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Www myfreetaxes com goodwillwm 8. Www myfreetaxes com goodwillwm   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Www myfreetaxes com goodwillwm Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Www myfreetaxes com goodwillwm It is similar to the straight line method of depreciation. Www myfreetaxes com goodwillwm The various amortizable costs covered in this chapter are included in the list below. Www myfreetaxes com goodwillwm However, this chapter does not discuss amortization of bond premium. Www myfreetaxes com goodwillwm For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Www myfreetaxes com goodwillwm Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Www myfreetaxes com goodwillwm How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Www myfreetaxes com goodwillwm To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Www myfreetaxes com goodwillwm For example, in 2012, you began to amortize a lease. Www myfreetaxes com goodwillwm In 2013, you began to amortize a second lease. Www myfreetaxes com goodwillwm Report amortization from the new lease on line 42 of your 2013 Form 4562. Www myfreetaxes com goodwillwm Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Www myfreetaxes com goodwillwm If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Www myfreetaxes com goodwillwm Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Www myfreetaxes com goodwillwm Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Www myfreetaxes com goodwillwm Generally, you recover costs for particular assets through depreciation deductions. Www myfreetaxes com goodwillwm However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Www myfreetaxes com goodwillwm For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Www myfreetaxes com goodwillwm For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Www myfreetaxes com goodwillwm The costs that are not deducted currently can be amortized ratably over a 180-month period. Www myfreetaxes com goodwillwm The amortization period starts with the month you begin operating your active trade or business. Www myfreetaxes com goodwillwm You are not required to attach a statement to make this election. Www myfreetaxes com goodwillwm You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Www myfreetaxes com goodwillwm Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Www myfreetaxes com goodwillwm See Regulations sections 1. Www myfreetaxes com goodwillwm 195-1, 1. Www myfreetaxes com goodwillwm 248-1, and 1. Www myfreetaxes com goodwillwm 709-1. Www myfreetaxes com goodwillwm For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Www myfreetaxes com goodwillwm Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Www myfreetaxes com goodwillwm If the election is made, you must attach any statement required by Regulations sections 1. Www myfreetaxes com goodwillwm 195-1(b), 1. Www myfreetaxes com goodwillwm 248-1(c), and 1. Www myfreetaxes com goodwillwm 709-1(c), as in effect before September 9, 2008. Www myfreetaxes com goodwillwm Note. Www myfreetaxes com goodwillwm You can apply the provisions of Regulations sections 1. Www myfreetaxes com goodwillwm 195-1, 1. Www myfreetaxes com goodwillwm 248-1, and 1. Www myfreetaxes com goodwillwm 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Www myfreetaxes com goodwillwm Otherwise, the provisions under Regulations sections 1. Www myfreetaxes com goodwillwm 195-1(b), 1. Www myfreetaxes com goodwillwm 248-1(c), and 1. Www myfreetaxes com goodwillwm 709-1(c), as in effect before September 9, 2008, will apply. Www myfreetaxes com goodwillwm For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Www myfreetaxes com goodwillwm See How To Make the Election , later. Www myfreetaxes com goodwillwm The cost must qualify as one of the following. Www myfreetaxes com goodwillwm A business start-up cost. Www myfreetaxes com goodwillwm An organizational cost for a corporation. Www myfreetaxes com goodwillwm An organizational cost for a partnership. Www myfreetaxes com goodwillwm Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Www myfreetaxes com goodwillwm Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Www myfreetaxes com goodwillwm Qualifying costs. Www myfreetaxes com goodwillwm   A start-up cost is amortizable if it meets both of the following tests. Www myfreetaxes com goodwillwm It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Www myfreetaxes com goodwillwm It is a cost you pay or incur before the day your active trade or business begins. Www myfreetaxes com goodwillwm   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Www myfreetaxes com goodwillwm Advertisements for the opening of the business. Www myfreetaxes com goodwillwm Salaries and wages for employees who are being trained and their instructors. Www myfreetaxes com goodwillwm Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Www myfreetaxes com goodwillwm Salaries and fees for executives and consultants, or for similar professional services. Www myfreetaxes com goodwillwm Nonqualifying costs. Www myfreetaxes com goodwillwm   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Www myfreetaxes com goodwillwm See Research and Experimental Costs , later. Www myfreetaxes com goodwillwm Purchasing an active trade or business. Www myfreetaxes com goodwillwm   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Www myfreetaxes com goodwillwm These are costs that help you decide whether to purchase a business. Www myfreetaxes com goodwillwm Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Www myfreetaxes com goodwillwm Example. Www myfreetaxes com goodwillwm On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Www myfreetaxes com goodwillwm They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Www myfreetaxes com goodwillwm In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Www myfreetaxes com goodwillwm The letter stated that a binding commitment would result only after a purchase agreement was signed. Www myfreetaxes com goodwillwm The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Www myfreetaxes com goodwillwm On October 22nd, you signed a purchase agreement with XYZ, Inc. Www myfreetaxes com goodwillwm All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Www myfreetaxes com goodwillwm Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Www myfreetaxes com goodwillwm Disposition of business. Www myfreetaxes com goodwillwm   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Www myfreetaxes com goodwillwm However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Www myfreetaxes com goodwillwm Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Www myfreetaxes com goodwillwm Qualifying costs. Www myfreetaxes com goodwillwm   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Www myfreetaxes com goodwillwm   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Www myfreetaxes com goodwillwm   Examples of organizational costs include: The cost of temporary directors. Www myfreetaxes com goodwillwm The cost of organizational meetings. Www myfreetaxes com goodwillwm State incorporation fees. Www myfreetaxes com goodwillwm The cost of legal services. Www myfreetaxes com goodwillwm Nonqualifying costs. Www myfreetaxes com goodwillwm   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Www myfreetaxes com goodwillwm Costs associated with the transfer of assets to the corporation. Www myfreetaxes com goodwillwm Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Www myfreetaxes com goodwillwm Qualifying costs. Www myfreetaxes com goodwillwm   A partnership can amortize an organizational cost only if it meets all the following tests. Www myfreetaxes com goodwillwm It is for the creation of the partnership and not for starting or operating the partnership trade or business. Www myfreetaxes com goodwillwm It is chargeable to a capital account (see chapter 1). Www myfreetaxes com goodwillwm It could be amortized over the life of the partnership if the partnership had a fixed life. Www myfreetaxes com goodwillwm It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Www myfreetaxes com goodwillwm However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Www myfreetaxes com goodwillwm It is for a type of item normally expected to benefit the partnership throughout its entire life. Www myfreetaxes com goodwillwm   Organizational costs include the following fees. Www myfreetaxes com goodwillwm Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Www myfreetaxes com goodwillwm Accounting fees for services incident to the organization of the partnership. Www myfreetaxes com goodwillwm Filing fees. Www myfreetaxes com