Quickfinder® 1040 Quickfinder® Handbook

Transcription

Quickfinder ®
1040 Quickfinder® Handbook
(2014 Tax Year)
Updates for the Tax Increase Prevention Act of 2014
Replacement Pages for Two-Sided (Duplex) Printing
Instructions: This packet contains “marked up” changes to the pages in the 1040
Quickfinder® Handbook that were affected by the Tax Increase Prevention Act of 2014,
which was enacted after the handbook was published.
This is a specially designed update packet for owners of the 3-ring binder version of the
handbook who have access to a printer that prints two-sided (duplex). Simply print the
entire PDF file (make sure to select two-sided or duplex printing), three-hole punch the
pages, and then replace the pages in your handbook. It’s that easy.
TAX PREPARATION
1040
Quickfinder
Handbook
2014 Key Amounts
®
Standard Deduction
Earned Income Credit (Maximum)
MFJ or QW1......................... $ 12,400 No children............................. $ 496
Single2.................................
6,200 1 child.....................................
3,305
HOH2...................................
9,100 2 children................................
5,460
MFS1....................................
6,200 >2 children..............................
6,143
Dependent2..........................
1,0003 Investment income limit..........
3,350
Personal Exemption
Kiddie Tax Threshold
$3,950
$2,000
Gift Tax Annual Exclusion
Elective Deferral Limits
$14,000
SIMPLE IRA Plan
Estate and Gift Tax Exclusion Amount < age 50................................. $ 12,000
$5,340,0004
≥ age 50................................. 14,500
Standard Mileage Rates
Business..............................
56¢
401(k), 403(b) and 457 Plans
Medical/moving.................... 23.5¢
< age 50................................. $ 17,500
Charitable............................
14¢
≥ age 50................................. 23,000
Profit-Sharing Plan/SEP
Contribution limit........................................................................................ $ 52,000
Compensation limit5................................................................................... $260,000
Health Savings Accounts (HSAs)
Self-only coverage
Contribution (deduction) limit.................... $ 3,300
Plan minimum deductible.........................
1,250
Plan out-of-pocket limit.............................
6,350
Family coverage
Contribution (deduction) limit.................... $ 6,550
Plan minimum deductible.........................
2,500
Plan out-of-pocket limit............................. 12,700
Additional contribution amount if age 55 or older...................................... $ 1,000
Add $1,200 for age 65 or older or blind, each.
Add $1,550 for age 65 or older or blind, each.
If greater, amount of earned income plus $350 (but not to exceed $6,200).
4
Plus the amount, if any, of deceased spousal unused exclusion amount.
5
For computing employer contributions.
1
2
3
Filing
Status
MFJ
QW
Single
HOH
MFS
Form 1040
2014 Tax Year
2014 Quick Tax Method
MFJ, QW Taxable Income
$ 0 – $ 18,150 ×
10.0%
minus
$ 0.00 = Tax
18,151 –
73,800 ×
15.0
minus
907.50 = Tax
73,801 –
148,850 ×
25.0
minus
8,287.50 = Tax
148,851 –
226,850 ×
28.0
minus
12,753.00 = Tax
226,851 –
405,100 ×
33.0
minus
24,095.50 = Tax
405,101 –
457,600 ×
35.0
minus
32,197.50 = Tax
457,601
and over
×
39.6
minus
53,247.10 = Tax
Single Taxable Income
$ 0 – $ 9,075 ×
10.0%
minus
$ 0.00 = Tax
9,076 –
36,900 ×
15.0
minus
453.75 = Tax
36,901 –
89,350 ×
25.0
minus
4,143.75 = Tax
89,351 –
186,350 ×
28.0
minus
6,824.25 = Tax
186,351 –
405,100 ×
33.0
minus
16,141.75 = Tax
405,101 –
406,750 ×
35.0
minus
24,243.75 = Tax
406,751
and over
×
39.6
minus
42,954.25 = Tax
HOH Taxable Income
$ 0 – $ 12,950 ×
10.0%
minus
$ 0.00 = Tax
12,951 –
49,400 ×
15.0
minus
647.50 = Tax
49,401 –
127,550 ×
25.0
minus
5,587.50 = Tax
127,551 –
206,600 ×
28.0
minus
9,414.00 = Tax
206,601 –
405,100 ×
33.0
minus
19,744.00 = Tax
405,101 –
432,200 ×
35.0
minus
27,846.00 = Tax
432,201
and over
×
39.6
minus
47,727.20 = Tax
MFS Taxable Income
$ 0 – $ 9,075 ×
10.0%
minus
$ 0.00 = Tax
9,076 –
36,900 ×
15.0
minus
453.75 = Tax
36,901 –
74,425 ×
25.0
minus
4,143.75 = Tax
74,426 –
113,425 ×
28.0
minus
6,376.50 = Tax
113,426 –
202,550 ×
33.0
minus
12,047.75 = Tax
202,551 –
228,800 ×
35.0
minus
16,098.75 = Tax
228,801
and over
×
39.6
minus
26,623.55 = Tax
Note: Assumes taxable income is all ordinary income. High-income taxpayers may
also be subject to the 3.8% tax on net investment income and/or the 0.9% additional
Medicare tax on earned income. Caution: IRS Tax Tables must be used for taxable
income under $100,000. To calculate the exact tax using the Quick Tax Method for
taxable income under $100,000, round taxable income to the nearest $25 or $75
increment before using the formula. Round $50 or $100 increments up.
2014 AGI Phase-Out Amounts/Thresholds
Student Loan Interest
Education Savings
Lifetime Learning
Tuition and Fees
Deduction
Bond Interest Exclusion
Credit
Deduction1
$130,000 / $160,000
$130,000 – $160,000
$113,950 – $143,950
$108,000 – $128,000
65,000 / 80,000
65,000 – 80,000
113,950 – 143,950
54,000 – 64,000
65,000 / 80,000
65,000 – 80,000
76,000 – 91,000
54,000 – 64,000
65,000 / 80,000
65,000 – 80,000
76,000 – 91,000
54,000 – 64,000
Do Not Qualify
Do Not Qualify
Do Not Qualify
Do Not Qualify
Earned Income Credit3
Saver’s
Traditional IRA
Itemized
Deduction4
Deductions2 Credit3
No Child
1 Child 2 Children >2 Children
MFJ
$ 305,050
$ 60,000
$ 20,020
$ 43,941
$ 49,186
$ 52,427
$ 96,000 – $116,000
QW
305,050
30,000
14,590
38,511
43,756
46,997
96,000 – 116,000
Single
254,200
30,000
14,590
38,511
43,756
46,997
60,000 – 70,000
HOH
279,650
45,000
14,590
38,511
43,756
46,997
60,000 – 70,000
MFS
152,525
30,000
Do Not Qualify
05– 10,000
1
Caution: Deduction expired 12/31/13, but has been reinstated in the past. Amounts shown are thresholds
for $4,000 and $2,000 deduction, respectively.
2
Amount at which phase-out begins.
3
Amount at which phase-out is complete.
4
Phase-out only applies if taxpayer is covered by an employer retirement plan. For MFJ, phase-out range
for non-covered spouse is $181,000–$191,000.
5
Married individuals filing MFS who live apart at all times during the year are treated as single.
6
Amount at which tax begins.
Replacement Page 1/2015
American Opportunity
Credit
$160,000 – $180,000
80,000 – 90,000
80,000 – 90,000
80,000 – 90,000
Do Not Qualify
Roth IRA
Contribution
$181,000 – $191,000
181,000 – 191,000
114,000 – 129,000
114,000 – 129,000
05– 10,000
Personal
Exemptions
$305,050 – $427,550
305,050 – 427,550
254,200 – 376,700
279,650 – 402,150
152,525 – 213,775
Net Investment
Income Tax6
$250,000
250,000
200,000
200,000
125,000
1040 Quickfinder® Handbook
© 2014 Thomson Reuters/Tax & Accounting. All Rights
Reserved. Quickfinder® is a trademark of Thomson Reuters.
ISSN 1945-3035
ISBN 978-0-7646-6922-2
P.O. Box 115008
Carrollton, TX 75011-5008
Phone 800-510-8997 • Fax 888-286-9070
tax.thomsonreuters.com
The 1040 Quickfinder® Handbook is published by Thomson Reuters. Reproduction is
prohibited without written permission of the publisher. Not assignable without consent.
The 1040 Quickfinder® Handbook is to be used as a first-source, quick reference to basic
tax principles used in preparing individual income tax returns. The focus of this handbook
is to present often-needed reference information in a concise, easy-to-use format. The
summaries, highlights, tax tips and other information included herein are intended to
apply to the average individual taxpayer only. Information included is general in nature
and we acknowledge the existence of many exceptions in the area of income tax. The
information this handbook contains has been carefully compiled from sources believed
to be reliable, but its accuracy is not guaranteed. The author/publisher is not engaged
in rendering legal, accounting or other advice and will not be held liable for any actions
or suit based on this handbook. For further information regarding a specific situation,
see applicable IRS publications, rulings, regulations, court cases and Code sections.
This handbook is not intended to be used as your only reference source.
2015 Key Amounts
Standard Deduction
Earned Income Credit (Maximum)
No Children........................... $ 503
MFJ or QW1........................ $ 12,600
Single2................................
6,300
1 Child.................................. 3,359
HOH2..................................
9,250
2 Children............................. 5,548
MFS1...................................
6,300
>2 Children...........................
6,242
Dependent2.........................
1,0505 Investment Income Limit....... $ 3,400
Traditional IRA Deduction
Elective Deferral Limits
Phase-Out Begins at AGI of
SIMPLE IRA
< age 50............................... $ 12,500
MFJ,4 QW4.......................... $ 98,000
MFJ3................................... 183,000
≥ age 50............................... 15,500
Single4................................ 61,000
401(k), 403(b) and 457 Plans
HOH4.................................. 61,000
< age 50............................... $ 18,000
MFS4...................................
0
≥ age 50............................... 24,000
Gift Tax Annual Exclusion
Kiddie Tax Threshold
$14,000
$2,100
Profit-Sharing Plan/SEP
Contribution limit......................................................................................... $ 53,000
Compensation limit (for computing employer contributions)....................... 265,000
1
2
3
Add $1,250 for ≥ age 65 or blind, each.
Add $1,550 for ≥ age 65 or blind, each.
Noncovered spouse.
4
5
Covered by an employer retirement plan.
If greater, earned income plus $350, not
to exceed $6,300.
Updates
For supplemental information to the material in this handbook, please
refer to the Updates section of our website: tax.thomsonreuters.
com/quickfinder.
Join our Quickfinder Community
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Questions must be submitted in writing by mail, fax or online at tax.
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2015 Quick Tax Method
MFJ or QW Taxable Income
$ 0 – $ 18,450 ×
10.0%
minus
$ 0.00 = Tax
18,451 –
74,900 ×
15.0
minus
922.50 = Tax
74,901 –
151,200 ×
25.0
minus
8,412.50 = Tax
151,201 –
230,450 ×
28.0
minus
12,948.50 = Tax
230,451 –
411,500 ×
33.0
minus
24,471.00 = Tax
411,501 –
464,850 ×
35.0
minus
32,701.00 = Tax
464,851
and over
×
39.6
minus
54,084.10 = Tax
Single Taxable Income
$ 0 –
$ 9,225 ×
10.0%
minus
$ 0.00 = Tax
9,226 –
37,450 ×
15.0
minus
461.25 = Tax
37,451 –
90,750 ×
25.0
minus
4,206.25 = Tax
90,751 –
189,300 ×
28.0
minus
6,928.75 = Tax
189,301 –
411,500 ×
33.0
minus
16,393.75 = Tax
411,501 –
413,200 ×
35.0
minus
24,623.75 = Tax
413,201
and over
×
39.6
minus
43,630.95 = Tax
HOH Taxable Income
$ 0 – $ 13,150 ×
10.0%
minus
$ 0.00 = Tax
13,151 –
50,200 ×
15.0
minus
657.50 = Tax
50,201 –
129,600 ×
25.0
minus
5,677.50 = Tax
129,601 –
209,850 ×
28.0
minus
9,565.50 = Tax
209,851 –
411,500 ×
33.0
minus
20,058.00 = Tax
411,501 –
439,000 ×
35.0
minus
28,288.00 = Tax
439,001
and over
×
39.6
minus
48,482.00 = Tax
MFS Taxable Income
$ 0 –
$ 9,225 ×
10.0%
minus
$ 0.00 = Tax
9,226 –
37,450 ×
15.0
minus
461.25 = Tax
37,451 –
75,600 ×
25.0
minus
4,206.25 = Tax
75,601 –
115,225 ×
28.0
minus
6,474.25 = Tax
115,226 –
205,750 ×
33.0
minus
12,235.50 = Tax
205,751 –
232,425 ×
35.0
minus
16,350.50 = Tax
232,426
and over
×
39.6
minus
27,042.05 = Tax
Note: Assumes taxable income is all ordinary income. High-income taxpayers may
also be subject to the 3.8% tax on net investment income and/or the 0.9% additional
Medicare tax on earned income.
Age
13
17
18
19
21
24
25
27
30
50
55
59½
65
70½
Tax Rules By Age for 2014
Rule
Cannot claim a child care credit for children age 13 or older.
Cannot claim $1,000 child tax credit for children age 17 or older.
• Children working for parents’ unincorporated business subject to FICA.
• Generally cannot contribute to an ESA for children age 18 or older.
• Adoption credit/exclusion generally unavailable for children age 18 or older.
• Qualifies for saver’s credit (if not a dependent or a full-time student).
• Kiddie tax doesn’t apply if child’s earned income > than half his support.
• Exemption for dependent children who are not full-time students expires.
• Kiddie tax generally no longer applies except to full-time students.
Children working for parents’ unincorporated business subject to FUTA.
• Exemption for dependent children who are full-time-students expires.
• Can purchase savings bonds and exclude income used for education.
• Kiddie tax no longer applies.
Taxpayers with no children qualify for EIC.
Income exclusion for health insurance coverage and self-employed health
insurance deduction for coverage of children age 26 and younger expires.
Generally must distribute ESA when beneficiary reaches age 30.
• Eligible for catch-up contributions to IRAs, SIMPLE-IRAs, 401(k), 403(b)
and 457 plans.
• Qualified public safety employees eligible for penalty-free withdrawals
from a governmental defined benefit pension plan, if retired.
• Eligible for penalty-free withdrawal from employer retirement plan (but
not an IRA) if separated from service.
• Eligible for catch-up contributions to HSAs.
• Penalty for early withdrawal from retirement accounts expires.
• Roth IRA distributions are tax-free (if any Roth held for at least five years).
• Non-itemizers become eligible for a higher standard deduction.
• Taxpayers with no children no longer qualify for EIC.
• HSA and MSA withdrawals not used for medical costs are taxed but no
longer subject to a 20% penalty.
• Eligible for credit for the elderly.
• 7.5% (rather than 10%) of AGI threshold applies to medical expenses.
• Contributions no longer allowed to traditional IRAs.
• RMDs from retirement plans (other than Roth IRAs) must begin.
Quick Facts, Worksheets, Where to File
All worksheets included in Tab 3 may be copied and used in your tax practice.

