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Www Irs Gov Form 1040x

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Www Irs Gov Form 1040x

Www irs gov form 1040x 10. Www irs gov form 1040x   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Www irs gov form 1040x Cash method. Www irs gov form 1040x Debt acquired from a decedent. Www irs gov form 1040x Liquidation. Www irs gov form 1040x Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Www irs gov form 1040x Introduction You have a bad debt if you cannot collect money owed to you. Www irs gov form 1040x A bad debt is either a business bad debt or a nonbusiness bad debt. Www irs gov form 1040x This chapter discusses only business bad debts. Www irs gov form 1040x Generally, a business bad debt is one that comes from operating your trade or business. Www irs gov form 1040x You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Www irs gov form 1040x All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Www irs gov form 1040x For more information on nonbusiness bad debts, see Publication 550. Www irs gov form 1040x Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Www irs gov form 1040x S. Www irs gov form 1040x Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Www irs gov form 1040x Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Www irs gov form 1040x A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Www irs gov form 1040x Bad debts of a corporation (other than an S corporation) are always business bad debts. Www irs gov form 1040x Credit sales. Www irs gov form 1040x   Business bad debts are mainly the result of credit sales to customers. Www irs gov form 1040x Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Www irs gov form 1040x After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Www irs gov form 1040x   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Www irs gov form 1040x If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Www irs gov form 1040x    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Www irs gov form 1040x This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Www irs gov form 1040x Accrual method. Www irs gov form 1040x   If you use the accrual method of accounting, you generally report income as you earn it. Www irs gov form 1040x You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Www irs gov form 1040x   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Www irs gov form 1040x Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Www irs gov form 1040x Cash method. Www irs gov form 1040x   If you use the cash method of accounting, you generally report income when you receive payment. Www irs gov form 1040x You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Www irs gov form 1040x For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Www irs gov form 1040x Debts from a former business. Www irs gov form 1040x   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Www irs gov form 1040x If any of these receivables subsequently become worthless, the loss is still a business bad debt. Www irs gov form 1040x Debt acquired from a decedent. Www irs gov form 1040x   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Www irs gov form 1040x The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Www irs gov form 1040x Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Www irs gov form 1040x Liquidation. Www irs gov form 1040x   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Www irs gov form 1040x Types of Business Bad Debts Business bad debts may result from the following. Www irs gov form 1040x Loans to clients and suppliers. Www irs gov form 1040x   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Www irs gov form 1040x Debts owed by political parties. Www irs gov form 1040x   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Www irs gov form 1040x You use the accrual method of accounting. Www irs gov form 1040x The debt arose from the sale of goods or services in the ordinary course of your trade or business. Www irs gov form 1040x More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Www irs gov form 1040x You made substantial and continuing efforts to collect on the debt. Www irs gov form 1040x Loan or capital contribution. Www irs gov form 1040x   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Www irs gov form 1040x Debts of an insolvent partner. Www irs gov form 1040x   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Www irs gov form 1040x If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Www irs gov form 1040x Business loan guarantee. Www irs gov form 1040x   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Www irs gov form 1040x You made the guarantee in the course of your trade or business. Www irs gov form 1040x You have a legal duty to pay the debt. Www irs gov form 1040x You made the guarantee before the debt became worthless. Www irs gov form 1040x You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Www irs gov form 1040x You received reasonable consideration for making the guarantee. Www irs gov form 1040x You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Www irs gov form 1040x Example. Www irs gov form 1040x Jane Zayne owns the Zayne Dress Company. Www irs gov form 1040x She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Www irs gov form 1040x Elegant Fashions is one of Zayne's largest clients. Www irs gov form 1040x Elegant Fashions later defaulted on the loan. Www irs gov form 1040x As a result, Ms. Www irs gov form 1040x Zayne paid the remaining balance of the loan in full to the bank. Www irs gov form 1040x She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Www irs gov form 1040x She was motivated by the desire to retain one of her better clients and keep a sales outlet. Www irs gov form 1040x Deductible in the year paid. Www irs gov form 1040x   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Www irs gov form 1040x Rights against a borrower. Www irs gov form 1040x   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Www irs gov form 1040x The debt is then owed to you. Www irs gov form 1040x If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Www irs gov form 1040x Joint debtor. Www irs gov form 1040x   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Www irs gov form 1040x Sale of mortgaged property. Www irs