goodwillwm Nonqualifying costs. Www myfreetaxes com goodwillwm   The following costs cannot be amortized. Www myfreetaxes com goodwillwm The cost of acquiring assets for the partnership or transferring assets to the partnership. Www myfreetaxes com goodwillwm The cost of admitting or removing partners, other than at the time the partnership is first organized. Www myfreetaxes com goodwillwm The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Www myfreetaxes com goodwillwm The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Www myfreetaxes com goodwillwm These “syndication fees” are capital expenses that cannot be depreciated or amortized. Www myfreetaxes com goodwillwm Liquidation of partnership. Www myfreetaxes com goodwillwm   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Www myfreetaxes com goodwillwm However, these costs can be deducted only to the extent they qualify as a loss from a business. Www myfreetaxes com goodwillwm How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Www myfreetaxes com goodwillwm You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Www myfreetaxes com goodwillwm Once you choose an amortization period, you cannot change it. Www myfreetaxes com goodwillwm To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Www myfreetaxes com goodwillwm The result is the amount you can deduct for each month. Www myfreetaxes com goodwillwm Cash method partnership. Www myfreetaxes com goodwillwm   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Www myfreetaxes com goodwillwm However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Www myfreetaxes com goodwillwm How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Www myfreetaxes com goodwillwm You may also be required to attach an accompanying statement (described later) to your return. Www myfreetaxes com goodwillwm For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Www myfreetaxes com goodwillwm Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Www myfreetaxes com goodwillwm 195-1, 1. Www myfreetaxes com goodwillwm 248-1, and 1. Www myfreetaxes com goodwillwm 709-1, you must also attach an accompanying statement to elect to amortize the costs. Www myfreetaxes com goodwillwm If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Www myfreetaxes com goodwillwm See Starting a Business , earlier, for more information. Www myfreetaxes com goodwillwm Generally, you must file the return by the due date (including any extensions). Www myfreetaxes com goodwillwm However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www myfreetaxes com goodwillwm For more information, see the instructions for Part VI of Form 4562. Www myfreetaxes com goodwillwm You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Www myfreetaxes com goodwillwm Note. Www myfreetaxes com goodwillwm The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Www myfreetaxes com goodwillwm If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Www myfreetaxes com goodwillwm A shareholder or partner cannot make this election. Www myfreetaxes com goodwillwm You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Www myfreetaxes com goodwillwm Only the corporation or partnership can amortize these costs. Www myfreetaxes com goodwillwm However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Www myfreetaxes com goodwillwm These costs qualify as business start-up costs if you acquire the partnership interest. Www myfreetaxes com goodwillwm Start-up costs election statement. Www myfreetaxes com goodwillwm   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Www myfreetaxes com goodwillwm A description of the business to which the start-up costs relate. Www myfreetaxes com goodwillwm A description of each start-up cost incurred. Www myfreetaxes com goodwillwm The month your active business began (or was acquired). Www myfreetaxes com goodwillwm The number of months in your amortization period (which is generally 180 months). Www myfreetaxes com goodwillwm Filing the statement early. Www myfreetaxes com goodwillwm   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Www myfreetaxes com goodwillwm If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Www myfreetaxes com goodwillwm Revised statement. Www myfreetaxes com goodwillwm   You can file a revised statement to include any start-up costs not included in your original statement. Www myfreetaxes com goodwillwm However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Www myfreetaxes com goodwillwm You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Www myfreetaxes com goodwillwm Organizational costs election statement. Www myfreetaxes com goodwillwm   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Www myfreetaxes com goodwillwm A description of each cost. Www myfreetaxes com goodwillwm The amount of each cost. Www myfreetaxes com goodwillwm The date each cost was incurred. Www myfreetaxes com goodwillwm The month your corporation or partnership began active business (or acquired the business). Www myfreetaxes com goodwillwm The number of months in your amortization period (which is generally 180 months). Www myfreetaxes com goodwillwm Partnerships. Www myfreetaxes com goodwillwm   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Www myfreetaxes com goodwillwm   You do not need to separately list any partnership organizational cost that is less than $10. Www myfreetaxes com goodwillwm Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Www myfreetaxes com goodwillwm   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Www myfreetaxes com goodwillwm Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Www myfreetaxes com goodwillwm The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Www myfreetaxes com goodwillwm However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Www myfreetaxes com goodwillwm For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Www myfreetaxes com goodwillwm How to amortize. Www myfreetaxes com goodwillwm   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Www myfreetaxes com goodwillwm Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Www myfreetaxes com goodwillwm You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Www myfreetaxes com goodwillwm You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Www myfreetaxes com goodwillwm See Anti-Churning Rules, later. Www myfreetaxes com goodwillwm Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Www myfreetaxes com goodwillwm The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Www myfreetaxes com goodwillwm You cannot deduct amortization for the month you dispose of the intangible. Www myfreetaxes com goodwillwm If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Www myfreetaxes com goodwillwm You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Www myfreetaxes com goodwillwm Tax-exempt use property subject to a lease. Www myfreetaxes com goodwillwm   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. Www myfreetaxes com goodwillwm Cost attributable to other property. Www myfreetaxes com goodwillwm   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Www myfreetaxes com goodwillwm For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Www myfreetaxes com goodwillwm Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Www myfreetaxes com goodwillwm Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Www myfreetaxes com goodwillwm You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Www myfreetaxes com goodwillwm Goodwill. Www myfreetaxes com goodwillwm   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Www myfreetaxes com goodwillwm Going concern value. Www myfreetaxes com goodwillwm   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Www myfreetaxes com goodwillwm It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Www myfreetaxes com goodwillwm It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Www myfreetaxes com goodwillwm Workforce in place, etc. Www myfreetaxes com goodwillwm   This includes the composition of a workforce (for example, its experience, education, or training). Www myfreetaxes com goodwillwm It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Www myfreetaxes com goodwillwm   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Www myfreetaxes com goodwillwm Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Www myfreetaxes com goodwillwm Business books and records, etc. Www myfreetaxes com goodwillwm   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Www myfreetaxes com goodwillwm It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Www myfreetaxes com goodwillwm Patents, copyrights, etc. Www myfreetaxes com goodwillwm   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Www