit. Www h&rblock Subtract line 4 from line 3. Www h&rblock Enter the result here and on Form 1040, line 69 (or Form 1040A, line 41) $80. Www h&rblock 60 How to figure the credit if you worked for a railroad. Www h&rblock   If you were a railroad employee at any time during 2013, figure the credit as follows: 1. Www h&rblock Add all social security and tier 1 RRTA tax withheld at the 6. Www h&rblock 2% rate (but not more than $7,049. Www h&rblock 40 for each employer). Www h&rblock Enter the total here   2. Www h&rblock Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT”   3. Www h&rblock Add lines 1 and 2. Www h&rblock If $7,049. Www h&rblock 40 or less, stop here. Www h&rblock You cannot take  the credit   4. Www h&rblock Social security and tier 1 RRTA  tax limit 7,049. Www h&rblock 40 5. Www h&rblock Credit. Www h&rblock Subtract line 4 from line 3. Www h&rblock Enter the result here and on Form 1040, line 69 (or Form 1040A, line 41) $ How to take the credit. Www h&rblock   Enter the credit on Form 1040, line 69, or include it in the total for Form 1040A, line 41. Www h&rblock More information. Www h&rblock   For more information on the credit, see Publication 505. Www h&rblock Prev  Up  Next   Home   More Online Publications
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Understanding Your CP19 Notice

We have increased the amount of tax you owe because we believe you incorrectly claimed one or more deductions or credits.


What you need to do

  • Review your notice and compare our changes to your tax return.
  • Complete and return the Response form.

You may want to...

  • Review this notice with your tax preparer.
  • Read about the deduction or credit in Publication 17.
  • Call us for clarification at the number listed on your notice.

Answers to Common Questions

What is the notice telling me?
Based on the information shown on your tax return, it appears you have not met the requirements for claiming one or more deductions or credits. As a result, your total tax is more than you expected.

What do I have to do?
Review the requirements for the deduction or credit we adjusted. Return the Response form indicating thereon your agreement or disagreement with the changes we made.

If you feel your tax return was correct as filed, send us the documentation listed on page 2 of the notice to verify you qualify for the exemption or credit.

If you agree with the changes we made, pay the amount due by the date requested on the notice.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 20-Feb-2014

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How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
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  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Www H&rblock