Tab 3 Topics
Quick Facts Data Sheet........................................... Page 3-1
Business Use of Home Worksheet.......................... Page 3-4
Capital Loss Carryover Worksheet (2014)............... Page 3-5
Child Tax Credit Worksheet (2014).......................... Page 3-5
Donations—Noncash............................................... Page 3-6
Donated Goods Valuation Guide............................. Page 3-6
Donations Substantiation Guide.............................. Page 3-7
Earned Income Credit (EIC) Worksheet (2014)....... Page 3-8
Net Operating Loss Worksheet #1........................... Page 3-9
Net Operating Loss Worksheet #2—
Computation of NOL............................................ Page 3-10
Net Operating Loss Worksheet #3—
NOL Carryover.................................................... Page 3-10
Social Security Benefits Worksheet (2014)............ Page 3-11
Reporting Capital Gains and Losses—
Form 8949........................................................... Page 3-12
Deduction for Exemptions Worksheet.................... Page 3-12
Itemized Deductions Worksheet............................ Page 3-12
2014 State and Local Sales Tax Deduction........... Page 3-13
Health Coverage Exemptions................................ Page 3-13
Where to File 2014 Form 1040, 1040A,
1040EZ................................................................ Page 3-14
Where to File Form 1040-ES for 2015................... Page 3-14
Where to File Form 4868 for 2014 Return............. Page 3-14
Quick Facts Data Sheet
2015
2014
2013
2012
2011
General Deductions and Credits
Standard deduction:
MFJ or QW
$ 12,600
Single
6,300
HOH
9,250
MFS
6,300
Additional for age 65 or older or blind each (MFJ, QW, MFS)
1,250
Additional for age 65 or older or blind each (Single, HOH)
1,550
Personal exemption
$ 4,000
Personal exemption and itemized deduction phase-out begins at AGI of:
MFJ or QW
$ 309,900
Single
258,250
HOH
284,050
MFS
154,950
Earned income credit:
Earned income and AGI must be less than (MFJ):1
No qualifying children
$ 20,330
One qualifying child
44,651
Two qualifying children
49,974
Three or more qualifying children
53,267
Maximum amount of credit (all filers except MFS):
No qualifying children
$ 503
One qualifying child
3,359
Two qualifying children
5,548
Three or more qualifying children
6,242
Investment income limit
3,400
Advance payment of health insurance premium tax credit—repayment limit:2
Household income < 200% of federal poverty line (FPL)
$ 600
Household income ≥ 200% of FPL, but < 300%
1,500
Household income ≥ 300% of FPL, but < 400%
2,500
No Limit
Household income ≥ 400% of FPL
Child tax credit:
Credit per child
$ 1,000
Additional (refundable) credit—earned income floor
3,000
Adoption credit/exclusion:
Maximum credit/exclusion (and amount allowed for
adoption of special needs child)
$ 13,400
Credit/exclusion phase-out begins at AGI of:
All taxpayers except MFS
$ 201,010
MFS
Not Allowed
Kiddie tax unearned income threshold
$ 2,100
Foreign earned income exclusion
$ 100,800
$ 12,400
6,200
9,100
6,200
1,200
1,550
$ 3,950
$ 12,200
6,100
8,950
6,100
1,200
1,500
$ 3,900
$ 305,050
254,200
279,650
152,525
$ 300,000
250,000
275,000
150,000
$ 20,020
43,941
49,186
52,427
$ 19,680
43,210
48,378
51,567
$ 19,190
42,130
47,162
50,270
$ 18,740
41,132
46,044
49,078
$ 496
3,305
5,460
6,143
3,350
$ 487
3,250
5,372
6,044
3,300
$ 475
3,169
5,236
5,891
3,200
$ 464
3,094
5,112
5,751
3,150
$ 600
1,500
2,500
No Limit
N/A
N/A
N/A
N/A
$ 11,900
5,950
8,700
5,950
1,150
1,450
$ 3,800
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 11,600
5,800
8,500
5,800
1,150
1,450
$ 3,700
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 1,000
3,000
$ 1,000
3,000
$ 1,000
3,000
$ 1,000
3,000
$ 13,190
$ 12,970
$ 12,650
$ 13,360
$ 197,880
Not Allowed
$ 2,000
$ 99,200
$ 194,580
Not Allowed
$ 2,000
$ 97,600
$ 189,710
Not Allowed
$ 1,900
$ 95,100
$ 185,210
Not Allowed
$ 1,900
$ 92,900
Table continued on the next page
2014 Tax Year | 1040 Quickfinder ® Handbook 3-1
Quick Facts Data Sheet (Continued)
2015
Maximum earnings subject to tax:
Social Security tax
Medicare tax
Maximum tax paid by:
Employee—Social Security
Self-employed—Social Security
Employee or self-employed—Medicare
Additional Medicare tax begins at earnings of:
MFJ
Single, HOH or QW
MFS
Section 179 deduction—limit
Section 179 deduction—SUV limit (per vehicle)
Section 179 deduction—qualified real property limit
Section 179 deduction—qualifying property phase-out threshold
Depreciation limit—autos (1st year)
Depreciation limit—trucks and vans (1st year)
Standard mileage allowances:
Business
Charity work
Medical/moving
Health savings accounts (HSAs):
Self-only coverage: Contribution limit
Plan minimum deductible
Plan out-of-pocket limit
Family coverage:
Contribution limit
Plan minimum deductible
Additional contribution limit—age 55 or older
Long-term care insurance—deduction limits:
Age 40 and under
Age 41 – 50
Age 51 – 60
Age 61 – 70
Age 71 and older
Long-term care—excludible per diem
Medical savings accounts (MSAs):
Self-only coverage: Plan minimum deductible
Plan maximum deductible
Family coverage: Plan minimum deductible
Plan maximum deductible
Health flexible spending arrangement—contribution limit
2014 Tax Year | 1040 Quickfinder ® Handbook
2013
2012
2011
$ 118,500
No Limit
$ 117,000
No Limit
$ 113,700
No Limit
$ 110,100
No Limit
$ 106,800
No Limit
$ 7,347.00
14,694.00
No Limit
$ 7,254.00
14,508.00
No Limit
$ 7,049.40
14,098.80
No Limit
$ 4,624.20
11,450.40
No Limit
$ 4,485.60
11,107.20
No Limit
$ 250,000
200,000
125,000
$ 250,000
200,000
125,000
$ 250,000
200,000
125,000
N/A
N/A
N/A
N/A
N/A
N/A
$ 25,0003
25,000
N/A
200,0003
$ 500,000
25,000
N/A
2,000,000
3,1605
3,4605
$ 500,000
25,000
250,000
2,000,000
3,1605
3,3605
$ 500,000
25,000
250,000
2,000,000
3,1605
3,3605
$ 500,000
25,000
250,000
2,000,000
3,0605
3,2605
56¢
14¢
23.5¢
56.5¢
14¢
24¢
55.5¢
14¢
23¢
51¢ / 55.5¢
14¢
19¢ / 23.5¢
Business Deductions
4
4
57.5¢
14¢
23¢
Health Care Deductions/Exclusions
Education savings accounts (ESAs) phase-out begins at AGI of:
MFJ
Single, HOH, QW or MFS
Hope/American opportunity credit—maximum credit (per student)
Lifetime learning credit (LLC)—maximum credit (per return)
Education credit phase-out begins at AGI of:
MFJ:
Hope/American opportunity
LLC
Single, HOH or QW: Hope/American opportunity
LLC
MFS
Student loan interest deduction limit
Student loan interest deduction phase-out begins at AGI of:
MFJ
Single, HOH or QW
3-2 2014
FICA/SE Taxes
$ 3,350
1,300
6,450
6,650
2,600
12,900
1,000
$ 3,300
1,250
6,350
6,550
2,500
12,700
1,000
$ 3,250
1,250
6,250
6,450
2,500
12,500
1,000
$ 3,100
1,200
6,050
6,250
2,400
12,100
1,000
$ 3,050
1,200
5,950
6,150
2,400
11,900
1,000
$ 380
710
1,430
3,800
4,750
$ 330
$ 370
700
1,400
3,720
4,660
$ 330
$ 360
680
1,360
3,640
4,550
$ 320
$ 350
660
1,310
3,500
4,370
$ 310
$ 340
640
1,270
3,390
4,240
$ 300
$ 2,200
3,300
4,450
4,450
6,650
8,150
$ 2,550
$ 2,200
3,250
4,350
4,350
6,550
8,000
$ 2,500
$ 2,150
3,200
4,300
4,300
6,450
7,850
$ 2,500
$ 2,100
3,150
4,200
4,200
6,300
7,650
N/A
$ 2,050
3,050
4,100
4,100
6,150
7,500
N/A
$ 190,000
95,000
$ 2,500
$ 2,000
$ 190,000
95,000
$ 2,500
$ 2,000
$ 190,000
95,000
$ 2,500
$ 2,000
$ 190,000
95,000
$ 2,500
$ 2,000
$ 190,000
95,000
$ 2,500
$ 2,000
$ 160,000
110,000
80,000
55,000
Not Allowed
$ 2,500
$ 160,000
108,000
80,000
54,000
Not Allowed
$ 2,500
$ 160,000
107,000
80,000
53,000
Not Allowed
$ 2,500
$ 160,000
104,000
80,000
52,000
Not Allowed
$ 2,500
$ 160,000
102,000
80,000
51,000
Not Allowed
$ 2,500
$ 130,000
65,000
$ 130,000
65,000
$ 125,000
60,000
$ 125,000
60,000
$ 120,000
60,000
Education Tax Incentives
Quick Facts Data Sheet (Continued)
MFS
Savings bonds income exclusion phase-out begins at AGI of:
MFJ or QW
Single or HOH
MFS
Tuition deduction phase-out begins at AGI of:
MFJ
Single, HOH or QW
MFS
AMT exemption:
MFJ or QW
Single or HOH
MFS
Child subject to kiddie tax—earned income plus
Net investment income tax begins at AGI of:
MFJ or QW
Single or HOH
MFS
2015
Not Allowed
2014
Not Allowed
2013
Not Allowed
2012
Not Allowed
$ 115,750
77,200
Not Allowed
$ 113,950
76,000
Not Allowed
6
$ 112,050
74,700
Not Allowed
$ 109,250
72,850
Not Allowed
$ 106,650
71,100
Not Allowed
$ 130,000
65,000
Not Allowed
$ 130,000
65,000
Not Allowed
$ $ 130,000
65,000
Not Allowed
$ 83,400
53,600
41,700
$ 7,400
$ 82,100
52,800
41,050
$ 7,250
$ 80,800
51,900
40,400
$ 7,150
$ 250,000
200,000
125,000
$ 250,000
200,000
125,000
$ 250,000
200,000
125,000
6
6
Additional Taxes
Retirement Plans
IRA contribution limits:
Under age 50 at year end
$ 5,500
$ 5,500
$ 5,500
Age 50 or older at year end
6,500
6,500
6,500
Traditional IRA deduction phase-out begins at AGI of (taxpayer or spouse covered by employer retirement plan):
MFJ and QW (covered spouse)
$ 98,000
$ 96,000
$ 95,000
MFJ (non-covered spouse)
183,000
181,000
178,000
Single and HOH
61,000
60,000
59,000
MFS
0
0
0
Roth IRA contribution phase-out begins at AGI of:
MFJ or QW
$ 183,000
$ 181,000
$ 178,000
Single or HOH
116,000
114,000
112,000
MFS
0
0
0
SIMPLE IRA plan elective deferral limits:
$ 12,500
$ 12,000
$ 12,000
15,500
14,500
14,500
401(k), 403(b), 457 and SARSEP elective deferral limits:
$ 18,000
$ 17,500
$ 17,500
24,000
23,000
23,000
Profit-sharing plan/SEP contribution limits
$ 53,000
$ 52,000
$ 51,000
Compensation limit (for employer contributions to profit sharing plans) $ 265,000
$ 260,000
$ 255,000
Defined benefit plans—annual benefit limit
$ 210,000
$ 210,000
$ 205,000
Retirement saver’s credit phased-out when AGI exceeds:
MFJ
$ 61,000
$ 60,000
$ 59,000
HOH
45,750
45,000
44,250
Single, MFS or QW
30,500
30,000
29,500
Key employee compensation threshold
$ 170,000
$ 170,000
$ 165,000
Highly compensated threshold
$ 120,000
$ 115,000
$ 115,000
Maximum earnings and still receive full Social Security benefits:
Under full retirement age (FRA) at year-end, benefits
reduced by $1 for each $2 earned over
Year FRA reached, benefits reduced $1 for each $3 earned
over (months up to FRA only)
Month FRA reached and later
Social Security
130,000
65,000
Not Allowed
$ 78,750
50,600
39,375
$ 6,950
2011
Not Allowed
$ 74,450
48,450
37,225
$ 6,800
N/A
N/A
N/A
N/A
N/A
N/A
$ 5,000
6,000
$ 5,000
6,000
$ 92,000
173,000
58,000
0
$ 90,000
169,000
56,000
0
$ 173,000
110,000
0
$ $ 11,500
14,000
$ 11,500
14,000
$ 17,000
22,500
$ 50,000
$ 250,000
$ 200,000
$ 16,500
22,000
$ 49,000
$ 245,000
$ 195,000
$ 57,500
43,125
28,750
$ 165,000
$ 115,000
$ 56,500
42,375
28,250
$ 160,000
$ 110,000
169,000
107,000
0
$ 15,720
$ 15,480
$ 15,120
$ 14,640
$ 14,160
41,880
41,400
40,080
38,880
37,680
No Limit
No Limit
No Limit
No Limit
No Limit
Estate and Gift Taxes
Estate and gift tax exclusion
$ 5,430,0007
$ 5,340,0007
$ 5,250,0007
$ 5,120,0007
$ 5,000,0007
GST tax exemption
$ 5,430,000
$ 5,340,000
$ 5,250,000
$ 5,120,000
$ 5,000,000
Gift tax annual exclusion
$ 14,000
$ 14,000
$ 14,000
$ 13,000
$ 13,000
1
Phaseout amount for all other filers (except MFS) is amount shown reduced by: $5,520 ($5,510 if no children) in 2015; $5,430 in 2014; $5,340 in 2013; $5,210 in 2012;
$5,080 in 2011.
2
For single filing status, the amount is half of the amount shown.
3
Amount has been raised by Congress many times in the past. Watch for developments.
4
Amount not released by IRS at publication time. Tax professionals should watch for developments.
5
Add $8,000 if special depreciation claimed. See Special Depreciation Allowance on Page 10-8 for potential application to 2014.
6
Caution: Deduction expired 12/31/13, but could be reinstated for 2015. Watch for developments.
7
extended through 2014
Plus the amount, if any, of deceased spousal unused exclusion amount.
Business Use of Home Worksheet
Caution: Schedule C filers must use Form 8829, Expenses for Business Use of Your Home, or claim the deduction computed under
the simplified method on Schedule C, line 30. Use this worksheet if Schedule F is filed or if the individual is an employee (result to
Schedule A) or a partner (result to Schedule E).
Part 1—Part of Home Used for Business:
1) Area of home used for business..............................................................................................................
1) 2) Total area of home...................................................................................................................................
2) 3) Percentage of home used for business (divide line 1 by line 2 and show result as percentage)............
3) %
Part 2—Allowable Deductions:
4) Gross income from business...................................................................................................................
(a)
Direct Expenses
4) (b)
Indirect Expenses
5) Casualty loss.....................................................
5) 6) Deductible mortgage interest and qualified
mortgage interest premiums..............................
6) 7) Real estate taxes...............................................
7) 8) Total of lines 5 through 7...................................
8) 9) Multiply column (b) of line 8 by line 3..........................................................
9) 10) Add column (a) of line 8 and line 9.............................................................. 10) 11) Business expenses not related to business use of home............................ 11) 12) Add lines 10 and 11................................................................................................................................. 12) 13) Deduction limit. Subtract line 12 from line 4............................................................................................ 13) 14) Excess mortgage interest and qualified
mortgage insurance premiums........................... 14) 15) Insurance............................................................ 15) 16) Rent.................................................................... 16) 17) Repairs and maintenance.................................. 17) 18) Utilities................................................................ 18) 19) Other expenses related to use of home............. 19) 20) Add lines 14 through 19..................................... 20) 21) Multiply column (b) of line 20 by line 3......................................................... 21) 22) Carryover of operating expenses from prior year......................................... 22) 23) Add column (a) of line 20, line 21 and line 22......................................................................................... 23) 24) Allowable operating expenses. Enter the smaller of line 13 or line 23.................................................... 24) 25) Limit on excess casualty losses and depreciation. Subtract line 24 from line 13.................................... 25) 26) Excess casualty losses................................................................................ 26) 27) Depreciation of home from line 39 below..................................................... 27) 28) Carryover of excess casualty losses and depreciation from prior year........ 28) 29) Add lines 26 through 28.......................................................................................................................... 29) 30) Allowable excess casualty losses and depreciation. Enter the smaller of line 25 or line 29................... 30) 31) Add lines 10, 24 and 30........................................................................................................................... 31) 32) Casualty losses included on lines 10 and 30.......................................................................................... 32) 33) Allowable expenses for business use of home. (Subtract line 32 from line 31.)..................................... 33) Part 3—Depreciation of Home:
34) Smaller of adjusted basis or fair market value of home when first used for business............................. 34) 35) Basis of land (or FMV, if FMV of home used on line 34)......................................................................... 35) 36) Depreciable basis of building (subtract line 35 from line 34)................................................................... 36) 37) Business basis of building (multiply line 36 by line 3)............................................................................. 37) 38) MACRS depreciation percentage............................................................................................................ 38) 39) Depreciation allowable (multiply line 37 by line 38)................................................................................. 39) Part 4—Carryover of Unallowed Expenses to Next Year:
40) Operating expenses. Subtract line 24 from line 23. If less than zero, enter -0-...................................... 40) 41) Excess casualty losses and depreciation. Subtract line 30 from line 29. If less than zero, enter -0-...... 41) 3-4 2014 Tax Year | 1040 Quickfinder ® Handbook
2014 State and Local Sales Tax Deduction
can
2014
can
For 2013, taxpayers could elect to deduct state and local sales taxes instead of state and local income taxes (see Electing
to Deduct Sales Tax on Page 5-5). Instead of deducting their actual expenses, taxpayers could use optional sales tax
tables [based on the taxpayer’s state(s) of residence] provided by the IRS. This election expired on December 31, 2013. It
is possible that Congress will extend the election to 2014, but it had not done so at the date of publication. If the election
to deduct state and local sales taxes in lieu of income taxes is extended to 2014, a deduction worksheet and any optional
tables issued by the IRS will be posted to the Updates section of tax.thomsonreuters.com/quickfinder.
The
Health Coverage Exemptions
For 2014, individuals must have health care coverage, qualify for a health coverage exemption, or make a shared responsibility payment with their tax return. This chart shows
all of the coverage exemptions available for 2014, including information about where the coverage exemptions can be obtained and the code for the coverage exemption
that is to be used on Form 8965, Health Insurance Exemptions, when claiming the exemption. See Health Care: Individual Responsibility on Page 4-22 for more information.
Coverage Exemption
Granted by
Marketplace
Claimed on
tax return
Code for
Exemption
Coverage is considered unaffordable—Individual cannot afford coverage because the minimum
amount he must pay for premiums is more than 8% of his household income.