myfreetaxes com goodwillwm Customer-based intangible. Www myfreetaxes com goodwillwm   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Www myfreetaxes com goodwillwm For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Www myfreetaxes com goodwillwm A customer base. Www myfreetaxes com goodwillwm A circulation base. Www myfreetaxes com goodwillwm An undeveloped market or market growth. Www myfreetaxes com goodwillwm Insurance in force. Www myfreetaxes com goodwillwm A mortgage servicing contract. Www myfreetaxes com goodwillwm An investment management contract. Www myfreetaxes com goodwillwm Any other relationship with customers involving the future provision of goods or services. Www myfreetaxes com goodwillwm   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Www myfreetaxes com goodwillwm Supplier-based intangible. Www myfreetaxes com goodwillwm   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Www myfreetaxes com goodwillwm The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Www myfreetaxes com goodwillwm Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Www myfreetaxes com goodwillwm Also, see Assets That Are Not Section 197 Intangibles below. Www myfreetaxes com goodwillwm Government-granted license, permit, etc. Www myfreetaxes com goodwillwm   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Www myfreetaxes com goodwillwm For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Www myfreetaxes com goodwillwm Covenant not to compete. Www myfreetaxes com goodwillwm   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Www myfreetaxes com goodwillwm An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Www myfreetaxes com goodwillwm   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Www myfreetaxes com goodwillwm Franchise, trademark, or trade name. Www myfreetaxes com goodwillwm   A franchise, trademark, or trade name is a section 197 intangible. Www myfreetaxes com goodwillwm You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Www myfreetaxes com goodwillwm For information on currently deductible contingent payments, see chapter 11. Www myfreetaxes com goodwillwm Professional sports franchise. Www myfreetaxes com goodwillwm   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Www myfreetaxes com goodwillwm Contract for the use of, or a term interest in, a section 197 intangible. Www myfreetaxes com goodwillwm   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Www myfreetaxes com goodwillwm It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Www myfreetaxes com goodwillwm Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Www myfreetaxes com goodwillwm Any interest in a corporation, partnership, trust, or estate. Www myfreetaxes com goodwillwm Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Www myfreetaxes com goodwillwm Any interest in land. Www myfreetaxes com goodwillwm Most computer software. Www myfreetaxes com goodwillwm (See Computer software , later. Www myfreetaxes com goodwillwm ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www myfreetaxes com goodwillwm An interest in a film, sound recording, video tape, book, or similar property. Www myfreetaxes com goodwillwm A right to receive tangible property or services under a contract or from a governmental agency. Www myfreetaxes com goodwillwm An interest in a patent or copyright. Www myfreetaxes com goodwillwm Certain rights that have a fixed duration or amount. Www myfreetaxes com goodwillwm (See Rights of fixed duration or amount , later. Www myfreetaxes com goodwillwm ) An interest under either of the following. Www myfreetaxes com goodwillwm An existing lease or sublease of tangible property. Www myfreetaxes com goodwillwm A debt that was in existence when the interest was acquired. Www myfreetaxes com goodwillwm A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www myfreetaxes com goodwillwm Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Www myfreetaxes com goodwillwm Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Www myfreetaxes com goodwillwm You generally must use the straight line method over its useful life. Www myfreetaxes com goodwillwm For certain intangibles, the depreciation period is specified in the law and regulations. Www myfreetaxes com goodwillwm For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Www myfreetaxes com goodwillwm For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Www myfreetaxes com goodwillwm Computer software. Www myfreetaxes com goodwillwm   Section 197 intangibles do not include the following types of computer software. Www myfreetaxes com goodwillwm Software that meets all the following requirements. Www myfreetaxes com goodwillwm It is, or has been, readily available for purchase by the general public. Www myfreetaxes com goodwillwm It is subject to a nonexclusive license. Www myfreetaxes com goodwillwm It has not been substantially modified. Www myfreetaxes com goodwillwm This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Www myfreetaxes com goodwillwm Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www myfreetaxes com goodwillwm Computer software defined. Www myfreetaxes com goodwillwm   Computer software includes all programs designed to cause a computer to perform a desired function. Www myfreetaxes com goodwillwm It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Www myfreetaxes com goodwillwm Rights of fixed duration or amount. Www myfreetaxes com goodwillwm   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Www myfreetaxes com goodwillwm However, this does not apply to the following intangibles. Www myfreetaxes com goodwillwm Goodwill. Www myfreetaxes com goodwillwm Going concern value. Www myfreetaxes com goodwillwm A covenant not to compete. Www myfreetaxes com goodwillwm A franchise, trademark, or trade name. Www myfreetaxes com goodwillwm A customer-related information base, customer-based intangible, or similar item. Www myfreetaxes com goodwillwm Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Www myfreetaxes com goodwillwm You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Www myfreetaxes com goodwillwm If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Www myfreetaxes com goodwillwm Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Www myfreetaxes com goodwillwm Amortize these costs using the rules of Revenue Procedure 2004-36. Www myfreetaxes com goodwillwm For more information, see Revenue Procedure 2004-36, 2004-24 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 1063, available at  www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2004-24_IRB/ar16. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm A change in the treatment of creative property costs is a change in method of accounting. Www myfreetaxes com goodwillwm Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Www myfreetaxes com goodwillwm These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Www myfreetaxes com goodwillwm Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Www myfreetaxes com goodwillwm You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Www myfreetaxes com goodwillwm You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Www myfreetaxes com goodwillwm You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Www myfreetaxes com goodwillwm This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Www myfreetaxes com goodwillwm See Related person , later, for more information. Www myfreetaxes com goodwillwm Exceptions. Www myfreetaxes com goodwillwm   The anti-churning rules do not apply in the following situations. Www myfreetaxes com goodwillwm You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Www myfreetaxes com goodwillwm The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Www myfreetaxes com goodwillwm This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Www myfreetaxes com goodwillwm The gain-recognition exception, discussed later, applies. Www myfreetaxes com goodwillwm Related person. Www myfreetaxes com goodwillwm   For purposes of the anti-churning rules, the following are related persons. Www myfreetaxes com goodwillwm An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Www myfreetaxes com goodwillwm ), and lineal descendants (children, grandchildren, etc. Www myfreetaxes com goodwillwm ). Www myfreetaxes com goodwillwm A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Www myfreetaxes com goodwillwm Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Www myfreetaxes com goodwillwm (For an exception, see section 1. Www myfreetaxes com goodwillwm 197-2(h)(6)(iv) of the regulations. Www myfreetaxes com goodwillwm ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Www myfreetaxes