Www h&rblock 6. Www h&rblock   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Www h&rblock Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Www h&rblock Also use basis to figure depreciation, amortization, depletion, and casualty losses. Www h&rblock If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Www h&rblock Only the basis allocated to the business or investment use of the property can be depreciated. Www h&rblock Your original basis in property is adjusted (increased or decreased) by certain events. Www h&rblock For example, if you make improvements to the property, increase your basis. Www h&rblock If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Www h&rblock Keep accurate records of all items that affect the basis of your assets. Www h&rblock For information on keeping records, see chapter 1. Www h&rblock Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Www h&rblock Cost Basis The basis of property you buy is usually its cost. Www h&rblock Cost is the amount you pay in cash, debt obligations, other property, or services. Www h&rblock Your cost includes amounts you pay for sales tax, freight, installation, and testing. Www h&rblock The basis of real estate and business assets will include other items, discussed later. Www h&rblock Basis generally does not include interest payments. Www h&rblock However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Www h&rblock You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Www h&rblock Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Www h&rblock Loans with low or no interest. Www h&rblock   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Www h&rblock You generally have unstated interest if your interest rate is less than the applicable federal rate. Www h&rblock See the discussion of unstated interest in Publication 537, Installment Sales. Www h&rblock Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Www h&rblock If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Www h&rblock Some of these expenses are discussed next. Www h&rblock Lump sum purchase. Www h&rblock   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Www h&rblock Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Www h&rblock Figure the basis of each asset by multiplying the lump sum by a fraction. Www h&rblock The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Www h&rblock Fair market value (FMV). Www h&rblock   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Www h&rblock Sales of similar property on or about the same date may help in figuring the FMV of the property. Www h&rblock If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Www h&rblock Real estate taxes. Www h&rblock   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Www h&rblock   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Www h&rblock Whether or not you reimburse the seller, do not include that amount in the basis of your property. Www h&rblock Settlement costs. Www h&rblock   Your basis includes the settlement fees and closing costs for buying the property. Www h&rblock See Publication 551 for a detailed list of items you can and cannot include in basis. Www h&rblock   Do not include fees and costs for getting a loan on the property. Www h&rblock Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Www h&rblock Points. Www h&rblock   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Www h&rblock You may be able to deduct the points currently or over the term of the loan. Www h&rblock For more information about deducting points, see Points in chapter 4 of Publication 535. Www h&rblock Assumption of a mortgage. Www h&rblock   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Www h&rblock Example. Www h&rblock If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Www h&rblock Constructing assets. Www h&rblock   If you build property or have assets built for you, your expenses for this construction are part of your basis. Www h&rblock Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Www h&rblock   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Www h&rblock You must capitalize them (include them in the asset's basis). Www h&rblock Employee wages paid for the construction work, reduced by any employment credits allowed. Www h&rblock Depreciation on equipment you own while it is used in the construction. Www h&rblock Operating and maintenance costs for equipment used in the construction. Www h&rblock The cost of business supplies and materials used in the construction. Www h&rblock    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Www h&rblock Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Www h&rblock To determine the basis of these assets or separate items, there must be an allocation of basis. Www h&rblock Group of assets acquired. Www h&rblock   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Www h&rblock Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Www h&rblock You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Www h&rblock If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Www h&rblock Farming business acquired. Www h&rblock   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Www h&rblock Generally, reduce the purchase price by any cash received. Www h&rblock Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Www h&rblock See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Www h&rblock Transplanted embryo. Www h&rblock   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Www h&rblock Allocate the rest of the purchase price to the basis of the calf. Www h&rblock Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Www h&rblock Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Www h&rblock You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Www h&rblock Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Www h&rblock However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Www h&rblock You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Www h&rblock You are not subject to the uniform capitalization rules if the property is produced for personal use. Www h&rblock In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Www h&rblock Plants. Www h&rblock   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Www h&rblock Animals. Www h&rblock   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Www h&rblock The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Www h&rblock Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Www h&rblock For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Www h&rblock For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Www h&rblock Exceptions. Www h&rblock   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Www h&rblock   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Www h&rblock See Accrual Method Required under Accounting Methods in chapter 2. Www h&rblock   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Www h&rblock If you make this election, special rules apply. Www h&rblock This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Www h&rblock This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Www h&rblock    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Www h&rblock See chapter 7, for additional information on depreciation. Www h&rblock Example. Www h&rblock You grow trees that have a preproductive period of more than 2 years. Www h&rblock The trees produce an annual crop. Www h&rblock You are an individual and the uniform capitalization rules apply to your farming business. Www h&rblock You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Www h&rblock You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Www h&rblock Preproductive period of more than 2 years. Www h&rblock   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Www h&rblock Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Www h&rblock Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Www h&rblock More information. Www h&rblock   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Www h&rblock 263A-4. Www h&rblock Table 6-1. Www h&rblock Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Www h&rblock Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Www h&rblock The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Www h&rblock Increases to Basis Increase the basis of any property by all items properly added to a capital account. Www h&rblock These include the cost of any improvements having a useful life of more than 1 year. Www h&rblock The following costs increase the basis of property. Www h&rblock The cost of extending utility service lines to property. Www h&rblock Legal fees, such as the cost of defending and perfecting title. Www h&rblock Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Www h&rblock Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Www h&rblock Do not deduct these expenses as taxes. Www h&rblock However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Www h&rblock