A
Short coverage gap—Individual went without coverage for less than 3 consecutive months during the
year.

B
Citizens living abroad and certain noncitizens—Individual is:
• A U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 12–month period,
• A U.S. citizen who is a bona fide resident of a foreign country or U.S. territory, or
• Neither a U.S. citizen or U.S. national nor an alien lawfully present in the U.S.

C
Household income below the filing threshold—The individual’s household income is below the
minimum threshold for filing a tax return.

No Code
See Part II1
Members of a health care sharing ministry—The individual is a member of a health care sharing
ministry.


D
Members of Federally-recognized Indian tribes—The individual is a member of a Federally-recognized
Indian tribe.


E
Incarceration—The individual is in a jail, prison, or similar penal institution or correctional facility after the
disposition of charges.


F
Members of certain religious sects—The individual is a member of a recognized religious sect.

No Code
See Part I1
Limited benefit Medicaid and TRICARE programs—The individual is enrolled in certain types of
Medicaid and TRICARE programs that are not minimum essential coverage. (Available only in 2014.)

H
Fiscal year employer–sponsored plan—The individual was eligible, but did not purchase, coverage
under an employer plan with a plan year that started in 2013 and ended in 2014. (Available only in 2014.)

H

G

G

G

E
Hardships:
• Two or more family members’ aggregate cost of self-only employer-sponsored coverage is more than
8% of household income, as is the cost of any available employer-sponsored coverage for the entire
family
• The individual purchased insurance through the Marketplace during the initial enrollment period but had
a coverage gap at the beginning of 2014.
• The individual applied for CHIP coverage during the initial open enrollment period and was found
eligible for CHIP based on that application but had a coverage gap at the beginning of 2014.
• The individual is an American Indian, Alaska native, or a spouse or descendent of either who is eligible
for services through an Indian health care provider.
• The individual’s gross income is below the filing threshold.
• The individual is experiencing circumstances that prevents him from obtaining coverage under a
qualified health plan.
• The individual does not have access to affordable coverage based on his projected household income.
• The individual is ineligible for Medicaid solely because the state in which he lives does not participate in
the Medicaid expansion under the Affordable Care Act.
• The individual has been notified that his health insurance policy will not be renewed and he considers
the other plans available unaffordable.
1
.