com goodwillwm The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Www myfreetaxes com goodwillwm The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Www myfreetaxes com goodwillwm The executor and beneficiary of an estate. Www myfreetaxes com goodwillwm A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Www myfreetaxes com goodwillwm A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Www myfreetaxes com goodwillwm Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Www myfreetaxes com goodwillwm Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Www myfreetaxes com goodwillwm A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Www myfreetaxes com goodwillwm Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Www myfreetaxes com goodwillwm When to determine relationship. Www myfreetaxes com goodwillwm   Persons are treated as related if the relationship existed at the following time. Www myfreetaxes com goodwillwm In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Www myfreetaxes com goodwillwm In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Www myfreetaxes com goodwillwm Ownership of stock. Www myfreetaxes com goodwillwm   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Www myfreetaxes com goodwillwm Rule 1. Www myfreetaxes com goodwillwm   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Www myfreetaxes com goodwillwm Rule 2. Www myfreetaxes com goodwillwm   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Www myfreetaxes com goodwillwm Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Www myfreetaxes com goodwillwm Rule 3. Www myfreetaxes com goodwillwm   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Www myfreetaxes com goodwillwm Rule 4. Www myfreetaxes com goodwillwm   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Www myfreetaxes com goodwillwm Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Www myfreetaxes com goodwillwm Gain-recognition exception. Www myfreetaxes com goodwillwm   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Www myfreetaxes com goodwillwm That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Www myfreetaxes com goodwillwm That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Www myfreetaxes com goodwillwm See chapter 2 in Publication 544 for information on making this choice. Www myfreetaxes com goodwillwm   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Www myfreetaxes com goodwillwm Notification. Www myfreetaxes com goodwillwm   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Www myfreetaxes com goodwillwm Anti-abuse rule. Www myfreetaxes com goodwillwm   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Www myfreetaxes com goodwillwm To avoid the requirement that the intangible be acquired after August 10, 1993. Www myfreetaxes com goodwillwm To avoid any of the anti-churning rules. Www myfreetaxes com goodwillwm More information. Www myfreetaxes com goodwillwm   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Www myfreetaxes com goodwillwm 197-2(h). Www myfreetaxes com goodwillwm Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Www myfreetaxes com goodwillwm See Amended Return , next. Www myfreetaxes com goodwillwm If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Www myfreetaxes com goodwillwm See Changing Your Accounting Method , later. Www myfreetaxes com goodwillwm Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Www myfreetaxes com goodwillwm A mathematical error made in any year. Www myfreetaxes com goodwillwm A posting error made in any year. Www myfreetaxes com goodwillwm An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Www myfreetaxes com goodwillwm When to file. Www myfreetaxes com goodwillwm   If an amended return is allowed, you must file it by the later of the following dates. Www myfreetaxes com goodwillwm 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Www myfreetaxes com goodwillwm (A return filed early is considered filed on the due date. Www myfreetaxes com goodwillwm ) 2 years from the time you paid your tax for that year. Www myfreetaxes com goodwillwm Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Www myfreetaxes com goodwillwm File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Www myfreetaxes com goodwillwm The following are examples of a change in method of accounting for amortization. Www myfreetaxes com goodwillwm A change in the amortization method, period of recovery, or convention of an amortizable asset. Www myfreetaxes com goodwillwm A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Www myfreetaxes com goodwillwm A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Www myfreetaxes com goodwillwm Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Www myfreetaxes com goodwillwm An adjustment in the useful life of an amortizable asset. Www myfreetaxes com goodwillwm Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Www myfreetaxes com goodwillwm Any change in the placed-in-service date of an amortizable asset. Www myfreetaxes com goodwillwm See Regulations section 1. Www myfreetaxes com goodwillwm 446-1(e)(2)(ii)(a) for more information and examples. Www myfreetaxes com goodwillwm Automatic approval. Www myfreetaxes com goodwillwm   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Www myfreetaxes com goodwillwm For a list of automatic accounting method changes, see the Instructions for Form 3115. Www myfreetaxes com goodwillwm Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Www myfreetaxes com goodwillwm For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Www myfreetaxes com goodwillwm See Revenue Procedure 2006-12, 2006-3 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 310, available at  www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2006-03_IRB/ar14. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm  See Revenue Procedure 2006-37, 2006-38 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 499, available at  www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2006-38_IRB/ar10. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm  See Revenue Procedure 2008-52, 2008-36 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 587, available at www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2008-36_IRB/ar09. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm  See Revenue Procedure 2009-39, 2009-38 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 371, available at  www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2009-38_IRB/ar08. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm  See Revenue Procedure 2011-14, 2011-4 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 330, available at  www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2011-04_IRB/ar08. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm  See Revenue Procedure 2011-22, 2011-18 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 737, available at  www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2011-18_IRB/ar08. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm Also, see Revenue Procedure 2012-39, 2012-41 I. Www myfreetaxes com goodwillwm R. Www myfreetaxes com goodwillwm B. Www myfreetaxes com goodwillwm 470 available at www. Www myfreetaxes com goodwillwm irs. Www myfreetaxes com goodwillwm gov/irb/2012-41_IRB/index. Www myfreetaxes com goodwillwm html. Www myfreetaxes com goodwillwm Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Www myfreetaxes com goodwillwm If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Www myfreetaxes com goodwillwm If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Www myfreetaxes com goodwillwm Any remaining gain, or any loss, is a section 1231 gain or loss. Www myfreetaxes com goodwillwm If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Www myfreetaxes com goodwillwm For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Www myfreetaxes com goodwillwm Nondeductible loss. Www myfreetaxes com goodwillwm   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Www myfreetaxes com goodwillwm Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Www myfreetaxes com goodwillwm Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Www myfreetaxes com goodwillwm The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Www myfreetaxes com goodwillwm The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Www myfreetaxes com goodwillwm Covenant not to compete. Www myfreetaxes com goodwillwm   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Www myfreetaxes com goodwillwm Nonrecognition transfers. Www myfreetaxes com goodwillwm   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Www myfreetaxes com goodwillwm You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Www