If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Www h&rblock See chapter 7. Www h&rblock Deducting vs. Www h&rblock capitalizing costs. Www h&rblock   Do not add to your basis costs you can deduct as current expenses. Www h&rblock For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Www h&rblock However, you can elect either to deduct or to capitalize certain other costs. Www h&rblock See chapter 7 in Publication 535. Www h&rblock Decreases to Basis The following are some items that reduce the basis of property. Www h&rblock Section 179 deduction. Www h&rblock Deductions previously allowed or allowable for amortization, depreciation, and depletion. Www h&rblock Alternative motor vehicle credit. Www h&rblock See Form 8910. Www h&rblock Alternative fuel vehicle refueling property credit. Www h&rblock See Form 8911. Www h&rblock Residential energy efficient property credits. Www h&rblock See Form 5695. Www h&rblock Investment credit (part or all) taken. Www h&rblock Casualty and theft losses and insurance reimbursements. Www h&rblock Payments you receive for granting an easement. Www h&rblock Exclusion from income of subsidies for energy conservation measures. Www h&rblock Certain canceled debt excluded from income. Www h&rblock Rebates from a manufacturer or seller. Www h&rblock Patronage dividends received from a cooperative association as a result of a purchase of property. Www h&rblock See Patronage Dividends in chapter 3. Www h&rblock Gas-guzzler tax. Www h&rblock See Form 6197. Www h&rblock Some of these items are discussed next. Www h&rblock For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Www h&rblock Depreciation and section 179 deduction. Www h&rblock   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Www h&rblock For more information on these deductions, see chapter 7. Www h&rblock Section 179 deduction. Www h&rblock   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Www h&rblock Depreciation. Www h&rblock   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Www h&rblock If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Www h&rblock If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Www h&rblock   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Www h&rblock   See chapter 7 for information on figuring the depreciation you should have claimed. Www h&rblock   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Www h&rblock Casualty and theft losses. Www h&rblock   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Www h&rblock Also, decrease it by any deductible loss not covered by insurance. Www h&rblock See chapter 11 for information about figuring your casualty or theft loss. Www h&rblock   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Www h&rblock To make this determination, compare the repaired property to the property before the casualty. Www h&rblock Easements. Www h&rblock   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Www h&rblock It reduces the basis of the affected part of the property. Www h&rblock If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Www h&rblock See Easements and rights-of-way in chapter 3. Www h&rblock Exclusion from income of subsidies for energy conservation measures. Www h&rblock   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Www h&rblock Reduce the basis of the property by the excluded amount. Www h&rblock Canceled debt excluded from income. Www h&rblock   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Www h&rblock A debt includes any indebtedness for which you are liable or which attaches to property you hold. Www h&rblock   You can exclude your canceled debt from income if the debt is any of the following. Www h&rblock Debt canceled in a bankruptcy case or when you are insolvent. Www h&rblock Qualified farm debt. Www h&rblock Qualified real property business debt (provided you are not a C corporation). Www h&rblock Qualified principal residence indebtedness. Www h&rblock Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Www h&rblock If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Www h&rblock If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Www h&rblock   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Www h&rblock For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Www h&rblock For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Www h&rblock For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Www h&rblock Basis Other Than Cost There are times when you cannot use cost as basis. Www h&rblock In these situations, the fair market value or the adjusted basis of property may be used. Www h&rblock Examples are discussed next. Www h&rblock Property changed from personal to business or rental use. Www h&rblock   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Www h&rblock An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Www h&rblock   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Www h&rblock   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Www h&rblock The basis for figuring a gain is your adjusted basis in the property when you sell the property. Www h&rblock Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Www h&rblock Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Www h&rblock Property received for services. Www h&rblock   If you receive property for services, include the property's FMV in income. Www h&rblock The amount you include in income becomes your basis. Www h&rblock If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Www h&rblock Example. Www h&rblock George Smith is an accountant and also operates a farming business. Www h&rblock George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Www h&rblock The accounting work and the cow are each worth $1,500. Www h&rblock George must include $1,500 in income for his accounting services. Www h&rblock George's basis in the cow is $1,500. Www h&rblock Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Www h&rblock A taxable gain or deductible loss also is known as a recognized gain or loss. Www h&rblock A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Www h&rblock If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Www h&rblock Example. Www h&rblock You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Www h&rblock You must report a taxable gain of $4,000 for the land. Www h&rblock The tractor has a basis of $6,000. Www h&rblock Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Www h&rblock Similar or related property. Www h&rblock   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Www h&rblock However, make the following adjustments. Www h&rblock Decrease the basis by the following amounts. Www h&rblock Any loss you recognize on the involuntary conversion. Www h&rblock Any money you receive that you do not spend on similar property. Www h&rblock Increase the basis by the following amounts. Www h&rblock Any gain you recognize on the involuntary conversion. Www h&rblock Any cost of acquiring the replacement property. Www h&rblock Money or property not similar or related. Www h&rblock   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Www h&rblock Allocating the basis. Www h&rblock   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Www h&rblock Basis for depreciation. Www h&rblock   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Www h&rblock For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Www h&rblock For more information about involuntary conversions, see chapter 11. Www h&rblock Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Www h&rblock A nontaxable gain or loss also is known as an unrecognized gain or loss. Www h&rblock If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Www h&rblock Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Www h&rblock For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Www h&rblock There must also be an exchange of like-kind property. Www h&rblock For more information, see Like-Kind Exchanges in  chapter 8. Www h&rblock The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Www h&rblock Example 1. Www h&rblock You traded a truck you used in your farming business for a new smaller truck to use in farming. Www h&rblock The adjusted basis of the old truck was $10,000. Www h&rblock The FMV of the new truck is $30,000. Www h&rblock Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Www h&rblock Example 2. Www h&rblock You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Www h&rblock You use both the field cultivator and the planter in your farming business. Www h&rblock The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Www h&rblock   Exchange expenses generally are the closing costs that you pay. Www h&rblock They include such items as brokerage commissions, attorney fees, and deed preparation fees. Www h&rblock Add them to the basis of the like-kind property you receive. Www h&rblock Property plus cash. Www h&rblock   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Www h&rblock Example. Www