No Code
See Part II1
No Code
See Part I1
No Code
See Part I1
No Code
See Part I1
No Code
See Part I1
Of Form 8965, Health Coverage Exemptions.
Where to File 2014 Form 1040, 1040A, 1040EZ
Due Date: April 15, 2015
At the date of publication, the IRS had not released the mailing addresses for Form 1040 series. When available, the filing
addresses will be posted to the Updates section of our website: tax.thomsonreuters.com/quickfinder.
Where to File Form 1040-ES for 2015
Due Dates: See Page 16-5
At the date of publication, the IRS had not released the mailing addresses for Form 1040-ES for 2015. When available, the filing
Where to File Form 4868 for 2014 Return
Due Date: April 15, 2015
At the date of publication, the IRS had not released the mailing addresses for Form 4868. When available, the filing
— End of Tab 3 —
3-14 2014 Tax Year | 1040 Quickfinder ® Handbook
ports the total IRA distribution on line 15a and the taxable amount
(amount of distribution that was not an HFD) on line 15b. Enter
“HFD” next to line 15b.
Multiple exceptions. Attach a statement showing the amount for
each exception instead of making an entry next to line 15b.
Pensions and Annuities
See also Tab 14 and Form 1099-R, Box 7 Distribution Codes on
Page 14-13.
Fully taxable distributions. Distributions from pensions and annuities are fully taxable if: (1) the taxpayer
did not contribute to the cost or (2) the taxpayer’s
entire cost was recovered before 2014. Leave
line 16a blank and report the entire amount on
line 16b.
Partially taxable distributions. Enter the total
distribution on line 16a and the taxable amount on
line 16b. If Form 1099-R does not show the taxable amount use
either the general rule or the simplified method to figure the taxable amount. See Qualified Annuities on Page 14-20 to calculate
the amount to enter on line 16b.
Form 1099-R payments that should be reported on line 7:
•Disability pensions received before the minimum retirement age
set by the taxpayer’s employer.
•Corrective distributions of excess salary deferrals or excess
contributions to retirement plans (not including IRAs).
Lump-sum distributions. See Tab 14.
Form RRB-1099-R. The amount in box 7 is generally fully taxable
and reported on line 16b. However, if an amount is shown in box
3 (Employee Contributions) a portion of the benefits is nontaxable. See Qualified Annuities on Page 14-20 for information about
computing the taxable portion of benefits.
Rollovers. Enter the total distribution (from Form 1099-R, box 1)
on line 16a. From this total, subtract any after-tax contributions the
taxpayer made and the amount of the qualified rollover. Enter the
result, even if zero, on line 16b. Write “Rollover” next to line 16b.
See Rollovers and Transfers on Page 14-9.
If rollover is to a Roth IRA or a designated Roth account, enter
total distribution on line 16a. Subtract any after-tax contributions
and enter the remaining amount on line 16b.
Retired public safety officers. If a retired public safety officer
elects to exclude from income distributions (up to $3,000) received
from a governmental retirement plan that were used to pay for
health and long-term care insurance premiums, report the total
distribution on line 16a and the taxable amount on line 16b. Write
“PSO” next to line 16b. (If pension is reported on line 7, include only
the taxable amount on that line and enter “PSO” and the amount
excluded in the space to the left of that line.)
U Caution: This election is only available if the taxpayer retired
because of disability or reached normal retirement age. The distribution must be from a plan maintained by the employer from
which the taxpayer retired as a public safety officer and must be
made directly from the plan to the insurance provider.
Rental Real Estate, Royalties,
Partnerships, S Corporations, Trusts,
etc.
See Tab 8.
Farm Income
See Schedule F—Profit/Loss From Farming on Page
6-16.
Unemployment Compensation
IRS Publication 525
Unemployment compensation is taxable [IRC §85(c)]. Total unemployment compensation is reported to the taxpayer on Form
1099-G. If an overpayment was received and repaid during the
year, subtract the repayment amount from the total and enter the
result on line 19. Write “Repaid” and the amount repaid on the
dotted line.
Repayments for prior years cannot be deducted from the benefits
reported on line 19. See Repayments of Income on Page 5-17 for
information on how to handle prior year repayments.
Social Security Benefits
IRS Publication 915
See the Social Security Benefits Worksheet (2014) on Page 3-11.
Calculate the taxable amount using the figure from box 5 of Form
SSA-1099 or RRB-1099. (Form RRB-1099 reports railroad retirement benefits treated as Social Security benefits. Do not use the
figures from Form RRB-1099-R.)
Report the net benefits (from box 5 of Form SSA-1099 or Form
RRB-1099) on line 20a and the taxable amount (or -0- if none are
taxable) on line 20b. (Note: Amounts are reported on lines 20a
and 20b, even if none of the benefits are taxable.) If the taxpayer
is filing MFS and lived apart from his spouse for all of 2014, also
enter “D” to the right of the word “benefits” on line 20a.
Living apart means living in separate residences. Using separate
bedrooms in the same residence is not living apart. [McAdams,
118 TC 373 (2002)]
Repayments. All repayments made in 2014 are reported in box 4
of Form SSA-1099, including repayments for benefits received in
prior years. Gross benefits are reduced by repayments, and the
net amount is reported in box 5.
Repayments are not reported on Form 1040 unless repayments
shown in box 4 are more than gross benefits shown in box 3. If
repayments exceed gross benefits, see Repayments of Income
on Page 5-17 for how to deduct the excess.
IRA deduction and Social Security computation. If the taxpayer
(or spouse) is covered by an employer retirement plan, see IRA
Deduction and Taxable Social Security on Page 14-6 for how to
calculate the IRA deduction and taxable Social Security benefits.
Social Security lump-sum election. Taxpayers must include the
taxable part of a retroactive payment of benefits in current-year
income even if the payment includes benefits for a prior year.
There are two methods to calculate the taxable part of the total
benefits received.
1) Regular Method. Use current-year income to figure the taxable
part of the total benefits (including those from a prior year)
received in the current year.
2) Lump-Sum Election Method:
a) Refigure the taxable part of benefits for each prior year using
that year’s income, any benefits received during that year,
and benefits received during the current year designated for
that year.
b) Subtract any taxable benefits for the refigured year that were
previously reported. The remainder is the taxable part of the
lump-sum payment.
c) Refigure current-year taxable benefits without the lump-sum
payment.
d)Add all prior-year taxable benefits to current-year taxable
benefits. Compare to taxable benefits calculated using the
regular method and use the lower amount.
Publication 915 contains worksheets for computing the taxable
benefits using the lump-sum election method. To report benefits
using the lump-sum election method, enter “LSE” on Form 1040
to the left of line 20a.
Other Income
Use line 21 to report any taxable income not reported
elsewhere on the return. List the type and amount of
income and, if necessary, include a statement showing
the required information.
Examples of income to report:
•Alaska Permanent Fund dividends.
•Child’s income over $2,000 from Form 8814, Parents’ Election to
Report Child’s Interest and Dividends. Write “8814” in the space
next to the line. See Reporting Child’s Income on Parents’ Return
on Page 13-2.
•Income from the rental of personal property if the taxpayer was
not in the business of renting such property. Report expenses
on line 36 and write “PPR” next to the line.
•Income from an activity not engaged in for profit. See Business
vs. Hobby Losses on Page 6-11.
•Net operating loss carryover. (Subtract the NOL deduction from
any income on line 21 and enter the result. If negative, enter in
parenthesis. Enter “NOL” and the amount of the deduction, in
parentheses, next to the line.) See Net Operating Loss (NOL)
on Page 6-14.
•Income and taxable reimbursements not included on any other
line or schedule.
•Prizes and awards.
•Jury duty pay.
•Gambling winnings. (Winnings over certain thresholds generally
reported to taxpayer on Form W-2G.)
•Taxable distributions from qualified tuition programs (QTPs) or
Coverdell education savings accounts (ESAs). Taxable amount
may be subject to 10% penalty, reported on Form 5329. See
Education Savings Accounts on Page 13-7 and Qualified Tuition
Programs on Page 13-6.
•Taxable distributions from medical savings accounts (MSAs). Enter “MSA” (“Med MSA” if distribution from a Medicare Advantage
MSA) next to the line. Taxable distributions may also be subject
to a 20% penalty tax (50% for Medicare Advantage MSA). See
Form 8853.
•Deemed income from an HSA because the individual
did not remain HSA-eligible during the testing
period. See Recapture on Page 4-17.
•Taxable per diem or periodic payments under
a long-term care insurance contract from Form
8853. Enter “LTC” next to line.
•Reemployment trade adjustment assistance (RTAA) payments
(Form 1099-G, box 5).
•Loss on certain corrective distributions of excess elective deferrals to employer retirement plans. A loss is reported as a negative
amount and identified as “Loss on Excess Deferral Distribution.”
•Dividends on insurance policies if they exceed the total of all net
premiums paid for the contract.
•Taxable cancellation of debt income (non-business debts). See
Canceled Debt on Page 4-3.
•Recapture of charitable contribution deductions related to donations of fractional interests in personal property or to property
donations when the charity disposes of the property within three
years.
•Taxable part of disaster relief payments.
Taxable health savings account (HSA) distributions. Distributions not used for qualified medical expenses of the account
beneficiary, spouse, or dependents are included in gross income
and subject to a 20% penalty. Exceptions to the penalty include
distributions after the beneficiary’s death, disability or attainment
of age 65. (Qualified medical expenses are generally the same
as for itemized medical expenses. See Tab 5. Exception: Insurance premiums normally are not treated as a qualified medical
expense for HSAs.)
All HSA distributions are reported on Form 8889, Health Savings
Accounts (HSAs), where the taxable amount and 20% penalty, if
any, are computed and carried to lines 21 and 62 of Form 1040,
respectively. If an amount carries to line 21 or 62, enter “HSA” on
the dotted line next to the amount.
Adjustments to Income
Reserved (for Educators Expenses)
Line 23 is reserved. See Educators on Page 9-7.
Business Expenses for Certain Employees
See Above-the-Line Deduction for Certain Employees on Page 9-7.
Health Savings Account Deduction
IRS Publication 969
A health savings account (HSA) is a savings account set up exclusively for paying the qualified medical expenses of the account
beneficiary or the beneficiary’s spouse or dependents. (IRC §223)
Eligible individuals. To qualify for an HSA, an individual:
•Must be covered under a high deductible health plan (HDHP).
•May not be covered under any non-HDHP health plan.
•Cannot be enrolled in Medicare.
•Cannot be eligible to be claimed as a dependent on another
person’s return.
Employees. The employee, the employer or both may contribute
to the HSA.
•Contributions made by the employee are deductible.
•Contributions made by the employer (including contributions
made through a cafeteria plan) are excluded from employee’s
income and are not subject to employment taxes.
S corporation shareholders. More than 2% shareholders are not
eligible for pre-tax HSA contributions by their employer. Employer
contributions to a more-than-2% shareholder’s HSA are generally
treated as compensation and then deducted by the shareholder.
(Notice 2005-8)
Self-employed or unemployed. The eligible individual may contribute to the HSA or any person (such as a family member) may
contribute to an HSA on behalf of an eligible individual.
•Contributions made by the individual (or by any other person)
are deductible in computing the individual’s AGI.
•A self-employed individual’s own HSA contributions are not taken
into account in determining SE tax.
2014 HSA Contribution Limits1
Type of Coverage
Under Age 55
Self-Only
$3,300
Additional Contribution
Age 55 or Older at Year-End
$1,000
Family
6,5502
1,000
Contribution limit reduced by:
• Amounts contributed to an MSA.
• Employer contributions to the HSA that were excluded from income.
• Transfers from the individual’s IRA to the HSA. See Health savings account
(HSA) funding distribution (HFD) on Page 4-14.
2
Divided between spouses if either spouse has family coverage.
1
Alimony Paid
See also Alimony on Page 13-10.
Enter alimony paid on line 31a. Include the recipient’s Social Security number on line 31b. If the taxpayer made alimony payments
to more than one person, enter one SSN on line 31b and attach
a statement listing the numbers of the other alimony recipients.
IRA Deduction
See also Traditional IRAs on Page 14-4.
2014 IRA contributions must be made by April 15, 2015—no extensions. Report:
•Deductible IRA contributions for the taxpayer and spouse on
line 32.
•Nondeductible contributions to a traditional IRA on Form 8606.
•2014 conversion contributions to a Roth IRA on Form 8606. See
Roth IRA Conversions on Page 14-7.
Student Loan Interest Deduction
See Student Loan Interest Deduction on Page 13-4.
Reserved (for Tuition and Fees Deduction)
Line 34 is reserved. See Tuition and Fees Deduction on Page 13-4.
Domestic Production Activities Deduction
See Domestic Producer Deduction (DPD) on Page 6-22.
Total Adjustments
Add lines 23 through 35 and enter the total on line 36.
Include the following adjustments in the total on line 36, and enter
the amount and description to the left of line 36:
Describe on
Adjustments
Return as
Included in Line 36
Archer MSA deductions (see Archer MSA deduction below).
MSA
Attorneys fees paid in connection with a taxable IRS whistleWBF
blower’s award.
Attorneys fees for settlements in connection with unlawful
UDC
discrimination, but only to the extent of the amount included in income.
Contributions by certain chaplains to Section 403(b) plans.
403(b)
Contributions to Section 501(c)(18)(D) pension plans. This
501(c)(18)(D)
amount should be identified with Code H in box 12 of Form W-2.
Expenses from the rental of personal property if the income from
PPR
the rental of personal property was reported on line 21.
Forestation or reforestation amortization if the taxpayer could
RFST
claim a deduction for these costs and did not have to file
Schedule C, C-EZ or F.
Jury pay given to employer because employer continued to pay
Jury Pay
salary while on jury duty. (Also reported as income on line 21.)
Repayment of supplemental unemployment benefits under the
Sub-Pay TRA
Trade Act of 1974. Alternatively, the taxpayer may be able to
claim a credit against tax. (IRS Pub. 525)
Archer MSA deduction. A medical savings account (MSA) is a
trust established to pay for qualified medical expenses of the account holder. A participant must:
1) Work for a small employer or be self-employed and
2) Have a high-deductible health plan (HDHP). (IRC §220)
2014 MSA
High-Deductible Health Plan
Minimum
Annual plan
deductibles
Maximum
Out-of-pocket expense limit
Maximum annual contribution
Individual
Coverage
$2,200
3,250
4,350
65% of
deductible
Family
Coverage
$4,350
6,550
8,000
75% of
deductible
Contributions are limited to net self-employment (SE) earnings
or employee compensation from the business establishing the
HDHP, and may be made by an employer, an employee or a
self-employed individual. 2014 contributions must be made on or
before April 15, 2015.
Taxpayers receive Form 5498-SA, which shows the amount contributed during the year. Report all contributions on Form 8853.
Include the deductible amount in the total on line 36 of Form 1040
and write “MSA” to the left.
Excess contributions are subject to a 6% penalty (calculated on
Form 5329) unless the excess plus allocable income is distributed
by the filing due date, including extensions.
Adjusted Gross Income
If line 37 is less than zero, the taxpayer may have an NOL [see Net
Operating Loss (NOL) on Page 6-14] that can be carried to another
year. See the NOL worksheets in Tab 3 and IRS Publication 536,
Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
Taxes and Credits
Age 65 or Older and Blind
Check all applicable boxes on line 39a for the taxpayer and spouse.
Age. For 2014, a taxpayer born before January 2, 1950 is considered age 65 or older.
Blindness:
•If the taxpayer or spouse is completely blind as of December 31,
2014, attach a statement describing the condition.
•If only partially blind, attach a copy of a statement certified by an
eye doctor or optometrist that sight is not better than 20/200 in
the better eye with glasses or contact lenses or the field of vision
is 20 degrees or less. If a statement filed in a prior year certified
that the condition was unlikely to improve, a new certified statement from the doctor or optometrist is not required. The taxpayer
must keep the statement for his records.
MFS and Spouse Itemizes Deductions or
Dual-Status Alien
Check the box on line 39b if the taxpayer is MFS and his spouse
itemizes deductions on a separate return (either MFS or HOH), or
if the taxpayer is a dual-status alien. Exception: If the dual-status
alien and his spouse who is a U.S. citizen file a joint return and
both agree to be taxed on their combined worldwide income, do
not check the box.
 Note: Married taxpayers filing as HOH do not need to check this
box, even if their spouse itemizes deductions. (CCA 200030023)
If the box on line 39b is checked, the standard deduction is zero.
Itemized/Standard Deduction
See Tab 5.
Enter the larger of itemized deductions or the standard deduction
on line 40. If the box on line 39b is checked, the standard deduction
is zero, even if the taxpayer is age 65 or older or blind. Standard
deductions are listed in the Quick Facts Data Sheet on Page 3-1.
A taxpayer who elects to itemize deductions even though they are
less than the standard deduction should complete Schedule A and
check the box on line 30 of that schedule.
@ Strategy: It may be advantageous to itemize deductions even
though less than the standard deduction when the taxpayer is
subject to AMT because the standard deduction is added back for
AMT purposes. Also, there may be instances when the tax benefit
of being able to itemize deductions on the taxpayer’s state tax
return is greater than the tax benefit lost on his federal return by
not taking the standard deduction.
Exemptions
Each exemption is worth $3,950 for 2014. Enter the allowable
exemption deduction on line 42.
Phase-out of exemption deduction. For 2014, the deduction
for personal exemption phases out for higher income taxpayers.
Exemption Deduction Phase-out (2014)
Filing Status
Phase-out begins at
AGI of:
MFJ, QW
$305,050
$427,550
Single
254,200
376,700
HOH
279,650
402,150
MFS
152,525
213,775
Methods used to calculate tax. Enter the tax on line 44. Use
the following to compute tax unless Form 8615, Schedule D Tax
Worksheet, Qualified Dividends and Capital Gain Tax Worksheet,
Foreign Earned Income Tax Worksheet, or Schedule J applies.
•Tax Table. Use if taxable income is less than $100,000. See
Tab 1.
•Tax Computation Worksheet. Use if taxable income is $100,000
or more. See 2014 Tax Computation Worksheet on Page 1-13.
Form 8615. Use to figure the tax for children under age 18 [or
age 18 (or full-time students age 19–23) whose earned income
is less than or equal to half of their support] and who had more
than $2,000 of investment income. Do not use if neither parent
was alive on December 31, 2014. See Kiddie Tax on Page 13-1.
Schedule D tax worksheet. Use the worksheet in the Schedule D instructions to calculate tax if Schedule D is required and
the taxpayer has 28% rate capital gains or unrecaptured Section
1250 gains.
Qualified dividends and capital gain tax worksheet. Use the
Qualified Dividends and Capital Gain Tax Worksheet in the Form
1040 instructions to calculate tax if the Schedule D Tax Worksheets
are not required and the taxpayer reports (1) qualified dividends
on Form 1040, line 9b, (2) capital gain distributions on Form 1040,
line 13 or (3) capital gains on Schedule D and lines 15 and 16 of
Schedule D are both more than zero.
Foreign earned income tax worksheet. Use the Foreign Earned
Income Tax Worksheet in the Form 1040 instructions if the taxpayer