myfreetaxes com goodwillwm Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Www myfreetaxes com goodwillwm   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Www myfreetaxes com goodwillwm Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Www myfreetaxes com goodwillwm Example. Www myfreetaxes com goodwillwm You own a section 197 intangible you have amortized for 4 full years. Www myfreetaxes com goodwillwm It has a remaining unamortized basis of $30,000. Www myfreetaxes com goodwillwm You exchange the asset plus $10,000 for a like-kind section 197 intangible. Www myfreetaxes com goodwillwm The nonrecognition provisions of like-kind exchanges apply. Www myfreetaxes com goodwillwm You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Www myfreetaxes com goodwillwm You amortize the other $10,000 of adjusted basis over a new 15-year period. Www myfreetaxes com goodwillwm For more information, see Regulations section 1. Www myfreetaxes com goodwillwm 197-2(g). Www myfreetaxes com goodwillwm Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Www myfreetaxes com goodwillwm See Reforestation Costs in chapter 7. Www myfreetaxes com goodwillwm You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Www myfreetaxes com goodwillwm There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Www myfreetaxes com goodwillwm The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Www myfreetaxes com goodwillwm A partner, shareholder, or beneficiary cannot make that election. Www myfreetaxes com goodwillwm A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Www myfreetaxes com goodwillwm , of a partnership or S corporation. Www myfreetaxes com goodwillwm The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Www myfreetaxes com goodwillwm Qualifying costs. Www myfreetaxes com goodwillwm   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Www myfreetaxes com goodwillwm Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Www myfreetaxes com goodwillwm They include costs for the following items. Www myfreetaxes com goodwillwm Site preparation. Www myfreetaxes com goodwillwm Seeds or seedlings. Www myfreetaxes com goodwillwm Labor. Www myfreetaxes com goodwillwm Tools. Www myfreetaxes com goodwillwm Depreciation on equipment used in planting and seeding. Www myfreetaxes com goodwillwm Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Www myfreetaxes com goodwillwm Qualified timber property. Www myfreetaxes com goodwillwm   Qualified timber property is property that contains trees in significant commercial quantities. Www myfreetaxes com goodwillwm It can be a woodlot or other site that you own or lease. Www myfreetaxes com goodwillwm The property qualifies only if it meets all of the following requirements. Www myfreetaxes com goodwillwm It is located in the United States. Www myfreetaxes com goodwillwm It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Www myfreetaxes com goodwillwm It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Www myfreetaxes com goodwillwm Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Www myfreetaxes com goodwillwm Amortization period. Www myfreetaxes com goodwillwm   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Www myfreetaxes com goodwillwm You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Www myfreetaxes com goodwillwm Life tenant and remainderman. Www myfreetaxes com goodwillwm   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Www myfreetaxes com goodwillwm Any remainder interest in the property is ignored for amortization purposes. Www myfreetaxes com goodwillwm Recapture. Www myfreetaxes com goodwillwm   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Www myfreetaxes com goodwillwm See chapter 3 of Publication 544 for more information. Www myfreetaxes com goodwillwm How to make the election. Www myfreetaxes com goodwillwm   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Www myfreetaxes com goodwillwm A description of the costs and the dates you incurred them. Www myfreetaxes com goodwillwm A description of the type of timber being grown and the purpose for which it is grown. Www myfreetaxes com goodwillwm Attach a separate statement for each property for which you amortize reforestation costs. Www myfreetaxes com goodwillwm   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Www myfreetaxes com goodwillwm However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www myfreetaxes com goodwillwm Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Www myfreetaxes com goodwillwm 9100-2” on Form 4562. Www myfreetaxes com goodwillwm File the amended return at the same address you filed the original return. Www myfreetaxes com goodwillwm Revoking the election. Www myfreetaxes com goodwillwm   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Www myfreetaxes com goodwillwm Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Www myfreetaxes com goodwillwm Please provide your daytime telephone number (optional), in case we need to contact you. Www myfreetaxes com goodwillwm You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Www myfreetaxes com goodwillwm    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Www myfreetaxes com goodwillwm NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Www myfreetaxes com goodwillwm These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Www myfreetaxes com goodwillwm For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Www myfreetaxes com goodwillwm If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Www myfreetaxes com goodwillwm Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Www myfreetaxes com goodwillwm However, see Atmospheric pollution control facilities for an exception. Www myfreetaxes com goodwillwm The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Www myfreetaxes com goodwillwm Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Www myfreetaxes com goodwillwm You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Www myfreetaxes com goodwillwm See chapter 3 of Publication 946. Www myfreetaxes com goodwillwm A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Www myfreetaxes com goodwillwm The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Www myfreetaxes com goodwillwm The facility must be certified by state and federal certifying authorities. Www myfreetaxes com goodwillwm The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Www myfreetaxes com goodwillwm Also, it must not significantly change the nature of the manufacturing or production process or facility. Www myfreetaxes com goodwillwm The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Www myfreetaxes com goodwillwm The federal certifying authority will describe the nature of the potential cost recovery. Www myfreetaxes com goodwillwm You must then reduce the amortizable basis of the facility by this potential recovery. Www myfreetaxes com goodwillwm New identifiable treatment facility. Www myfreetaxes com goodwillwm   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Www myfreetaxes com goodwillwm It does not include a building and its structural components unless the building is exclusively a treatment facility. Www myfreetaxes com goodwillwm Atmospheric pollution control facilities. Www myfreetaxes com goodwillwm   Certain atmospheric pollution control facilities can be amortized over 84 months. Www myfreetaxes com goodwillwm To qualify, the following must apply. Www myfreetaxes com goodwillwm The facility must be acquired and placed in service after April 11, 2005. Www myfreetaxes com goodwillwm If acquired, the original use must begin with you after April 11, 2005. Www myfreetaxes com goodwillwm The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Www myfreetaxes com goodwillwm If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Www myfreetaxes com goodwillwm Basis reduction for corporations. Www myfreetaxes com goodwillwm   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Www myfreetaxes com goodwillwm More information. Www myfreetaxes com goodwillwm   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Www myfreetaxes com goodwillwm Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Www myfreetaxes com goodwillwm If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Www myfreetaxes com goodwillwm The amortization period begins the month you first receive an economic benefit from the costs. Www myfreetaxes com goodwillwm For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Www myfreetaxes com goodwillwm Optional write-off method. Www myfreetaxes com goodwillwm   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Www myfreetaxes com goodwillwm For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Www