h&rblock You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Www h&rblock Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Www h&rblock Special rules for related persons. Www h&rblock   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Www h&rblock Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Www h&rblock Each person reports it on the tax return filed for the year in which the later disposition occurred. Www h&rblock If this rule applies, the basis of the property received in the original exchange will be its FMV. Www h&rblock For more information, see chapter 8. Www h&rblock Exchange of business property. Www h&rblock   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Www h&rblock For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Www h&rblock Basis for depreciation. Www h&rblock   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Www h&rblock For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Www h&rblock Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Www h&rblock The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Www h&rblock Decrease the basis by the following amounts. Www h&rblock Any money you receive. Www h&rblock Any loss you recognize on the exchange. Www h&rblock Increase the basis by the following amounts. Www h&rblock Any additional costs you incur. Www h&rblock Any gain you recognize on the exchange. Www h&rblock If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Www h&rblock Example 1. Www h&rblock You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Www h&rblock You realize a gain of $40,000. Www h&rblock This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Www h&rblock Include your gain in income (recognize gain) only to the extent of the cash received. Www h&rblock Your basis in the land you received is figured as follows. Www h&rblock Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Www h&rblock You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Www h&rblock You realize a gain of $7,250. Www h&rblock This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Www h&rblock You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Www h&rblock Your basis in the truck you received is figured as follows. Www h&rblock Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Www h&rblock   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Www h&rblock The rest is the basis of the like-kind property. Www h&rblock Example. Www h&rblock You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Www h&rblock You also received $1,000 cash and a truck that had an FMV of $3,000. Www h&rblock The truck is unlike property. Www h&rblock You realized a gain of $1,500. Www h&rblock This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Www h&rblock You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Www h&rblock Your basis in the properties you received is figured as follows. Www h&rblock Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Www h&rblock This is the truck's FMV. Www h&rblock The rest ($12,500) is the basis of the tractor. Www h&rblock Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Www h&rblock Example. Www h&rblock You used a tractor on your farm for 3 years. Www h&rblock Its adjusted basis is $22,000 and its FMV is $40,000. Www h&rblock You are interested in a new tractor, which sells for $60,000. Www h&rblock Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Www h&rblock Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Www h&rblock However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Www h&rblock Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Www h&rblock Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Www h&rblock Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Www h&rblock You also must know its FMV at the time it was given to you and any gift tax paid on it. Www h&rblock FMV equal to or greater than donor's adjusted basis. Www h&rblock   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Www h&rblock Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Www h&rblock   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Www h&rblock See Adjusted Basis , earlier. Www h&rblock   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Www h&rblock Figure the increase by multiplying the gift tax paid by the following fraction. Www h&rblock Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Www h&rblock The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Www h&rblock Example. Www h&rblock In 2013, you received a gift of property from your mother that had an FMV of $50,000. Www h&rblock Her adjusted basis was $20,000. Www h&rblock The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Www h&rblock She paid a gift tax of $7,320. Www h&rblock Your basis, $26,076, is figured as follows. Www h&rblock Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Www h&rblock 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Www h&rblock If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Www h&rblock However, your basis cannot exceed the FMV of the gift when it was given to you. Www h&rblock FMV less than donor's adjusted basis. Www h&rblock   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Www h&rblock Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Www h&rblock Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Www h&rblock (See Adjusted Basis , earlier. Www h&rblock )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Www h&rblock Example. Www h&rblock You received farmland as a gift from your parents when they retired from farming. Www h&rblock At the time of the gift, the land had an FMV of $80,000. Www h&rblock Your parents' adjusted basis was $100,000. Www h&rblock After you received the land, no events occurred that would increase or decrease your basis. Www h&rblock If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Www h&rblock If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Www h&rblock If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Www h&rblock For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Www h&rblock If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Www h&rblock Business property. Www h&rblock   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Www h&rblock Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Www h&rblock The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Www h&rblock However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Www h&rblock The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Www h&rblock For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Www h&rblock Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Www h&rblock If a federal estate return is filed, you can use its appraised value. Www h&rblock The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Www h&rblock For information on the alternate valuation, see the Instructions for Form 706. Www h&rblock The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Www h&rblock If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Www h&rblock Special-use valuation method. Www h&rblock   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Www h&rblock If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Www h&rblock If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Www h&rblock The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Www h&rblock   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Www h&rblock Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Www h&rblock Figure all FMVs without regard to the special-use valuation. Www h&rblock   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Www h&rblock This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Www h&rblock The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Www h&rblock   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Www h&rblock To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Www h&rblock If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Www h&rblock The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Www h&rblock   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Www h&rblock   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Www h&rblock Property inherited from a decedent who died in 2010. Www h&rblock   If you inherited property from a decedent who died in 2010, different rules may apply. Www h&rblock See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Www h&rblock Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Www h&rblock Partner's basis. Www h&rblock   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Www h&rblock However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Www h&rblock For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Www h&rblock Shareholder's basis. Www h&rblock   The basis of property distributed by a corporation to a shareholder is its fair market value. Www h&rblock For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Www h&rblock Prev  Up  Next   Home   More Online Publications