is claiming the foreign earned income exclusion or the housing
exclusion or deletion on Form 2555.
Schedule J. Use Schedule J to calculate tax for farmers or fishermen who elect to income average. See Schedule F—Profit/Loss
From Farming on Page 6-16.
Other tax reported on line 44. Include in total for line 44:
•Form 8814, Parents’ Election to Report Child’s Interest and
Dividends. Check box a on line 44. See Tab 13.
•Form 4972, Tax on Lump-Sum Distributions. Check box b on line
44. See Tab 14.
•Tax due to Section 962 election (election by a domestic shareholder of a controlled foreign corporation to be taxed at corporate
rates). Check box c on line 44 and enter the amount and “962”
in the space next to that box. Attach a statement showing how
the tax was computed.
•Recapture of an education credit. If a refund or tax-free educational assistance was received in 2014 for education costs for
which an education credit was claimed in a prior year, all or part
Alternative Minimum Tax
See Alternative Minimum Tax (AMT) on Page 12-13.
Completely phased-out
at AGI of:
Tax
of the previously claimed education credit must be recaptured.
See the Form 8863 instructions for details. Check box c and
enter the amount and “ECR” in the space next to that box.
•Any tax from Form 8621, line 16e, relating to a Section 1291
fund (certain passive foreign investment companies). Check box
c and enter the amount of the tax and “1291 TAX” in the space
next to that box.
Excess Advance Premium Tax Credit
Repayment
Individuals can choose to have some or all of their estimated health
insurance premium tax credit paid in advance. If the advance payments exceed the actual credit amount computed on Form 8962,
the difference is an additional amount of tax due, reported on line
46 of Form 1040. However, the repayment is limited to the lesser
of the excess amount or the amount shown in the following table.
Excess Advance Premium Tax Credit
Repayment Limitations
Household income as a % of
the federal poverty line
Single
Any other filing
status
Less than 200%
$ 300
$ 600
1,500
200%–299%
750
300%–399%
1,250
2,500
400% or more
No limit
No limit
See Advance Payment of the Credit on Page 12-11.
Foreign Tax Credit
See Foreign Tax Credit on Page 12-10.
Credit for Child and
Dependent Care Expenses
See Child and Dependent Care Credit on Page 12-3.
Education Credits
See Education Tax Credits on Page 12-7.
Retirement Savings Contributions Credit
See Retirement Saver’s Credit on Page 12-12.
Child Tax Credit
See Child Tax Credit Worksheet (2014) on Page 3-5 and Child
Tax Credit on Page 12-5.
If a child tax credit is claimed on line 52, check the box in column 4
of line 6c for each dependent claimed.
Residential Energy Credit
See Residential Energy Tax Credits on Page 12-11.
Other Credits
See the Tax Credit Summary (2014) table on Page 12-1.
Elderly or disabled credit (Schedule R). The taxpayer or spouse
must be either:
•Age 65 or older by the end of 2014 or
•Under age 65 by the end of 2014, and retired on permanent and
total disability and had taxable disability income in 2014.
Court Case: In Baker [122 TC 143 (2004)], the court allowed a percentage
method for calculating the portion of monthly fees deductible as medical
expenses. Skilled nursing facility costs and other medical costs of the entire
retirement community were assumed to be a percentage portion of each
resident’s entry fee and monthly payments. See also Revenue Ruling 76-481.
U Caution: Payments made for future medical care and insur-
ance premiums for benefits substantially beyond the current tax
year are not deductible in the year paid unless they are purchased
in connection with obtaining lifetime care. (Rev. Rul. 93-72)
•Charitable contribution deduction. Some continuing-care facilities
are operated by qualified charitable organizations. If payments
exceed regular monthly fees and no additional benefits are provided, the excess may be deductible as a charitable contribution.
•Imputed interest. Part of the entrance fee to a life-care facility
may be considered a loan if a portion of the payment is a longterm refundable fee. However, an individual is exempt from the
imputed interest rule if he (or his spouse) is age 62 or older
before the end of the year, the facility provides an independent
living unit, along with an assisted living or nursing facility, or both,
and substantially all of the independent living unit residents are
covered by continuing care contracts. [IRC §7872(h)]
Insurance Reimbursements
Deductible medical costs must be reduced by any insurance reimbursements received. Excess reimbursements are taxable only
to the extent they were provided for under an employer plan and
attributable to the employer’s contribution that was not included
in income.
Taxes
See also IRS Pubs. 523, 530 and 535
State and Local Income Taxes
State and local income taxes are deductible on Schedule A in the
year paid. The tax may be paid either through withholding, estimated payments or payments for prior year returns. The IRS may
disallow deductions for large estimated state income tax payments
made solely to increase itemized deductions (Rev. Rul. 82-208).
The prepayment of estimated state income tax should be based
on tax liability. Penalties and interest are not deductible.
N Observation: State and local income taxes properly allocable
to items included in net investment income (NII) offset NII when
computing the 3.8% NII tax. See 3.8% Net Investment Income Tax
on Page 12-15 for details. In determining whether to deduct state
and local income taxes or state sales tax or general sales tax, the
practitioner should consider the effect on NII Tax.
Electing to Deduct Sales Tax
 Expired Provision Alert: The election
to deduct state and
local sales tax expired December 31, 2013. However, Congress
has, on several occasions, extended the provision. This section is
retained in the event the provision is extended to 2014.
can
For
Before 2014, taxpayers could elect to deduct state and local sales
tax rather than state and local income taxes. Taxpayers who made
the election could deduct either:
can
make
1) Actual sales tax amounts (based on their records) or
2) Predetermined deduction figures from IRS tables.
To deduct actual amounts. Add up the nonbusiness general state
and local sales taxes (including any compensating use taxes) paid
during the year plus any selective sales taxes if the rate is the
same as the general sales tax rate. Include selective sales taxes
on food, clothing, medical supplies and motor vehicles even if the
rate is lower than the general sales tax rate. If the selective sales
tax rate on a motor vehicle is higher than the general rate, deduct
only the amount that would have resulted from charging the lower
general sales tax rate.
To deduct amounts from IRS tables. The table amounts depend
on the taxpayer’s AGI plus nontaxable income (for example, taxexempt interest and nontaxable portion of Social Security benefits),
the number of exemptions claimed on Form 1040 and the state of
residence. If the taxpayer lives in more than one state during the
year, pro-rate the amount from the table for each state (based on
the number of days spent there divided by 365), add up the prorated amounts and deduct the total.
See the 2014 State and Local Sales Tax Deduction Worksheet on
Page 3-13. Also, a Sales Tax Deduction Calculator can be found
at www.irs.gov.
 Note: In addition to the table amounts, the taxpayer can deduct
additional actual sales tax amounts from purchases of motor vehicles (including leased vehicles). If the sales tax rate on a motor
vehicle is higher than the general rate, deduct only the amount
that would have resulted from charging the lower general sales
tax rate. Also add sales taxes paid on boats, airplanes, homes
(including mobile and prefabricated) or home building materials if
the rate was the same as the general sales tax rate.
Real Estate Taxes
A real estate tax is deductible in the year it is paid
to the taxing authority. Prepaid real estate taxes can
generally be deducted in the year of the prepayment
if the taxpayer is on the cash basis and does not live
in an area in which the prepayment would be considered
a deposit by the taxing authority. How prepaid taxes are treated
varies among local jurisdictions. Taxes placed in escrow are deductible when actually paid to the taxing authority, not when paid
to the escrow agent. Penalties and interest on late payments are
not deductible. Also, see Electing to Capitalize Taxes and Interest
on Page 5-8.
Generally, real estate taxes can be deducted only by the owner of
the property upon which the tax is imposed. Regulation Section
1.164-3(b) defines real property taxes as “taxes imposed on interests in real property and levied for the general public welfare…”
Because of the lack of a detailed definition, the issue has been the
subject of several court cases and IRS rulings. For example, the
tax imposed on renters by the New York Real Property Tax Law
is not deductible for federal tax purposes. Taxes paid under this
law are considered rent, not property taxes. (Rev. Rul. 79-180)
In contrast, Revenue Ruling 71-49 stated that certain payments
made to an educational construction fund by a cooperative housing
corporation did qualify as real property taxes, and were deductible
by the tenant-shareholders.
More than one property. Real estate taxes are deductible for all
property owned by a taxpayer.
Sale of real estate. The buyer and the seller must divide real
estate taxes according to the number of days that each owned the
property during the year. Both are considered to have paid their
share of taxes, even if one or the other paid the entire amount.
•Buyer-paid taxes. Deductible by the buyer only for the period
he owned the property. The buyer cannot deduct the real estate
taxes of the seller. The buyer must add these taxes to the basis
of the property. The seller treats this as additional sales proceeds.
•Seller-paid taxes. If the seller pays real estate tax owed by the
buyer (beginning on the date of sale), the buyer is considered to
have paid the tax. The tax is deductible by the buyer. The buyer
must reduce the basis in the property by the tax paid. The seller
treats this as a reduced selling price.
Equitable owner. Taxpayers who do not have legal title to a property may still claim a Schedule A deduction for real estate taxes
paid if they are equitable owners of the property. An equitable
owner is a person who has the economic benefits and burdens
of ownership, based on the facts. Occupying and maintaining the
home and paying the mortgage and taxes on it are factors that
might indicate equitable ownership. See Trans (TC Memo 1999233), Uslu (TC Memo 1997-551) and Edosada (TC Summ. Op.
2012-17) for situations where taxpayers were equitable owners.
Cooperative Housing Corporations (Co-Ops)
Mortgage interest and property taxes allocated to a tenant-shareholder in a co-op are generally treated the same as those paid
by other homeowners, provided the following conditions are met.
1) The corporation has only one class of stock outstanding.
2) Each shareholder has the right (but is not required) to occupy
a dwelling unit solely because of the ownership of the stock.
3) No shareholder can receive any distribution of capital, except
on liquidation of the corporation.
4) During the year, the corporation either (a) receives at least
80% of its gross income from tenant-shareholders, (b) makes
available at least 80% of the property’s total square footage for
use by tenant-shareholders or (c) pays or incurs at least 90%
of its expenditures for the acquisition, construction, management, maintenance or care of the property for the benefit of
the tenant-shareholders. [IRC §216(b)]
The tenant-shareholder’s deductible percentage of interest and
taxes paid by the corporation is allocated based on the number
of shares owned versus total shares outstanding. Co-ops usually
issue a year-end statement showing the allocated amounts.
Special Assessments
Improvements. Taxes charged for local benefits or improvements
that tend to increase the taxpayer’s property value (such as construction of streets, sidewalks or water and sewer systems) are
not deductible [IRC §164(c)(1)]. A tax is considered assessed for
local benefits when property assessed with the tax is limited to
property benefited [Reg. §1.164-4(a)]. It is not necessary for the
property’s value to actually increase.
Maintenance, repairs or interest. Assessments to meet maintenance or repair costs or interest charges for the local benefit are
deductible (if the taxpayer can substantiate them) as taxes on
Schedule A because such expenditures do not tend to increase
property values. [Rev. Rul. 79-201; Reg. §1.164-4(b)(1)]
Personal Property Taxes
Personal property taxes are deductible if they are a state or local
tax:
1) Charged on personal property,
2) Based only on the value of the personal property and
3) Charged on a yearly basis (even if collected more or less than
once per year).
Automobile license fees.
•Fee based on weight, model, year or horsepower.
Not deductible.
•Fee based on the value of the car. Deductible,
even if the tax is imposed on the exercise of a
privilege of registering a car or for using a car
on the road.
•Tax based partly on value and partly on weight
or other test. Only the tax attributed to the value is deductible.
For example, assume annual registration fee based on 1% of
value, plus 40¢ per hundred-weight. The part of the tax equal to
1% of value is deductible.
Foreign Taxes
Most income taxes paid to a foreign country or U.S. possession are
allowable either as an itemized deduction or as a credit against tax
on Form 1116. If available, the credit is often more advantageous. See Foreign Tax Credit on Page 12-10.
Nondeductible Taxes
•Custom or import duties.
•Federal estate and gift taxes.
•Federal income and excise taxes.
•Fines or penalties for violation of the law, such
as parking or speeding tickets.
•License fees (marriage, drivers, dogs, trailers, boats).
•Social Security, Medicare, railroad retirement taxes.
Interest Tracing
See also IRS Pub. 535
Taxpayers must track the use of loan proceeds to determine the
type of interest paid (for example, personal, business, etc.) (Temp.
Reg. §1.163-8T). Strategy: Keep loan proceeds totally separate
from other funds whenever possible. This can avoid reallocation
by the IRS, and may save important tax deductions.
Interest Expense—Types
Business interest. Interest on debts incurred in a trade or business is deductible as a business expense on Schedule C or F or on
Schedule E, Part II, if used to purchase stock in an S corporation
or a partnership interest.
Capitalized interest. Interest subject to capitalization rules, such
as that incurred on manufacture or production of certain long life
assets, is recovered through depreciation. (Form 4562)
Student loan interest. Deducted as an adjustment to income
on Form 1040 (available whether or not the taxpayer itemizes
deductions). The deduction is limited to $2,500. See Student Loan
Interest Deduction on Page 13-4 for more information.
Interest paid to purchase or carry tax-exempt securities. Not
deductible.
Investment interest. Deductible up to the amount of net investment income (Schedule A, Form 4952). See Investment Interest
Expense on Page 5-7.
Mortgage interest (Schedule A). See Qualified Residence Interest on Page 5-8.
Passive activity interest. Interest on debts incurred in a passive activity. Passive activity loss
limitations apply (Form 8582). See Tab 8.
Nondeductible personal interest:
•Interest paid on car loans (except for business
use of car by self-employed individuals).
•Interest paid on a taxpayer’s Form 1040 tax deficiency, even if
the deficiency was caused by an understatement of business
(Schedule C) income.
•Credit card interest for nonbusiness purchases.
•Interest on home equity debt over $100,000 (or less if FMV limit
applies—see Qualified Residence Interest on Page 5-8).
•Interest paid on life insurance policy loans. [IRC §264(a)(4)]
•Home acquisition interest on loans not secured by residence
(unless properly allocated to another category). See Interest
Allocation Rules on Page 5-7.
•Interest paid on personal bills and expenditures.
•Finance charges arising related to personal expenditures.
•Bank overdraft fees or interest charges on personal accounts
not used for business.
Court Case: In Huntsman, taxpayers purchased and improved their residence
by means of a three-year loan and later refinanced the loan with a 30-year
mortgage. The court allowed the deduction of the points on the refinancing.
The court found that the 30-year mortgage was obtained “in connection with”
the purchase of their principal residence, therefore the taxpayer was entitled
to deduct all of the points in the year paid. [Huntsman, 66 AFTR 2d 90-5020
(8th Cir. 1990)]
Amortizing Points
Amortization is per month, not per year. Thus, if a taxpayer incurs
$2,000 in points on a 30-year loan of 360 monthly payments and
the first payment is for November of 2014, only
$11.12 is deductible for 2014 ($2,000 ÷ 360 =
$5.56 × 2 months = $11.12).
Home equity line-of-credit points. Points
paid initially for a line of credit of up to
$100,000 secured by the home are deductible as home equity debt interest over the period of time
until the credit line expires. However, if funds from a line of credit
are used for home improvements for the principal residence, the
points are fully deductible the first year.
Business or investment property. Amortize the points over the
life of the loan.
Second Home
Assuming the home is treated as the second home under the qualified residence interest expense rules, points are treated as follows.
Personal use only. Points are amortized as mortgage interest
expense over the entire loan period.
Rental and personal use:
1) If personal use is not more than the greater of 14 days or 10%
of the days the home is rented, the second home is treated as
a rental property. Amortize and deduct the rental portion of the
points over the life of the loan. Points allocated to personal use
are non-deductible.
2) If personal use exceeds the 14-day or 10% use rule, divide
the points proportionately based on rental and personal use.
Amortize and deduct the amount attributable to the rental activity against the rental income, and amortize and deduct the
balance as qualified residence interest expense.
 Note: See Renting Out a Home on Page 8-1.
Other Mortgage
Interest Deduction Rules
Late Payment Charges
Late payment charges are generally deductible as mortgage interest if they are not for a specific service such as a collection fee.
Land Rent (Redeemable Ground Rent)
Periodic lease payments made for the use of land
on which a home is located can be deductible as
mortgage interest. To be deductible, all of the
following must be true.
1) The land lease term is more than 15 years,
including renewal periods, and is freely assignable by the lessee;
2) The lessee has the right to terminate the lease and purchase
the lessor’s land by paying a specific amount and
3) The lessor’s interest in the land is a security interest to protect
the entitlement to rental payment.
Construction Loans
Interest on construction loans or loans to buy
a lot is qualified residence interest if the following requirements are met:
1) A home under construction is treated as a qualifying home for
up to 24 months provided that when ready for occupancy, the
house is used as a main or second home. The deduction was
allowed even when the home was never completed because
the taxpayers could not obtain financing. [Rose, TC Summary
Opinion 2011-117 (2011)]
2) If the construction period exceeds 24 months, the interest for
the remaining months is considered personal interest.
3) Loan proceeds must be directly traceable to home construction
expenses, including the purchase of a lot.
4) Before construction begins, the loan does not qualify as acquisition debt and interest incurred during that period is treated
generally as personal interest.
5) 90-day rule. A loan incurred within 90 days after construction
is complete may also qualify to the extent of construction
expenses made within the period starting 24 months before
completion of the house and ending on the date of the loan.
(Notice 88-74)
Timeshares
Homes owned under a time-sharing plan can be considered second homes for deducting interest expense. A time-sharing plan
is an arrangement between two or more people that limits each
person’s interest in the home or right to use it to a certain part of
the year. However, if any portion of the timeshare is rented to a
third party, the ability to claim a deduction for the personal portion
of the mortgage interest may be lost.