myfreetaxes com goodwillwm Costs you can amortize. Www myfreetaxes com goodwillwm   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Www myfreetaxes com goodwillwm You paid or incurred the costs in your trade or business. Www myfreetaxes com goodwillwm You are not deducting the costs currently. Www myfreetaxes com goodwillwm How to make the election. Www myfreetaxes com goodwillwm   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Www myfreetaxes com goodwillwm Generally, you must file the return by the due date (including extensions). Www myfreetaxes com goodwillwm However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www myfreetaxes com goodwillwm Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Www myfreetaxes com goodwillwm 9100-2” on Form 4562. Www myfreetaxes com goodwillwm File the amended return at the same address you filed the original return. Www myfreetaxes com goodwillwm   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Www myfreetaxes com goodwillwm Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Www myfreetaxes com goodwillwm If you make this election, there is no AMT adjustment. Www myfreetaxes com goodwillwm The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Www myfreetaxes com goodwillwm How to make the election. Www myfreetaxes com goodwillwm   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Www myfreetaxes com goodwillwm   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Www myfreetaxes com goodwillwm However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www myfreetaxes com goodwillwm Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Www myfreetaxes com goodwillwm 9100-2” on Form 4562. Www myfreetaxes com goodwillwm File the amended return at the same address you filed the original return. Www myfreetaxes com goodwillwm Revoking the election. Www myfreetaxes com goodwillwm   You must obtain consent from the IRS to revoke your election. Www myfreetaxes com goodwillwm Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Www myfreetaxes com goodwillwm The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Www myfreetaxes com goodwillwm If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Www myfreetaxes com goodwillwm Prev  Up  Next   Home   More Online Publications
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Www myfreetaxes com goodwillwm 3. Www myfreetaxes com goodwillwm   Lifetime Learning Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Www myfreetaxes com goodwillwm They are the American opportunity credit and the lifetime learning credit. Www myfreetaxes com goodwillwm This chapter discusses the lifetime learning credit. Www myfreetaxes com goodwillwm The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . Www myfreetaxes com goodwillwm This chapter explains: Who can claim the lifetime learning credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Www myfreetaxes com goodwillwm What is the tax benefit of the lifetime learning credit. Www myfreetaxes com goodwillwm   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. Www myfreetaxes com goodwillwm There is no limit on the number of years the lifetime learning credit can be claimed for each student. Www myfreetaxes com goodwillwm   A tax credit reduces the amount of income tax you may have to pay. Www myfreetaxes com goodwillwm Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Www myfreetaxes com goodwillwm The lifetime learning credit is a nonrefundable credit. Www myfreetaxes com goodwillwm This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. Www myfreetaxes com goodwillwm   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Www myfreetaxes com goodwillwm Can you claim more than one education credit this year. Www myfreetaxes com goodwillwm   For each student, you can elect for any year only one of the credits. Www myfreetaxes com goodwillwm For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. Www myfreetaxes com goodwillwm   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. Www myfreetaxes com goodwillwm   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. Www myfreetaxes com goodwillwm This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Www myfreetaxes com goodwillwm Differences between the American opportunity and lifetime learning credits. Www myfreetaxes com goodwillwm   There are several differences between these two credits. Www myfreetaxes com goodwillwm For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. Www myfreetaxes com goodwillwm However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Www myfreetaxes com goodwillwm The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Www myfreetaxes com goodwillwm Overview of the lifetime learning credit. Www myfreetaxes com goodwillwm   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. Www myfreetaxes com goodwillwm The details are discussed in this chapter. Www myfreetaxes com goodwillwm Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. Www myfreetaxes com goodwillwm Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. Www myfreetaxes com goodwillwm You pay qualified education expenses of higher education. Www myfreetaxes com goodwillwm You pay the education expenses for an eligible student. Www myfreetaxes com goodwillwm The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Www myfreetaxes com goodwillwm Table 3-1. Www myfreetaxes com goodwillwm Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. Www myfreetaxes com goodwillwm Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Www myfreetaxes com goodwillwm “Qualified education expenses” are defined later under Qualified Education Expenses . Www myfreetaxes com goodwillwm “Eligible students” are defined later under Who Is an Eligible Student . Www myfreetaxes com goodwillwm A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Www myfreetaxes com goodwillwm You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. Www myfreetaxes com goodwillwm Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. Www myfreetaxes com goodwillwm Your filing status is married filing separately. Www myfreetaxes com goodwillwm You are listed as a dependent on another person's tax return (such as your parents'). Www myfreetaxes com goodwillwm See Who Can Claim a Dependent's Expenses , later. Www myfreetaxes com goodwillwm Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). Www myfreetaxes com goodwillwm MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Www myfreetaxes com goodwillwm You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Www myfreetaxes com goodwillwm More information on nonresident aliens can be found in Publication 519. Www myfreetaxes com goodwillwm You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. Www myfreetaxes com goodwillwm What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Www myfreetaxes com goodwillwm Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. Www myfreetaxes com goodwillwm For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. Www myfreetaxes com goodwillwm Academic period. Www myfreetaxes com goodwillwm   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Www myfreetaxes com goodwillwm In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Www myfreetaxes com goodwillwm Paid with borrowed funds. Www myfreetaxes com goodwillwm   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Www myfreetaxes com goodwillwm You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Www myfreetaxes com goodwillwm Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. Www myfreetaxes com goodwillwm Student withdraws from class(es). Www myfreetaxes com goodwillwm   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. Www myfreetaxes com goodwillwm Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. Www myfreetaxes com goodwillwm The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Www myfreetaxes com goodwillwm Eligible educational institution. Www myfreetaxes com goodwillwm   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Www myfreetaxes com goodwillwm S. Www myfreetaxes com goodwillwm Department of Education. Www myfreetaxes com goodwillwm It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Www myfreetaxes com goodwillwm The educational institution should be able to tell you if it is an eligible educational institution. Www myfreetaxes com goodwillwm   Certain educational institutions located outside the United States also participate in the U. Www myfreetaxes com goodwillwm S. Www myfreetaxes com goodwillwm Department of Education's Federal Student Aid (FSA) programs. Www myfreetaxes com goodwillwm Related expenses. Www myfreetaxes com goodwillwm   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. Www