gov form 1040x   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Www irs gov form 1040x When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Www irs gov form 1040x This may occur when the debt is due or prior to that date. Www irs gov form 1040x To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Www irs gov form 1040x It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Www irs gov form 1040x Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Www irs gov form 1040x Property received for debt. Www irs gov form 1040x   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Www irs gov form 1040x You can deduct the remaining debt as a bad debt if and when it becomes worthless. Www irs gov form 1040x   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Www irs gov form 1040x It is not a recovery of a bad debt. Www irs gov form 1040x For information on the sale of an asset, see Publication 544. Www irs gov form 1040x How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Www irs gov form 1040x The specific charge-off method. Www irs gov form 1040x The nonaccrual-experience method. Www irs gov form 1040x Generally, you must use the specific charge-off method. Www irs gov form 1040x However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Www irs gov form 1040x Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Www irs gov form 1040x However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Www irs gov form 1040x Partly worthless debts. Www irs gov form 1040x   You can deduct specific bad debts that become partly uncollectible during the tax year. Www irs gov form 1040x Your tax deduction is limited to the amount you charge off on your books during the year. Www irs gov form 1040x You do not have to charge off and deduct your partly worthless debts annually. Www irs gov form 1040x You can delay the charge off until a later year. Www irs gov form 1040x However, you cannot deduct any part of a debt after the year it becomes totally worthless. Www irs gov form 1040x Significantly modified debt. Www irs gov form 1040x   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Www irs gov form 1040x For more information, see Regulations section 1. Www irs gov form 1040x 166-3(a)(3). Www irs gov form 1040x Deduction disallowed. Www irs gov form 1040x   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Www irs gov form 1040x If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Www irs gov form 1040x The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Www irs gov form 1040x Totally worthless debts. Www irs gov form 1040x   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Www irs gov form 1040x   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Www irs gov form 1040x However, you may want to do so. Www irs gov form 1040x If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Www irs gov form 1040x See Partly worthless debts, earlier. Www irs gov form 1040x Filing a claim for refund. Www irs gov form 1040x   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Www irs gov form 1040x If the bad debt was totally worthless, you must file the claim by the later of the following dates. Www irs gov form 1040x 7 years from the date your original return was due (not including extensions). Www irs gov form 1040x 2 years from the date you paid the tax. Www irs gov form 1040x   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Www irs gov form 1040x 3 years from the date you filed your original return. Www irs gov form 1040x 2 years from the date you paid the tax. Www irs gov form 1040x You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Www irs gov form 1040x Such an impairment requires proof of existence. Www irs gov form 1040x   For details and more information about filing a claim, see Publication 556. Www irs gov form 1040x Use one of the following forms to file a claim. Www irs gov form 1040x For more information, see the instructions for the applicable form. Www irs gov form 1040x Table 10-1. Www irs gov form 1040x Forms Used To File a Claim IF you filed as a. Www irs gov form 1040x . Www irs gov form 1040x . Www irs gov form 1040x THEN file. Www irs gov form 1040x . Www irs gov form 1040x . Www irs gov form 1040x Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Www irs gov form 1040x Under this method, you do not accrue service related income you expect to be uncollectible. Www irs gov form 1040x Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Www irs gov form 1040x Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Www irs gov form 1040x Service related income. Www irs gov form 1040x   You can use the nonaccrual-experience method only for amounts earned by performing services. Www irs gov form 1040x You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Www irs gov form 1040x Gross receipts test. Www irs gov form 1040x   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Www irs gov form 1040x If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Www irs gov form 1040x   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Www irs gov form 1040x For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Www irs gov form 1040x Interest or penalty charged. Www irs gov form 1040x   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Www irs gov form 1040x However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Www irs gov form 1040x You otherwise accrue the full amount due as gross income at the time you provide the services. Www irs gov form 1040x You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Www irs gov form 1040x Change in accounting method. Www irs gov form 1040x   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Www irs gov form 1040x See Form 3115 and the Instructions for Form 3115 for more information. Www irs gov form 1040x Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Www irs gov form 1040x The amount you include is limited to the amount you actually deducted. Www irs gov form 1040x However, you can exclude the amount deducted that did not reduce your tax. Www irs gov form 1040x Report the recovery as “Other income” on the appropriate business form or schedule. Www irs gov form 1040x See Recoveries in Publication 525 for more information. Www irs gov form 1040x Net operating loss (NOL) carryover. Www irs gov form 1040x   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Www irs gov form 1040x A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Www irs gov form 1040x For more information about NOLs, see Publication 536. Www irs gov form 1040x Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 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The Www Irs Gov Form 1040x