Boats, Mobile Homes and House Trailers
For the qualified residence interest deduction, a qualified home
includes a boat, mobile home, house trailer or similar property
that has sleeping, cooking and toilet facilities. However, local law
must allow for such use. A houseboat would not qualify if moored
at a marina where overnight sleeping is prohibited. Interest paid
on a boat or mobile home used on a transient basis generally is
not deductible for alternative minimum tax. See AMT for Individuals—Adjustments and Preferences (2014) on Page 12-14.
Prepaid Mortgage Interest
Mortgage interest prepaid in 2014 that fully accrues by January
15, 2015, may be included in Form 1098, box 1. However, this
prepaid interest is not deductible in 2014; it should be deducted
in 2015. (Pub. 936)
 Note: Some lenders apply prepaid amounts to both interest
and principal; others apply prepayments to principal only.
Reverse Mortgages
A reverse mortgage is used to convert home equity into cash. The
homeowner receives payments (as a line of credit, a lump sum,
monthly payments for a specified number of years, or payments
over his life). The amount received is a loan, so it is tax-free and
will not affect Social Security benefits.
When a reverse mortgage comes due, the lender recovers the
amount owed from the borrower (or the heirs).
Mortgage interest deduction. Mortgage interest is added to the
loan balance over the term of the loan, but is not deducted under
the personal residence interest rules until the loan is repaid.
Mortgage Insurance Premiums
 Expired Provision Alert: The deduction for mortgage insurance premiums expired December 31, 2013. Unless Congress
extends this provision, it will not be available for mortgage insurance premiums paid after 2013. This discussion is retained in the
event the provision is extended to years after 2013.
2014
For 2007–2013, mortgage insurance premiums paid or accrued
during the year in connection with acquisition debt on a taxpayer’s
primary or second home are deductible as residence interest. The
deduction phases out ratably by 10% for each $1,000 (or portion
thereof) by which the taxpayer’s AGI exceeds $100,000. Phaseout amounts are halved for married filing separately. Thus, it is not
available for taxpayers with AGI greater than $109,000 ($54,500
for MFS). Only amounts paid on mortgage insurance contracts
issued after 2006 qualify.
Charitable Contributions
See also IRS Pubs. 526 and 561 and
Donation Guides in Tab 3
Deductible Contributions
Includes money or property given to:
•Churches, synagogues, temples, mosques and other
religious organizations.
•Federal, state and local governments, if contribution
is solely for public purposes.
•Nonprofit schools, hospitals and volunteer fire companies.
•Public parks and recreation facilities.
•Public charities such as Salvation Army, Red Cross, CARE,
Goodwill Industries, United Way, Boy/Girl Scouts, Boys/Girls
Clubs of America, etc.
•War veterans’ groups.
Charitable travel. Travel expenses such as transportation, meals
and lodging are deductible if there is not a significant element of
personal pleasure, recreation or vacation in the travel. Car expenses can be deducted using actual cost or a standard mileage
rate of 14¢ per mile.
Court Case: Charitable deductions were allowed for the cost of lodging in deluxe
hotels while traveling on behalf of a charitable organization. These costs were
considered reasonable because the taxpayer was an important person in the
organization and to effectively perform his job, he needed to stay at or near
the hotel where the function was being held. (Cavalaris, TC Memo 1996-308)
Volunteer out-of-pocket expenses when serving a qualified
organization. For example, scout leaders can deduct the cost of
uniforms (and cleaning) that are worn when performing donated
services, but that are not suitable for everyday wear.
Text message. Contributions made by text message are deductible in the year the text message is sent if the contribution is
charged to the individual’s telephone or wireless account.
Credit card. Contributions charged to a bank credit card are deductible in the year the charge is made. (Rev. Rul. 78-38)
Delegate to a church convention. Deduct the unreimbursed expenses of attending. A person must be a delegate and not merely
attending on his own.
Exchange students. Deduct up to $50 per school month for
housing an exchange student (grade 12 or lower) sponsored by a
qualified organization. The student does not have to be a foreign
student as long as the student becomes a member of the taxpayer’s
household under a written agreement between the taxpayer and
the charitable organization.
Foster parents. If there is no profit or profit motive, deduct
expenses exceeding payments received from a charitable organization for providing support for qualified foster care individuals
placed in the home.
Canadian, Mexican and Israeli charities. Donations to certain
Canadian, Mexican and Israeli charities may be deductible under
an income tax treaty with that country. Special rules or limits may
apply. U.S. income tax treaties with these countries can be found
on the IRS website.
Typhoon Haiyan relief donations. Taxpayers who donated
money after March 25, 2014 and before April 15, 2014 for the
relief of victims in the Republic of the Philippines affected by the
November 8, 2013 typhoon can choose to claim the donation on
their 2013 rather than 2014 return.
Nondeductible Contributions
Money or property given to:
•Civic leagues, social and sports clubs, labor unions and chambers
of commerce.
•Foreign organizations (other than certain Canadian, Mexican
and Israeli charities).
•Groups that are run for personal profit.
•Groups whose purpose is to lobby for law changes.
•Homeowners’ associations.
•Individuals.
•Political groups or candidates for public office.
Cost of raffle, bingo or lottery tickets.
Dues, fees or bills paid to country clubs, lodges, fraternal orders or similar groups.
Tuition (secular or religious).
Value of blood given to a blood bank.
Value of time or services rendered by the taxpayer.
Rental value of a right to use property donated to charity, such
as the right to stay at a vacation home for one week. The entire
ownership interest in the property must be donated to charity to
make the contribution deductible.
Charitable distribution from IRA. See Qualified Charitable Distributions (QCDs) on Page 14-13.
Limits on Charitable Contribution
The deduction for charitable contributions cannot exceed 50%
of the taxpayer’s AGI. A reduced limit of 30% or 20% applies for
certain contributions.
æ Practice Tip: The deduction limit percentage for many charities is available online as part of the Exempt Organizations Select
Check tool at www.irs.gov.
Up to 50%-of-AGI limit. Donation of cash or property (other than
capital gain property) to a publicly supported charity or foundation
qualifying as a 50% limit organization.
Examples of 50% limit organizations: Churches, educational organizations, hospitals, medical research organizations, publicly supported organizations that receive a substantial amount of support
from the general public or governmental units, private operating
foundations, private nonoperating foundations that distribute 100%
of the contributions to qualified charities within 21/2 months after
the end of the tax year, private foundations that pool contributions
into a common fund and allow contributors to name the charities
to receive their gifts if the income is distributed within 21/2 months
after the end of the tax year.
Up to 30% of AGI limit:
•Donation of capital gain property to a 50% limit organization.
Property is capital gain property if its sale at FMV on the date of
the contribution would have resulted in long-term capital gain.
Exception: 30% limit does not apply if donor elects to deduct only
the property’s cost or other basis rather than its FMV.
•Donation of cash or property (other than capital gain property)
to any qualified organizations other than 50% limit organizations
(includes veterans’ organizations, fraternal societies, nonprofit
cemeteries, certain private nonoperating foundations).
Up to 20%-of-AGI limit. Donation of capital gain property to any
qualified organizations other than 50% limit organizations. For
multiple contributions subject to different limits, use the worksheet
in IRS Publication 526 to compute the deduction.
Five-Year Contribution Carryforward
Contributions that exceed the AGI limit in the current
year can be carried forward to each of the five succeeding years. Carryover contributions are subject to
the original percentage limits in the carryover years,
and are deducted after deducting allowable contributions for the current year. If there are carryovers from
two or more years, use the earlier year carryover first.
Contribution deductions disallowed due to NOL carryovers are
added to the unused NOL as additional NOL and no longer treated
as contributions [Reg. §1.170A-10(d)]
Standard deduction claimed. If the taxpayer claims the standard
deduction in any of the carryover years (including the contribution
year), the carryover amount is reduced by the amount that would
have been deductible if itemizing. (Reg. §1.170A-10)
Deceased spouse. Carryovers allocable to the excess contributions of a deceased spouse may only be claimed on the final
return of the deceased spouse, not by the surviving spouse. [Reg.
§1.170A-10(d)(4)(iii)]
Qualified Conservation Contributions
 Expired Provision Alert: The special rule discussed below for
qualified conservation contributions expired December 31, 2013.
Unless Congress extends this provision, it will not be available for
donations after 2013. This discussion is retained in the event the
provision is extended to years after 2013.
2014
For 2006–2013, the deduction for qualified conservation contributions was limited to 50% of AGI (100% of AGI for qualified farmers
and ranchers) minus the deduction for all other charitable contributions. Any excess amount is carried forward 15 years.
is
Contributions That Benefit the Taxpayer
Contributions that are made partly for goods or services provided
by the organization are deductible if:
1) The amount of the payment exceeds the FMV of goods and
services received and
2) The donor intends to make a payment in excess of the FMV
of goods and services.
Example: Anita makes a large contribution to a charity that has a history of
sponsoring a dinner-dance for donors making substantial contributions. The
charitable deduction is limited to amount of the donation less the FMV of the
anticipated dinner-dance even if the dance takes place in the following year.
Refused benefits. A donor can claim a full deduction if all benefits
are actively refused (such as checking off a refusal box on a form
sent by the charity). (Rev. Rul. 67-246)
Gifts of more than $75. If the donor receives some benefit, the
charity must provide a statement as to the deductible amount of
the contribution. The charity must make a “good faith estimate” of
the FMV of goods/services provided to the donor.
Token benefits. A donor can disregard benefits if either:
•The benefits received do not exceed the lesser of 2% of the
contribution or $104 (for 2014) or
•The gift is $52 or more and the benefit received bears the charity’s
name or logo and has an aggregate cost not more than $10.40
(for 2014).
Membership benefits. Certain benefits can be disregarded if the
annual payment is $75 or less. A payment of more than $75 can
be made if the organization does not require a larger payment to
receive these benefits. Disregarded benefits may include rights or
privileges that members can exercise frequently (such as free or
discounted admission and parking) or admission to member-only
events if the cost is $10.40 (for 2014) or less per person.
Tickets to college games. A payment made to a college or
university in exchange for a right to buy tickets to a sporting
event qualifies for a charitable deduction of 80% of the amount
paid. Any amount actually paid for tickets is not deductible. [Reg.
§1.170A-13(f)(14)]
Cash Donations—Substantiation
No deduction is allowed unless the taxpayer has either (1) bank
records (for example, a canceled check or account statement)
or (2) written acknowledgment from the charity documenting the
contribution’s amount and date [IRC §170(f)(17)]. This means that
donors who give cash will need to get written acknowledgement
from the charity to claim a deduction. Using a check for small
donations, rather than cash, may be preferable.
$250 or more. Charitable contributions of $250 or more in any
one day to any one organization must have written acknowledgment from the organization [IRC §170(f)(8)]. The acknowledgment
must be received by the earlier of the date the tax return is filed
for the contribution year or the extended due date for filing. It must
state whether the charitable organization provided any goods or
services in exchange for the contribution (and if so, an estimate
of the FMV of the goods or services provided). Payroll deduction
contributions: Employees can substantiate a payroll deduction of
$250 or more with (1) a Form W-2 or other document from the
employer showing payroll deduction and (2) a pledge card or other
document prepared by the charity.
Noncash Donations—Substantiation
General recordkeeping requirements for noncash
contributions:
1) Name of charitable organization.
2) Date and location of contribution.
3) Reasonably detailed description of contributed
property.
4) Fair market value and method of valuing the property.
5) Cost or other basis of the property if FMV must be reduced. See
Required Reductions to FMV—Donating Appreciated Property
on Page 5-14.
Specific requirements. See the Donations Substantiation Guide
on Page 3-7 for specific requirements based on the type and
amount of the donation.
Form 8283, Noncash Charitable Contributions. Must be filed if
the amount of noncash property donations is in excess of $500.
 Note: Special rules apply to donations of less than a taxpayer’s
entire interest in a property. See Publication 526, Charitable
Contributions.
Out-of-pocket expenses. An acknowledgment from the charity
is required if a volunteer claims a deduction for a single contribution of $250 or more in the form of out-of-pocket expenses.
The acknowledgement must contain a description of the service
provided and a statement about whether goods or services were
provided by the charity to reimburse the taxpayer for the expenses
incurred (including an estimate of the FMV of any goods or services provided). The charity must substantiate the type of services
performed (not dates or amounts of expenses).
Clothing and household items. No deduction is allowed for donating clothing or household items unless they are in good
used condition or better. Household items include furniture and
furnishings, electronics, appliances, linens and other similar items.
Exception: A deduction is allowed for a donation of an item of
clothing or a household item that is not in good used condition or
better if the deduction is more than $500 and a qualified appraisal
of it is included with the tax return.
Valuation
For guidelines on the value of donated goods, see the Donated
Goods Valuation Guide table on Page 3-6.
Appraisals
A written appraisal is required for charitable contributions of property for which the claimed value exceeds $5,000 if an income tax
deduction is claimed. Also, the recipient organization must file an
information return if it disposes of the property within two years of
receipt. See Notice 2006-96 for guidance on qualified appraisals
and qualified appraisers. Exception: Publicly traded securities do
not require written appraisal. (Nonpublicly traded securities must
be appraised if the claimed value is more than $10,000.)
Fees paid to determine the FMV of donated property are not
deductible as contributions. Claim them on Schedule A as miscellaneous deductions subject to 2%-of-AGI limitation.
Cars, Boats and Airplanes
For charitable contributions of motor vehicles in excess of $500,
the deduction amount depends on how the donated vehicle is used
by the charitable organization. These rules also apply to donations
of boats and airplanes.
•Outright sale. If the organization sells the vehicle without using it
significantly for charitable purposes or making material improvements, the deduction is generally limited to the gross proceeds from
the sale. When this general rule applies, the FMV of the donated
asset is irrelevant. The gross sale proceeds amount is reported on
line 4c of the Form 1098-C, Contributions of Motor Vehicles, Boats,
and Airplanes, provided to the donor (and to the IRS) by the charity.
•Transferred to needy individual. The sale-proceeds limitation
doesn’t apply if the charity sells or transfers the vehicle to a needy
individual for below FMV in furtherance of the organization’s
charitable purpose. In this case, the donor can generally deduct
the FMV of the vehicle as of the contribution date—even if FMV
exceeds the gross sale proceeds figure. The charity will indicate
when this exception applies by checking box 5b on Form 1098-C.
•Significant use or material improvements. The sale-proceeds
limitation also doesn’t apply if the charity keeps the donated
vehicle and uses it significantly for charitable purposes or makes
material improvements before ultimately selling it. In these cases,
the donor can generally deduct the FMV of the vehicle as of the
contribution date. The charity will indicate when one of these
exceptions applies by checking box 5a on Form 1098-C and
describing the significant use or material improvements on line
5c. (Notice 2005-44)
Form 1098-C required. The taxpayer cannot claim any deduction above $500 for a donated vehicle unless the recipient charity
provides an acknowledgment on Form 1098-C. The Form 1098-C
must be provided within 30 days of the sale (or within 30 days after
the donation if one of the exceptions explained above applies).
Donor must attach Copy B of Form 1098-C to their Form 1040.
(Notice 2005-44)
Required Reductions to FMV—
Donating Appreciated Property
The amount allowed as a deduction for donated property may be
less than FMV depending on the type of property involved.
Ordinary income property. The deduction is generally limited
to the adjusted basis of the property. This applies to property
that would generate ordinary income if sold at FMV on the date
of contribution. The allowable deduction is FMV reduced by the
amount that would be ordinary income or short-term capital gain
if sold at FMV.
Recapture income under Sections 617, 1245, 1250, 1252 and 1254
is also ordinary income for this purpose. Therefore, the deductible
amount is the asset’s FMV reduced by the amount of recapture
income that would be generated on the asset’s sale.
Capital gain property. Generally, the deduction is FMV for property that would generate long-term capital gain if sold at FMV on
the contribution date.
Exceptions: FMV must be reduced by any amount that would have
been long-term capital gain if the property were sold for FMV if:
•The property (other than qualified appreciated stock) is contributed to a private nonoperating foundation,
•The property is tangible personal property that is put to an unrelated use by the charity or
•The taxpayer elects to apply the 50%-of-AGI limit rather than the
30%-of-AGI limit that normally applies to donations of capital gain
property.
Qualified appreciated stock is corporate stock
that is long-term capital gain property for which
market quotations are readily available on an
established securities market. Quotations from
a brokerage firm do not meet this test (Ltr. Rul.
199915053). Qualified appreciated stock does not include any
stock if the taxpayer and his family have contributed (considering
all prior contributions) more than 10% of the value the corporation’s
outstanding stock. [IRC §170(e)(5)]
 Note: Shares in open-ended mutual funds are treated as qualified appreciated stock if quotations are readily available in general
circulation newspapers. (Ltr. Rul. 199925029)
Unrelated-use property. If tangible personal property is put to
an unrelated use by the charity, such as donating a painting to a
church that then sells it, the deduction is limited to the property’s
adjusted basis. Fair market value would be allowed for the deduction if the taxpayer obtains a letter from the charity stating its
intention to use the gift in a way that is related to the organization’s
charitable purpose. If the deduction for the property is more than
$5,000, the charity must agree in writing on Form 8283 to notify
the IRS if the property is sold within two years of the donation.
Donating Appreciated Property
Examples of Ordinary Income
Property—Deduct Basis
• Inventory.