myfreetaxes com goodwillwm Prepaid expenses. Www myfreetaxes com goodwillwm   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Www myfreetaxes com goodwillwm See Academic period , earlier. Www myfreetaxes com goodwillwm For example, you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Www myfreetaxes com goodwillwm You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Www myfreetaxes com goodwillwm In the following examples, assume that each student is an eligible student at an eligible educational institution. Www myfreetaxes com goodwillwm Example 1. Www myfreetaxes com goodwillwm   Jackson is a sophomore in University V's degree program in dentistry. Www myfreetaxes com goodwillwm This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Www myfreetaxes com goodwillwm Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Www myfreetaxes com goodwillwm Example 2. Www myfreetaxes com goodwillwm   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Www myfreetaxes com goodwillwm The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Www myfreetaxes com goodwillwm Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Www myfreetaxes com goodwillwm Donna bought hers at College W's bookstore. Www myfreetaxes com goodwillwm Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. Www myfreetaxes com goodwillwm Example 3. Www myfreetaxes com goodwillwm   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Www myfreetaxes com goodwillwm This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. Www myfreetaxes com goodwillwm No portion of the fee covers personal expenses. Www myfreetaxes com goodwillwm Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Www myfreetaxes com goodwillwm Therefore, it is a qualified expense. Www myfreetaxes com goodwillwm No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. Www myfreetaxes com goodwillwm Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. Www myfreetaxes com goodwillwm Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. Www myfreetaxes com goodwillwm Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Www myfreetaxes com goodwillwm See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Www myfreetaxes com goodwillwm Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Www myfreetaxes com goodwillwm See Adjustments to Qualified Education Expenses, next. Www myfreetaxes com goodwillwm This image is too large to be displayed in the current screen. Www myfreetaxes com goodwillwm Please click the link to view the image. Www myfreetaxes com goodwillwm Figure 3-1 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Www myfreetaxes com goodwillwm The result is the amount of adjusted qualified education expenses for each student. Www myfreetaxes com goodwillwm Tax-free educational assistance. Www myfreetaxes com goodwillwm   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Www myfreetaxes com goodwillwm See Academic period , earlier. Www myfreetaxes com goodwillwm   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Www myfreetaxes com goodwillwm This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Www myfreetaxes com goodwillwm   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed , later. Www myfreetaxes com goodwillwm If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed , later. Www myfreetaxes com goodwillwm   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), 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 ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Www myfreetaxes com goodwillwm Generally, any scholarship or fellowship is treated as tax free. Www myfreetaxes com goodwillwm However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Www myfreetaxes com goodwillwm The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www myfreetaxes com goodwillwm The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www myfreetaxes com goodwillwm You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Www myfreetaxes com goodwillwm For examples, see Coordination with Pell grants and other scholarships, later. Www myfreetaxes com goodwillwm Refunds. Www myfreetaxes com goodwillwm   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Www myfreetaxes com goodwillwm Some tax-free educational assistance received after 2013 may be treated as a refund. Www myfreetaxes com goodwillwm See Tax-free educational assistance , earlier. Www myfreetaxes com goodwillwm Refunds received in 2013. Www myfreetaxes com goodwillwm   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Www myfreetaxes com goodwillwm Refunds received after 2013 but before your income tax return is filed. Www myfreetaxes com goodwillwm   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Www myfreetaxes com goodwillwm Refunds received after 2013 and after your income tax return is filed. Www myfreetaxes com goodwillwm   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Www myfreetaxes com goodwillwm See Credit recapture, next. Www myfreetaxes com goodwillwm Credit recapture. Www myfreetaxes com goodwillwm    If any tax-free educational assistance for the qualified education expenses paid in 2013 or any refund of your qualified education expenses paid in 2013 is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Www myfreetaxes com goodwillwm You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Www myfreetaxes com goodwillwm You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Www myfreetaxes com goodwillwm Include that amount as an additional tax for the year the refund or tax-free assistance was received. Www myfreetaxes com goodwillwm Example. Www myfreetaxes com goodwillwm   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. Www myfreetaxes com goodwillwm You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. Www myfreetaxes com goodwillwm You claimed no other tax credits. Www myfreetaxes com goodwillwm After you filed your return, your child withdrew from two courses and you received a refund of $2,900. Www myfreetaxes com goodwillwm You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. Www myfreetaxes com goodwillwm The refigured credit is $1,280 and your tax liability increased by $580. Www myfreetaxes com goodwillwm See instructions for your 2014 income tax return to determine where to include this tax. Www myfreetaxes com goodwillwm If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Www myfreetaxes com goodwillwm Amounts that do not reduce qualified education expenses. Www myfreetaxes com goodwillwm   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Www myfreetaxes com goodwillwm   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Www myfreetaxes com goodwillwm The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www myfreetaxes com goodwillwm The use of the money is not restricted. Www myfreetaxes com goodwillwm For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. Www myfreetaxes com goodwillwm Coordination with Pell grants and other scholarships. Www myfreetaxes com goodwillwm   In some cases, you may be able to reduce your tax liability by including scholarships in income. Www myfreetaxes com goodwillwm If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Www myfreetaxes com goodwillwm The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Www myfreetaxes com goodwillwm Example 1—No scholarship. Www myfreetaxes com goodwillwm Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Www myfreetaxes com goodwillwm Her AGI and her MAGI, for purposes of the credit, are $27,000. Www myfreetaxes com goodwillwm Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. Www myfreetaxes com goodwillwm She claims no credits other than the lifetime learning credit. Www myfreetaxes com goodwillwm In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. Www myfreetaxes com goodwillwm Judy and the college meet all requirements for the lifetime learning tax credit. Www myfreetaxes com goodwillwm She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. Www myfreetaxes com goodwillwm She claims a $900 lifetime learning credit and her tax after credits is $1,256. Www myfreetaxes com goodwillwm Example 2—Scholarship excluded from income. Www myfreetaxes com goodwillwm The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Www myfreetaxes com goodwillwm Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. Www myfreetaxes com goodwillwm If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. Www myfreetaxes com goodwillwm Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. Www myfreetaxes com goodwillwm Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. Www myfreetaxes com goodwillwm Example 3—Scholarship included in income. Www myfreetaxes com goodwillwm The facts are the