Www irs gov form 1040x 8. Www irs gov form 1040x   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. Www irs gov form 1040x Half-time student. Www irs gov form 1040x How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. Www irs gov form 1040x ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Www irs gov form 1040x Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. Www irs gov form 1040x If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. Www irs gov form 1040x You cannot deduct either payments or contributions to a QTP. Www irs gov form 1040x For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. Www irs gov form 1040x What is the tax benefit of a QTP. Www irs gov form 1040x   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Www irs gov form 1040x See Are Distributions Taxable , later, for more information. Www irs gov form 1040x    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. Www irs gov form 1040x See Coordination With American Opportunity and Lifetime Learning Credits, later. Www irs gov form 1040x What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. Www irs gov form 1040x QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. Www irs gov form 1040x The program must meet certain requirements. Www irs gov form 1040x Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. Www irs gov form 1040x Qualified education expenses. Www irs gov form 1040x   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). Www irs gov form 1040x As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. Www irs gov form 1040x See Half-time student , later. Www irs gov form 1040x The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. Www irs gov form 1040x Tuition and fees. Www irs gov form 1040x Books, supplies, and equipment. Www irs gov form 1040x Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. Www irs gov form 1040x Expenses for room and board must be incurred by students who are enrolled at least half-time. Www irs gov form 1040x The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Www irs gov form 1040x The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Www irs gov form 1040x The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Www irs gov form 1040x You will need to contact the eligible educational institution for qualified room and board costs. Www irs gov form 1040x    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. Www irs gov form 1040x Designated beneficiary. Www irs gov form 1040x   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. Www irs gov form 1040x The designated beneficiary can be changed after participation in the QTP begins. Www irs gov form 1040x If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. Www irs gov form 1040x Half-time student. Www irs gov form 1040x   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Www irs gov form 1040x Eligible educational institution. Www irs gov form 1040x   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Www irs gov form 1040x S. Www irs gov form 1040x Department of Education. Www irs gov form 1040x It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Www irs gov form 1040x The educational institution should be able to tell you if it is an eligible educational institution. Www irs gov form 1040x   Certain educational institutions located outside the United States also participate in the U. Www irs gov form 1040x S. Www irs gov form 1040x Department of Education's Federal Student Aid (FSA) programs. Www irs gov form 1040x   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. Www irs gov form 1040x There are no income restrictions on the individual contributors. Www irs gov form 1040x You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. Www irs gov form 1040x   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. Www irs gov form 1040x This is a return of the investment in the plan. Www irs gov form 1040x The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). Www irs gov form 1040x Earnings and return of investment. Www irs gov form 1040x    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. Www irs gov form 1040x The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Www irs gov form 1040x Form 1099-Q should be sent to you by January 31, 2014. Www irs gov form 1040x Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. Www irs gov form 1040x Adjusted qualified education expenses. Www irs gov form 1040x   This amount is the total qualified education expenses reduced by any tax-free educational assistance. Www irs gov form 1040x 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. Www irs gov form 1040x Taxable earnings. Www irs gov form 1040x   Use the following steps to figure the taxable part. Www irs gov form 1040x Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. Www irs gov form 1040x The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. Www irs gov form 1040x Subtract the amount figured in (1) from the total distributed earnings. Www irs gov form 1040x The result is the amount the beneficiary must include in income. Www irs gov form 1040x Report it on Form 1040 or Form 1040NR, line 21. Www irs gov form 1040x Example 1. Www irs gov form 1040x In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Www irs gov form 1040x Over the years they contributed $18,000 to the account. Www irs gov form 1040x The total balance in the account was $27,000 on the date the distribution was made. Www irs gov form 1040x In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. Www irs gov form 1040x She paid her college expenses from the following sources. Www irs gov form 1040x   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. Www irs gov form 1040x   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. Www irs gov form 1040x Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Www irs gov form 1040x Sara figures the taxable part of the distributed earnings as follows. Www irs gov form 1040x   1. Www irs gov form 1040x $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. Www