• Donor’s creative works.
• Stocks and other capital assets held
one year or less.
• Business-use property to the extent it
would generate ordinary income if sold
(such as depreciation recapture).
Examples of Capital Gain
Property—Deduct FMV
• Land held more than a year.
• Stocks and other capital assets
held more than a year.
• Jewelry, artwork, etc. held more
than one year.
@ Strategy: Capital gain property. Donate property and deduct
FMV (reduced by any allowable depreciation). Even though appreciation of the property is not reported as income, a deduction
for FMV is allowed.
@ Strategy: Depreciated business or investment property. Sell
the asset and donate the proceeds. This generates a deductible
loss from the sale and a deduction for a charitable contribution. If
the property itself is donated, the deduction is limited to its FMV
and no capital loss is allowed.
 Line 15: Insurance. Deduct the following business insurance
premiums (not including any amounts credited to a reserve for
self-insurance):
•Fire, theft, flood or other casualty insurance.
•Credit insurance to cover losses from unpaid debts.
•Overhead insurance that pays for business overhead expenses
when the sole proprietor is unable to work due to
sickness or disability, but not premiums paid for a
policy that pays for lost earnings due to sickness or disability.
•Liability and malpractice insurance.
•Business interruption insurance for loss of profits
due to a fire or other cause which shuts down the
business operations.
•Workers’ compensation insurance.
Line 16: Interest. Mortgage interest on business real property
(other than a principal residence) is deducted on line 16a. Interest expenses for the business use of a principal residence are
deducted on Form 8829 (see Business Use of Home on Page 6-9).
All other business interest paid is deducted on line 16b.
Interest on auto loans. An individual engaged in a trade or business, other than as an employee, may deduct the business-use
percentage of interest paid on a vehicle loan (Reg. §1.163-8T).
This deduction is allowed in addition to the business standard
mileage rate.
Interest tracing rules. If borrowed funds (for example, vehicle
loans or credit card charges) are used for business expenses, the
business-use portion of interest paid may be deducted if tracing
rules are followed. See Interest Tracing on Page 5-6.
Interest on income tax owed. Interest on income tax assessed
on Form 1040 is not deductible even if the tax due is related to
Schedule C. [Temp. Reg. §1.163-9T(b)(2)(i)(A)]
Interest capitalization. Under the uniform capitalization (UNICAP)
rules of Section 263A, certain interest payments must be added
to the cost basis of property that is produced. See Capitalization
of Interest in Tab L of the Small Business Quickfinder® Handbook.
Line 17: Legal and professional services. Fees such as those
charged by accountants, that are ordinary and necessary expenses
of operating a business are deductible on line 17. However, legal
and other fees paid to acquire business assets must be added to
the basis of the asset and depreciated on Form 4562 (line 13 of
Schedule C). Tax preparation fees for Schedules C, E and F are
deductible as business expenses. (Rev. Rul. 92-29)
Line 18: Office expenses. Deduct costs such as office supplies
and postage.
Line 19: Pension and profit-sharing plans. Enter contributions to pension, profit-sharing or annuity plans, or plans for the
benefit of employees. Any amount contributed for the benefit of
the sole proprietor must be entered on line 28 of Form 1040, not
Schedule C.
Line 20: Rent or lease. Use line 20a for vehicle, machinery and
equipment rental expenses. Use line 20b for other rental expenses
(that is, office/building rent). Deduct business use of home rent on
Form 8829 (line 30, Schedule C). See Tab 11 for inclusion amounts
that may reduce the lease deduction for vehicles.
Lease or purchase. In general, lease payments are deductible;
loan payments are not. The cost of purchasing a business asset is
recovered through depreciation and, if financed, interest expense
deductions. Because of this rule, some lease agreements are
treated as purchases for tax. If the asset can be purchased for
a nominal amount (a fraction of its FMV) at the end of the lease
term, the lease is actually a conditional sales contract and the lease
payments must be treated as loan payments. See Revenue Rul-
ing 55-540 and IRS Publication on 535 for criteria for determining
whether an agreement is a lease or conditional sales contract.
Line 21: Repairs and maintenance. Deduct the cost of repairs
and maintenance, including supplies, labor and other items that
are not required to be capitalized. See Repairs vs. Capitalized
Improvements on Page 10-3 for more information.
Line 22: Supplies. Deduct the cost of supplies that are not
included in inventory costs. Generally, deduct the cost of nonincidental supplies only to the extent the supplies are consumed or
used during the tax year. Incidental supplies (kept on hand with no
inventory or record of use) are deductible in the year purchased,
provided that method clearly reflects income.
Line 23: Taxes and licenses. Deduct:
•Employer’s share of FICA taxes. Cash-basis employers deduct
their share of payroll taxes when the funds are paid to the government (Rev. Rul. 80-164). Accrual-basis employers can use
a safe harbor accounting method that allows them to deduct
their payroll taxes in the year that (1) all events have occurred
to establish that the related compensation liability exists and
(2) the compensation liability’s amount can be determined with
reasonable accuracy. (Rev. Proc. 2008-25)
N Observation: The employee’s share of FICA tax and FIT
withheld are deducted on line 26 as wages.
•State and federal unemployment taxes.
•Federal highway use tax.
•Real estate and personal property taxes on business assets.
•State taxes on gross income (vs. net income) directly attributable
to a trade or business. (Rev. Rul. 70-40)
Do not use line 23 for the following taxes:
•Federal income taxes (nondeductible).
•State and local income taxes (deductible
as an itemized deduction on Schedule A).
•Sales tax on purchase of business assets
(add to cost basis of asset).
•Taxes assessed to pay for improvements, such as paving and
sewers (add to cost basis of asset).
•Business use of home real estate taxes.
Sales taxes collected and paid over to the state or local government
are not deductible unless the sales taxes collected are included
in gross income.
Line 24a: Travel. Enter business travel expenses other than
meals and entertainment. Expenses in connection with work away
from home that exceeds (or is reasonably expected to exceed)
one year are not deductible. See Tab 9 for more information on
travel expenses.
Line 24b: Meals and entertainment. Enter deductible business
meals and entertainment expenses, including
meals while traveling away from home.
Per diem. Instead of using actual expenses
for meals and incidental expenses (M&IE),
per diem amounts up to the IRS-approved per
diem rates may be deducted. See Per Diem
Rates on Page 9-7.
50% deduction limit. In general, a deduction for business meals
and entertainment is limited to 50% of the actual cost. When the
per diem meal rate (also called the standard meal allowance) is
used in place of actual expenses, the deduction is reduced by
50% of the per diem meal amount. See 50% Limit on Page 9-2
for exceptions to the 50% deduction limit rule.
Department of Transportation (DOT) workers. The deduction for
meals is 80% for workers subject to the DOT hours of service
limitations [IRC §274(n)(3)]. The DOT federal hours of service rule
applies to workers who are limited in the number of hours they can
work each day, such as pilots, truck drivers and railroad workers.
Line 25: Utilities. Deduct trade or business utility expenses on
line 25. Deduct business use of home utility expenses on Form
8829.
Telephone. If the taxpayer’s home phone is
used for business purposes, do not deduct the
base rate (including taxes) of the first phone
line (land line) into the house. Any additional
costs incurred for business that exceed the base
rate are deductible [IRC §262(b)]. Examples of
deductible telephone expenses: The cost of any
business long distance phone calls, the cost of a second line into
the house used for business only.
Line 26: Wages. Enter gross wages minus (1) employment credits claimed and (2) any wages deducted elsewhere on Schedule
C (such as wages included in cost of goods sold). Do not count
payments made to the sole proprietor as wages. These payments
are not deducted nor are they recognized as income.
Gross wages include the employee taxes withheld (federal, state
and FICA taxes) but do not include the employer’s share of payroll
taxes (FICA, FUTA and state unemployment taxes). (Report the
employer’s share of payroll taxes on line 23.)
 Law Change Alert: Several credits that reduced the amount
of wages deducted on line 26 expired in 2013, but they could be
extended to 2014. These include:
There are several
•Work Opportunity Credit (Form 5884).
•Empowerment Zone Employment Credit (Form 8844).
•Indian Employment Credit (Form 8845).
•Credit for Employer Differential Wage Payments (Form 8932).
See Tab I of the Small Business Quickfinder® Handbook for employer reporting (Forms W-2 and W-3) requirements.
Line 27: Other expenses. Use Part V of Schedule C to enter
all ordinary and necessary business expenses not deducted
elsewhere. List the type and amount of each category of expense
separately. Include any amortization from Form 4562. Carry the
total to line 27a.
Charitable contributions. A deduction for charitable contributions
is not allowed on Schedule C. Charitable contributions made by a
sole proprietor are deducted on Schedule A. Exception: A business
purpose for the contribution may convert the contribution into a
business expense deductible on Schedule C. For example, the
charity provides services to the business (such as advertising) in
exchange for the contribution, or the contributions are designed
to solicit business from the charity. [Marquis, 49 TC 695 (1968)]
Line 30: Business use of home expenses. See Business Use
of Home on Page 6-9.
Line 31: Net profit or loss. If line 31 shows a loss, the box
on line 32a or 32b must be checked. If line 32b is checked, Form
6198, At-Risk Limitations, must be completed and attached to
Form 1040. See At-Risk Rules on Page 8-8.
U Caution: If a profit is not made in at least three out of five
years, IRS may question if the activity is really a for-profit activity.
If it is a hobby, losses are not allowed to offset other income. See
Business vs. Hobby Losses on Page 6-11.
Part III—Cost of Goods Sold
Lines 33–42. Generally, inventories must be used when the
production, purchase or sale of merchandise is an incomeproducing factor.
Most common examples of inventory items:
•Finished products.
•Merchandise or stock in trade.
•Raw materials.
•Supplies that become a part of the item intended for sale.
•Work in process.
Inventory valuation methods. A business
must have a method for identifying items included in inventory and for valuing each item.
The same method must be used from year to
year. There are three basic methods used to
identify inventory:
1) Specific identification method matches each specific inventory
item with its actual cost of acquisition. The value of closing
inventory is its actual cost.
2) First-in first-out (FIFO) method assumes items first purchased
or produced are the first items to be sold. Inventory items on
hand at the end of the year are valued as the items most recently purchased or produced. Under FIFO the value of closing
inventory can be either its cost, or the lower of cost or market.
Under the lower of cost or market method, the cost of each
inventory item is compared to its FMV. The lower of the two is
then used to determine its value.
3) Last-in first-out (LIFO) method assumes items purchased or
produced last are the first to be sold or removed from inventory. To use LIFO, Form 970, Application to Use LIFO Inventory
Method, must be filed with the IRS.
Cost of inventory on hand at the beginning of the year,
+ Cost of inventory acquired during the year (merchandise, raw materials, supplies, etc.),
+ Shipping costs to receive inventory items but not the
cost of shipping the finished product to customers (the
cost of shipping merchandise to customers is deducted
as an operating expense on line 27a of Schedule C),
+ Direct cost of labor for workers that produce inventory,
+ Depreciation on machinery used to produce inventory,
+ Allocable portion of most indirect costs that benefit or
are incurred because of production or resale activities,
if required (see UNICAP information below),
– Cost of inventory items withdrawn for personal use,
– Cost of inventory on hand at the end of the year
= Cost of goods sold deduction.
N Observation: Small businesses that maintain inventory but
use the cash method under either the $1 million or $10 million
gross receipts exceptions must complete Part III to account for
inventoriable items in the same manner as nonincidental materials and supplies. Report on line 41 the portion of raw materials
and merchandise purchased for resale on hand at year-end (and
included in the amount on line 40).
Uniform capitalization (UNICAP) rules. The Section
263A UNICAP rules require some businesses to
capitalize certain costs that benefit or are incurred
because of production or resale activities. Costs
are included in the basis of property produced or
acquired for resale, rather than deducted as current
operating expenses. These costs are recovered
through depreciation, amortization or the cost of
goods sold deduction when the property is sold or otherwise disposed of.
Exceptions to the UNICAP rules include:
•Resellers of personal property with average annual gross receipts
of $10 million or less (small resellers).
•The costs of certain producers who use a simplified production
method and whose total indirect costs are $200,000 or less. [Reg.
§1.263A-2(b)(3)(iv)]
Business Use of Vehicles—75% Rule
Farmers can claim 75% business use for vehicles used primarily
for farming business instead of keeping records of business mileage. [Temp. Reg. §1.274-6T(b)]
Once this method is elected, it must be used in future years. Likewise, if the standard mileage rate or actual expenses method is
elected, the farmer cannot revert to the 75% rule.
Conservation Expenses
A farmer may elect to deduct or capitalize certain expenses for soil
and water conservation or to prevent farmland erosion (IRC §175).
The election must be made in the first year that the farmer pays or
incurs such expenditures, and is binding for all subsequent years.
Conservation expenses must be allocated if they benefit both land
used for farming and land that does not qualify.
Deductible conservation expenses. Water and soil conservation expenses are deductible for land used currently or in the past
for farming by the farmer or the farmer’s tenant. Water and soil
conservation expenses may be deductible if they are consistent
with a plan approved by the USDA’s Soil Conservation Service or
a comparable state agency. The deduction cannot exceed 25% of
gross income from farming. Deductions not allowed in the current
year may be carried forward to following years, subject to the 25%
limitation. Deductible conservation expenses include:
•Treatment or movement of earth (grading, leveling, terracing,
conditioning, contour furrowing, restoration of fertility).
•Eradication of brush.
•Planting windbreaks.
•Construction, control and protection of irrigation and drainage
ditches, diversion channels, earthen dams, outlets, ponds.
 Notes:
•Expenses to drain or fill wetlands are not deductible.
•Expenses to maintain completed soil and water conservation
structures (for example, the removal of drainage ditch sediment)
are deductible farm business expenses.
•Any cost-sharing payments received for deducted expenses
cannot be excluded.
Depreciable conservation costs. Expenses for nonearthen items
of masonry or concrete must be capitalized. Depreciable conservation costs include: materials, supplies, wages, fuel, hauling and
moving dirt for structures or facilities such as tanks, reservoirs,
pipes, conduits, canals, dams, wells or pumps made of masonry,
concrete, tile, metal or wood. Exception: Part of an
assessment for depreciable property levied
against a farm by a soil and water conservation or drainage district may be deductible as
a conservation expense. See Publication 225
for details.
Land clearing versus soil and water conservation. Land clearing prepares the land for farming, while soil and water conservation
preserves the quality of land being farmed. Expenses for land
clearing are added to the basis of the land and are not deductible.
Land clearing expenses include:
•Cutting trees, blasting stumps, burning residual undergrowth.
•Leveling land for planting or irrigation.
•Removing minerals such as salt from the soil.
•Diverting a stream to another watercourse.
•Draining and filling a swamp or marsh.
Section 179 Deduction—Farm Property
See Section 179 Deduction on Page 10-9 for general rules. Also
see Section 179 Limit for Heavy Vehicles on Page 11-3.
Farm property that qualifies for a Section 179 deduction
includes:
•Tangible personal property such as machinery and equipment,
milk tanks, automatic feeders, barn cleaners and office equipment.
•Livestock (horses, cattle, hogs, sheep, goats and mink and other
fur bearing animals).
•Certain facilities used for the bulk storage of fungible commodities. This includes grain bins used in connection with the production of grain or livestock.
•Single-purpose agricultural and horticultural structures.
•Vineyard planting costs, including land preparation (other than
nondepreciable land costs). (CCA 201234024)
Single-purpose agricultural structure. Building or enclosure
specifically designed, constructed and used for housing, raising
and feeding a particular type of livestock (including poultry but not
horses), their produce and the equipment necessary for feeding
and caring for them [IRC §168(i)(13)]. This includes structures
used to:
•Breed chickens or hogs.
•Produce milk from dairy cattle.
•Produce feeder cattle or pigs, broiler chickens or eggs.
Single-purpose horticultural structure:
1) A greenhouse specifically designed, constructed and used for
the commercial production of plants or
2) A structure specifically designed, constructed and used for
commercial mushroom production.
Depreciating Farm Assets
Three-, five-, seven- and 10-year MACRS property used in a
farming business must be depreciated using the 150% decliningbalance or straight-line method. See MACRS Recovery Periods
(2014) on Page 10-1.
Estimated Tax
No penalty for failing to make estimated tax payments for 2014 if
at least two-thirds of total gross income was from farming or fishing
during 2012 or 2013 and Form 1040 is filed and all the tax due is
paid by March 2, 2015. See also Underpayment/Estimated Tax
Penalty on Page 16-5.
If a farmer or fisherman must pay 2014 estimated tax, only one annual payment is required by January 15, 2015, using special rules
to figure the amount of the payment. See Form 2210-F for details.
Farming gross income. Determine if at least two-thirds of total
gross income is from farming or fishing as follows:
•Gross income from farming includes:
–Gross farm income from Schedule F.
–Gross farm rental income from Form 4835.
–Share of gross farm income from a partnership, S corporation,
estate or trust.
–Gains from the sale of livestock used for draft, breeding, sport
or dairy purposes reported on Form 4797.
•Gross income from farming does not include:
–Wages received as a farm employee.
–Gains from sales of farmland and depreciable farm equipment.
–Income received from contract grain harvesting and hauling
with workers and machines furnished by the taxpayer.
Form T (Timber)—Forest Activities Schedule
Generally, Form T should be filed when standing timber is sold or
cut, or when there are other timber transactions.
Form T must be completed to claim a deduction for timber depletion, to elect to treat the cutting of timber as a sale or exchange
under Section 631(a), or to report outright sales of timber under
Section 631(b).
Sale or exchange of timber:
•Timber sold primarily for sale to customer. Gain or loss is treated
as ordinary income subject to SE tax. Farmers who cut and sell
timber on their land in the form of logs, firewood or pulpwood
report income and expenses as ordinary income and expenses
on Schedule F.
•Standing timber sold from investment property. Treated as a
capital gain or loss, reported on Form 8949.
•Outright sales of timber. Outright sales of timber by landowners