same as in Example 2—Scholarship excluded from income. Www myfreetaxes com goodwillwm If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. Www myfreetaxes com goodwillwm Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. Www myfreetaxes com goodwillwm She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Www myfreetaxes com goodwillwm Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. Www myfreetaxes com goodwillwm Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Www myfreetaxes com goodwillwm This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Www myfreetaxes com goodwillwm Sports, games, hobbies, and noncredit courses. Www myfreetaxes com goodwillwm   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Www myfreetaxes com goodwillwm However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Www myfreetaxes com goodwillwm Comprehensive or bundled fees. Www myfreetaxes com goodwillwm   Some eligible educational institutions combine all of their fees for an academic period into one amount. Www myfreetaxes com goodwillwm If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. Www myfreetaxes com goodwillwm The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. Www myfreetaxes com goodwillwm See Figuring the Credit , later, for more information about Form 1098-T. Www myfreetaxes com goodwillwm Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). Www myfreetaxes com goodwillwm Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year. Www myfreetaxes com goodwillwm For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. Www myfreetaxes com goodwillwm You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Www myfreetaxes com goodwillwm IF you. Www myfreetaxes com goodwillwm . Www myfreetaxes com goodwillwm . Www myfreetaxes com goodwillwm THEN only. Www myfreetaxes com goodwillwm . Www myfreetaxes com goodwillwm . Www myfreetaxes com goodwillwm claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. Www myfreetaxes com goodwillwm The dependent cannot claim the credit. Www myfreetaxes com goodwillwm do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. Www myfreetaxes com goodwillwm You cannot claim the credit based on this dependent's expenses. Www myfreetaxes com goodwillwm Expenses paid by dependent. Www myfreetaxes com goodwillwm   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Www myfreetaxes com goodwillwm Include these expenses when figuring the amount of your lifetime learning credit. Www myfreetaxes com goodwillwm    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Www myfreetaxes com goodwillwm Expenses paid by you. Www myfreetaxes com goodwillwm   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. Www myfreetaxes com goodwillwm If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Www myfreetaxes com goodwillwm Expenses paid by others. Www myfreetaxes com goodwillwm   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Www myfreetaxes com goodwillwm In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Www myfreetaxes com goodwillwm If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Www myfreetaxes com goodwillwm Example. Www myfreetaxes com goodwillwm In 2013, Ms. Www myfreetaxes com goodwillwm Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Www myfreetaxes com goodwillwm For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Www myfreetaxes com goodwillwm Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. Www myfreetaxes com goodwillwm If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. Www myfreetaxes com goodwillwm If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. Www myfreetaxes com goodwillwm Tuition reduction. Www myfreetaxes com goodwillwm   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Www myfreetaxes com goodwillwm If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Www myfreetaxes com goodwillwm For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www myfreetaxes com goodwillwm Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. Www myfreetaxes com goodwillwm The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). Www myfreetaxes com goodwillwm However, that amount may be reduced based on your MAGI. Www myfreetaxes com goodwillwm See Effect of the Amount of Your Income on the Amount of Your Credit , later. Www myfreetaxes com goodwillwm Example. Www myfreetaxes com goodwillwm Bruce and Toni Harper are married and file a joint tax return. Www myfreetaxes com goodwillwm For 2013, their MAGI is $75,000. Www myfreetaxes com goodwillwm Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. Www myfreetaxes com goodwillwm She already has a bachelor's degree in history and wants to become a nurse. Www myfreetaxes com goodwillwm In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Www myfreetaxes com goodwillwm Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. Www myfreetaxes com goodwillwm Form 1098-T. Www myfreetaxes com goodwillwm   To help you figure your lifetime learning credit, the student should receive Form 1098-T. Www myfreetaxes com goodwillwm Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Www myfreetaxes com goodwillwm An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Www myfreetaxes com goodwillwm However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. Www myfreetaxes com goodwillwm When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Www myfreetaxes com goodwillwm   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Www myfreetaxes com goodwillwm    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. Www myfreetaxes com goodwillwm Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). Www myfreetaxes com goodwillwm You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). Www myfreetaxes com goodwillwm Modified adjusted gross income (MAGI). Www myfreetaxes com goodwillwm   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Www myfreetaxes com goodwillwm MAGI when using Form 1040A. Www myfreetaxes com goodwillwm   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Www myfreetaxes com goodwillwm MAGI when using Form 1040. Www myfreetaxes com goodwillwm   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Www myfreetaxes com goodwillwm You can use Worksheet 3-1 to figure your MAGI. Www myfreetaxes com goodwillwm Worksheet 3-1. Www myfreetaxes com goodwillwm MAGI for the Lifetime Learning Credit 1. Www myfreetaxes com goodwillwm Enter your adjusted gross income  (Form 1040, line 38)   1. Www myfreetaxes com goodwillwm   2. Www myfreetaxes com goodwillwm Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Www myfreetaxes com goodwillwm       3. Www myfreetaxes com goodwillwm Enter your foreign housing deduction (Form 2555, line 50)   3. Www myfreetaxes com goodwillwm       4. Www myfreetaxes com goodwillwm Enter the amount of income from Puerto Rico you are excluding   4. Www myfreetaxes com goodwillwm       5. Www myfreetaxes com goodwillwm Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Www myfreetaxes com goodwillwm       6. Www myfreetaxes com goodwillwm Add the amounts on lines 2, 3, 4, and 5   6. Www myfreetaxes com goodwillwm   7. Www myfreetaxes com goodwillwm Add the amounts on lines 1 and 6. Www myfreetaxes com goodwillwm  This is your modified adjusted  gross income. Www myfreetaxes com goodwillwm Enter this amount  on Form 8863, line 14   7. Www myfreetaxes com goodwillwm   Phaseout. Www myfreetaxes com goodwillwm   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. Www myfreetaxes com goodwillwm The same method is shown in the following example. Www myfreetaxes com goodwillwm Example. Www myfreetaxes com goodwillwm You are filing a joint return with a MAGI of $112,000. Www myfreetaxes com goodwillwm In 2013, you paid $6,600 of qualified education expenses. Www myfreetaxes com goodwillwm You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). Www myfreetaxes com goodwillwm The result is a $1,320 (20% x $6,600) tentative credit. Www myfreetaxes com goodwillwm Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. Www myfreetaxes com goodwillwm The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. Www myfreetaxes com goodwillwm The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). Www myfreetaxes com goodwillwm The result is the amount of your phased out (reduced) lifetime learning credit ($990). Www myfreetaxes com goodwillwm   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Www myfreetaxes com goodwillwm Enter the credit on Form 1040, line 49, or Form 1040A, line 31. Www myfreetaxes com goodwillwm Note. Www myfreetaxes com goodwillwm In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Www myfreetaxes com goodwillwm Prev  Up  Next   Home   More Online Publications