irs gov form 1040x $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. Www irs gov form 1040x Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Www irs gov form 1040x This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. Www irs gov form 1040x Example 2. Www irs gov form 1040x Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). Www irs gov form 1040x   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. Www irs gov form 1040x   1. Www irs gov form 1040x $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. Www irs gov form 1040x $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). Www irs gov form 1040x This represents distributed earnings not used for adjusted qualified education expenses. Www irs gov form 1040x Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. Www irs gov form 1040x For purposes of this allocation, disregard any qualified elementary and secondary education expenses. Www irs gov form 1040x Example 3. Www irs gov form 1040x Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. Www irs gov form 1040x In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. Www irs gov form 1040x   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. Www irs gov form 1040x Note. Www irs gov form 1040x If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . Www irs gov form 1040x Coordination With Tuition and Fees Deduction. Www irs gov form 1040x   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Www irs gov form 1040x Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. Www irs gov form 1040x You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Www irs gov form 1040x Your basis is the total amount of contributions to that QTP account. Www irs gov form 1040x 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. Www irs gov form 1040x If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. Www irs gov form 1040x ) from all such accounts in order to determine your taxable earnings for the year. Www irs gov form 1040x By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. Www irs gov form 1040x Example 1. Www irs gov form 1040x In 2013, Taylor received a final distribution of $1,000 from QTP #1. Www irs gov form 1040x His unrecovered basis in that account before the distribution was $3,000. Www irs gov form 1040x If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). Www irs gov form 1040x Example 2. Www irs gov form 1040x Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. Www irs gov form 1040x His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Www irs gov form 1040x Taylor's adjusted qualified education expenses for 2013 totaled $6,000. Www irs gov form 1040x In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. Www irs gov form 1040x   1. Www irs gov form 1040x $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. Www irs gov form 1040x $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. Www irs gov form 1040x $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. Www irs gov form 1040x Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). Www irs gov form 1040x Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. Www irs gov form 1040x 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. Www irs gov form 1040x Exceptions. Www irs gov form 1040x   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. Www irs gov form 1040x Made because the designated beneficiary is disabled. Www irs gov form 1040x 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. Www irs gov form 1040x 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. Www irs gov form 1040x 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. Www irs gov form 1040x Made on account of the attendance of the designated beneficiary at a U. Www irs gov form 1040x S. Www irs gov form 1040x military academy (such as the USNA at Annapolis). Www irs gov form 1040x 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. Www irs gov form 1040x S. Www irs gov form 1040x Code) attributable to such attendance. Www irs gov form 1040x 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. Www irs gov form 1040x ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Www irs gov form 1040x Figuring the additional tax. Www irs gov form 1040x    Use Part II of Form 5329, to figure any additional tax. Www irs gov form 1040x Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Www irs gov form 1040x Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. Www irs gov form 1040x In addition, the designated beneficiary can be changed without transferring accounts. Www irs gov form 1040x Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). Www irs gov form 1040x An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. Www irs gov form 1040x Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Www irs gov form 1040x These are not taxable distributions. Www irs gov form 1040x Members of the beneficiary's family. Www irs gov form 1040x   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Www irs gov form 1040x Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Www irs gov form 1040x Brother, sister, stepbrother, or stepsister. Www irs gov form 1040x Father or mother or ancestor of either. Www irs gov form 1040x Stepfather or stepmother. Www irs gov form 1040x Son or daughter of a brother or sister. Www irs gov form 1040x Brother or sister of father or mother. Www irs gov form 1040x Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Www irs gov form 1040x The spouse of any individual listed above. Www irs gov form 1040x First cousin. Www irs gov form 1040x Example. Www irs gov form 1040x When Aaron graduated from college last year he had $5,000 left in his QTP. Www irs gov form 1040x He wanted to give this money to his younger brother, who was in junior high school. Www irs gov form 1040x In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. Www irs gov form 1040x If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. Www irs gov form 1040x Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. Www irs gov form 1040x See Members of the beneficiary's family , earlier. Www irs gov form 1040x Example. Www irs gov form 1040x Assume the same situation as in the last example. Www irs gov form 1040x Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. Www irs gov form 1040x Prev  Up  Next   Home   More Online Publications