qualify for capital gains treatment if the timber was held for more
than one year before the date of disposal.
Generally, cutting of timber results in no gain or loss until sold or
exchanged. Exception: Under Section 631(a) taxpayers
can elect to treat the cutting of timber as a sale under
Section 1231 in the year it is cut. To qualify for the Section 631(a) election, the timber must be cut for sale or for
use in the taxpayer’s trade or business, and the taxpayer
must own or hold a right to cut timber for more than one
year before the timber is cut.
Timber depletion. The depletion deduction for timber
must be calculated using cost depletion. The depletion
is taken in the year of sale or other disposition of the
products cut from the timber, unless the taxpayer elects to treat the
cutting of timber as a sale or exchange. The depletion deduction is
limited by the adjusted basis of the timber. The adjusted basis for
depletion cannot include the residual value of land and improvements at the end of operations. [Reg. §1.612-1(b)(1)]
Example: Samuel purchases a timber tract for $160,000. The residual value
of the land at the time of purchase, assuming all timber has been cut, equals
$100,000. The depletable basis of the timber for cost depletion is $60,000
($160,000 – $100,000). Samuel determines that the standing timber will produce 1,000 units when cut. Samuel’s depletion per unit equals $60 ($60,000
÷ 1,000). If Samuel sold 300 units during the year, his depletion allowance
would be $18,000 (300 × $60).
Domestic Producer
Deduction (DPD)
Form 8903
The DPD is 9% of the lesser of the business’s:
1) Qualified production activities income or
2) Taxable income (AGI for individual taxpayers) determined
without regard to the DPD.
The DPD cannot exceed 50% of the wages paid and reported on
Form W-2 by the business for the year (and allocable to domestic
production gross receipts).
Oil and gas activities. Individuals with oil-related qualified production activities income must reduce their DPD by 3% of the
least of their (1) oil-related qualified production activities income,
(2) qualified production activities income or (3) AGI (determined
without regard to the DPD). [IRC §199(d)(9)]
Oil-related qualified production activities income is qualified production activities income attributable to the production, refining,
processing, transportation or distribution of oil, gas or any primary
product thereof.
Qualified Production Activities Income
To determine the net income that qualifies for the 9% deduction,
the taxpayer’s receipts must be divided into those from eligible
activities (domestic production gross receipts or DPGR) and nonDPGR. Then, the taxpayer’s expenses are allocated between the
two categories of income. The DPGR less allocable expenses
equals qualified production activities income.
Eligible activities. The following activities generate DPGR if
performed in the U.S.: [IRC §199(c)(4)]
• Manufacture, production, growth or extraction of:
–Tangible personal property (for example, clothing, goods,
food, agricultural products).
–Computer software.
–Sound recordings.
•Certain film production.
•Production of electricity, natural gas or potable water.
•Construction or substantial renovation of residential and commercial buildings and infrastructure by taxpayers engaged in the
construction business.
•Engineering and architectural services performed by a taxpayer
engaged in the business of performing engineering or architec2014
ture.
N Observation: While most U.S. farming activities will generate
DPGR, income from custom farming if the farmer does not have
the benefits and burden of ownership of the property is not DPGR.
 Expired Provision Alert: For 2006–2013, qualified production
activities performed in Puerto Rico are included in the domestic
production gross receipts calculation as long as the activity in
Puerto Rico was subject to U.S. tax. This provision is not available
for 2014 unless Congress extends it.
Allocating costs. There are three methods for allocating costs to
DPGR (that is, income that qualifies for the DPD) and non-DPGR.
[Reg. §1.199-4]
Small business simplified overall method. Allocate all deductions
(including cost of goods sold) and losses between DPGR and nonDPGR based on relative gross receipts. Available to:
•Taxpayers with average gross receipts under $5 million.
•Taxpayers with average gross receipts of $10 million or less, if
they qualify to use the cash method under Revenue Procedure
2002-28.
•Farmers not required to use the accrual method.
Simplified deduction method. Use gross receipts to allocate all
costs and expenses except cost of goods sold. Cost of goods sold
must be specifically traced to DPGR and non-DPGR. Available to
taxpayers with average annual gross receipts of $100 million or
less or total assets of $10 million or less at the end of the year.
Section 861 method. Deductions are allocated to DPGR using
the rules under Section 861 for allocating deductions to foreign
income. This is the most complex method because it requires
tracing each cost to income.
S Shareholders and Partners
The DPD is determined at the shareholder or partner level so taxpayers should get the information from the S corporation or partnership Schedule K-1. Eligible small S corporations and partnerships
can choose to compute qualified production activities income and
Form W-2 wages at the entity level and allocate those amounts
to the shareholders or partners, who then report the amounts on
lines 7 and 17 of Form 8903.
—End of Tab 6—
28% Rate Gain
Collectibles gain or loss. A collectibles gain (loss) is any longterm gain or deductible long-term loss from the sale or exchange
of a collectible that is a capital asset. Collectibles include works
of art, rugs, antiques, metals (such as gold, silver and platinum
bullion), gems, stamps, coins, alcoholic beverages and certain
other tangible property. Also include any gain (but not loss) from
the sale or exchange of an interest in a partnership, S corporation
or trust held for more than one year and attributable to unrealized
appreciation of collectibles.
Qualified small business stock. Generally, up to 50% (60%
for certain empowerment zone business stock) of the gain from
the sale of Section 1202 qualified small business stock (QSBS)
is excluded from gross income if held for more than five years.
The taxable portion of the gain is included in income as long-term
capital gain subject to the 28% rate.
•QSBS acquired February 18, 2009–September 27, 2010. A 75%
gain exclusion rate may apply to QSBS (including QSBS stock in
certain empowerment zone businesses) acquired during this time
period. If held for more than five years and sold after February
19, 2014, such QSBS qualifies for the 75% exclusion. 2014
•QSBS acquired September 28, 2010–December 31, 2013. A
100% gain exclusion may apply to QSBS acquired during this
time period. However, the 100% gain exclusion will not apply to
2014 sales since the five-year holding period will not be met.
Gain from the sale of QSBS held over six months may be rolled
over by acquiring the stock of another qualified small business
within 60 days. If a partnership or S corporation sells such stock
and does not elect to defer the gain on the sale, a non-corporate
partner or shareholder can purchase replacement stock within 60
days of the date of the sale and elect to defer his distributive share
of the pass-through entity’s gain. (IRC §1045)
See AMT for Individuals—Adjustments and Preferences (2014)
on Page 12-14 for AMT rules on QSBS. Also see Small Business
Stock in Tab C in the Small Business Quickfinder® Handbook.
Related-Party Transactions
In general, a loss on the sale of property between related parties
is not deductible (IRC §267). If the property is later sold to an unrelated party, gain is recognized only to the extent that it exceeds
the loss not allowed from the previous transfer.
Example: Colin sells stock with a cost basis of $10,000 to his brother Finn for
$7,600. Colin’s $2,400 loss is not deductible. Finn later sells the same stock
to an unrelated person for $10,500. Although Finn has a gain of $2,900, his
taxable gain is only $500, the amount the gain exceeds Colin’s unallowed loss.
If the property is later sold to an unrelated party at a loss, the loss
disallowed to the related party cannot be recognized.
Definition. A related party is a family member who is a brother or
sister (whether by whole or half blood), spouse, ancestor (parent,
grandparent, etc.) or lineal descendant (child, grandchild, etc.) of
a taxpayer. A cousin, aunt, uncle, nephew, niece, stepchild, stepparent or in-law is not a related party for this purpose.
Deceased Spouse’s Capital Loss Carryover
A surviving spouse cannot claim a deceased spouse’s capital loss
carryover from joint return years (Ltr. Rul. 8510053). The annual
$3,000 net capital loss limitation applies to the final Form 1040
of the deceased taxpayer (if a joint return is filed). Any remaining
capital losses allocable to the deceased spouse are lost and cannot
be carried over to the surviving spouse’s Form 1040, the Form 1041
filed by the decedent’s estate or to any other beneficiary’s return.
 Strategy: In Letter Ruling 8510053, the property sold was the
decedent spouse’s separate property. If the property was owned
jointly by decedent and surviving spouse or owned by a decedent
and surviving spouse residing in a community property state at
the time of decedent’s death, the survivor would be entitled to half
the loss carryforward.
Revised Form 1099-B
For 2014, the Form 1099-B has been redesigned to conform to the
Form 8949 box numbers. Also, a new box at the top of the form
will be used to enter one of the following codes:
•Code A. A short-term transaction for which the cost or other basis
is being reported to the IRS. The recipient reports it on Schedule
D, line 1a or on Form 8949 with box A checked.
•Code B. A short-term transaction for which the cost or other basis
is not being reported to the IRS. The recipient reports it on Form
8949 with box B checked.
•Code D. A long-term transaction for which the cost or other basis
is being reported to the IRS. The recipient reports it on Schedule
D, line 8a or on Form 8949 with box D checked.
•Code E. A long-term transaction for which the cost or other basis
is not being reported to the IRS. The recipient reports it on Form
8949 with box E checked.
•Code X. Payers use this code if they cannot determine whether
the recipient should check box B or box E on Form 8949 because
the holding period is unknown.
Schedule D/Form 8949 Reporting Tips
1) Totals for short-term and long-term transactions reported on Form
1099-B for which basis was reported to the IRS and for which the
taxpayer has no adjustments can be reported directly on Schedule
D, lines 1a (short-term) and 8a (long-term). Note: Taxpayers can
choose to report these transactions on Form 8949.
2) All other sales and dispositions of capital assets are reported
on Form 8949 and the totals carried to Schedule D.
3) Report a sale of a principal residence only if required (see Sale
of Residence on Page 7-15).
4) Stock ticker symbols and abbreviations can be used to describe
property as long as they are based on the property description
shown on Form 1099-B or Form 1099-S (or substitute statement).
5) Each capital gain transaction must be reported separately on
Form 8949. Do not enter “available upon request” and summary
totals. Broker-provided statements that include the detailed
information may be attached instead of reporting each transaction. See the Form 8949 instructions.
6) If the taxpayer sells a block of stock (or similar property) purchased at various times, he may enter “VARIOUS” in the column
for “date acquired.”
7) If the property sold was inherited, enter “INHERITED” in column
b for the date acquired. However, if the property was inherited
from someone who died in 2010 and the executor elected carryover basis, enter “INH-2010” in column a with the property
description and see Publication 4895 for additional instructions
on how to report the sale.
8) If adjustments to gain or loss are required, report on Form 8949
the reason for and amount of the adjustment. See Reporting
Capital Gains and Losses—Form 8949 on Page 3-12.
9) Taxpayers with any net capital gains subject to the 25% or the
28% rates must use the Schedule D Tax Worksheets in the
Schedule D instructions.
•The net gain subject to the 25% rate (unrecaptured Section
1250 gain) is reported on line 19 of Schedule D.
•The net gain subject to the 28% rate is reported on line 18 of
Schedule D.
æ Practice Tip: Taxpayers who consent to paperless reporting
from their broker may not get their Form 1099-B in the mail but
instead, must go to the broker’s website to access their form. Tax
preparers may need to remind clients of this option if they do not
have their Form 1099-B (or other Forms 1099).
Stocks and Other Securities
See also IRS Pub. 550
Reporting Basis When Stock is Sold
There are two methods for identifying shares of stock sold when
taxpayers sell less than their entire holding in a particular stock:
[Reg. §1.1012-1(c)]
•First-In, First-Out (FIFO) method. Under the FIFO method, if the
stock or securities have been acquired on different dates or at
different prices and the taxpayer does not or cannot identify the
specific shares sold, they are considered to be sold in the order
they were purchased, beginning with the earliest.
•Specific identification method. If the taxpayer chooses to use
the specific identification method and specifies to the broker the
shares sold, the basis and holding period of those shares is used
in computing the character (short-term or long-term) and amount
of the gain or loss.
 Note: The average basis method is available for mutual fund
shares but is not available for corporate stock [except for shares
acquired through a dividend reinvestment plan (DRIP) after 2010].
See Figuring Basis on Page 7-9 for information on the average
basis method for mutual fund shares.
Basis Alternatives (2014)
Type of Security
or Shares
Corporate stock
Mutual fund
Dividend
Reinvestment
Plan (DRIP) stock
Exchange traded
fund (ETF)
First-In, FirstOut (FIFO)
X
X
Specific
Identification
X
X
X
X
X2
X
X
X3
Average Basis1
–
X
Computed using the single-category method. The double-category method for
mutual fund shares—which divided shares between short-term and long-term
holdings—was eliminated April 1, 2011.
2
Available for shares acquired after 2010.
3
Provided the ETF is structured as a regulated investment company (RIC).
1
Form 1099-B. Brokers must show in box 1e of Form 1099-B the
cost or other basis of the following so-called covered securities
when sold: (1) corporate stock acquired after 2010, (2) mutual fund
shares, DRIP stock and ETF shares acquired after 2011 and (3)
certain debt instruments, options and futures contracts acquired
after 2013. The basis in securities sold in 2014 but acquired before
those dates is not required to be reported on Form 1099-B.
 Note: For stock, brokers generally must use the FIFO method
when reporting basis, but can choose a method (FIFO, average
basis, or specific identification) for mutual fund, DRIP and ETF
shares. However, taxpayers can instruct brokers to use any permissible method.
Worthless Securities
Stocks, stock rights and bonds (other than those held by a securities
dealer) that became completely worthless during the year are treated
as though they were sold on the last day of the year [IRC §165(g)].
This will affect whether the capital loss is long- or short-term.
Wash Sales
A wash sale occurs if a taxpayer sells stock or securities at a loss
and, within 30 days before or after the sale, directly or
indirectly: (IRC §1091)
•Buys substantially identical stock or securities,
•Acquires substantially identical stock or securities in
a fully taxable trade or
•Enters into a contract or option to acquire substantially identical stock or securities.
The loss from a wash sale is not deducted. Instead,
the basis of the substantially identical property is increased by
the amount of the disallowed loss. The holding period of the new
stock includes that of the stock sold.
Example: Vern buys 100 shares of Dingdong stock for $1,000. Vern sells these
shares for $750 and within 30 days from the sale he acquires 100 shares of
the same stock for $800. Because Vern bought substantially identical stock
within 30 days of the sale, he cannot deduct the $250 loss. The $250 disallowed loss is added to the basis of the new shares. The new shares have a
basis of $1,050 ($800 + $250).
U Caution: Buying stock in a taxpayer’s traditional IRA can cause
a loss sustained by that taxpayer on stock held outside the IRA
to be subject to the wash sale rules. The taxpayer’s basis in the
IRA is not increased by the amount of the disallowed loss. (Rev.
Rul. 2008-5)
If the number of shares of substantially identical stock purchased
is less than the number of shares sold, determine the particular
shares of stock to which the wash sale rules apply. Match the
shares of stock sold with an equal number, up to the total of the
identical shares bought. Match the shares in the same order as
they were acquired.
Example: Theodore buys 100 shares of ChopShop stock on September 16,
2013 for $5,000. On December 23, 2013, he buys 25 more shares for $1,125.
On January 6, 2014, he sells the 100 shares purchased in September for
$4,000. Theodore has a $1,000 loss on the sale. However, because 25 shares
of substantially identical stock were purchased within 30 days before the sale,
he cannot deduct the loss on 25 shares ($250). He can deduct the loss on the
other 75 shares ($750). The basis of the 25 shares bought on December 23,
2013 is increased by the $250 nondeductible loss to $1,375 ($1,125 + $250).
How to report. Report a wash sale on Form 8949 (Part I or II,
depending on holding period). Show the full amount of the loss
and the adjustment. Enter code “W” in column f.
æ Practice Tip: Brokers must indicate a wash sale
by entering code “W” in box 1f of Form 1099-B and
entering the disallowed loss in box 1g if the sale and
purchase occurred within the same account. Brokers
can, but are not required to report other wash sales.
Therefore, a taxpayer may incur wash sales in addition
to those reported on Form 1099-B.
Return of Capital or Principal
Corporations, mutual funds and REITS may pay out amounts
called returns of capital or returns of principal. These amounts are
nontaxable to the extent of the taxpayer’s basis in the investment
and reduce that basis.
The payments should be reported on Form 1099-DIV (box 3) and
are only reported on the taxpayer’s return after the taxpayer’s stock
basis has been reduced to zero. Report the amount in excess of
basis on Form 8949 (Part I or II, depending on stock’s holding period) and enter “Nondividend Distribution Exceeding Basis” along
with the company’s name in Column a. (Pub. 550)
Converting a Vacation or Rental Property to
a Principal Residence
Gain attributable to a period of nonqualified use cannot be excluded [IRC §121(b)(5)]. This means that a portion of the gain on
a principal residence may be taxable if that home was used other
than as a principal residence.
Period of nonqualified use is any time after 2008 that the taxpayer (or his spouse or former spouse) does not use the home
as a principal residence.
Exception: A period of nonqualified uses does not include (1) any
portion of the five-year period ending on the date of sale that is after
the last day of use as a principal residence; (2) any period (up to
two years) that the taxpayer is temporarily absent due to a change
in the place of employment, health or unforeseen circumstance
and (3) any period of qualified extended duty. See Suspending the
Ownership and Use Test Periods on Page 7-18.
Example #1: Alex bought a vacation home on January 1, 2007 for $200,000.
On January 1, 2012, he converts the property into his principal residence,
where he and his wife live until they sell the home on January 1, 2014 for
$350,000. Alex’s total ownership period is seven years (2007–2013). However,
2009–2011 is a period of nonqualified use since the home was not Alex’s
principal residence during those years (years before 2009 are not counted).
Alex must report a $64,286 gain, as follows:
Period of nonqualified use ................................................................ 3 years
Total ownership period....................................................................... 7 years
Total gain ($350,000 – $200,000)...................................................... $150,000
Nonexcludable gain (3/7 × $150,000) ............................................... $ 64,286
The remaining $85,714 ($150,000 – 64,286) of gain can be excluded under
Section 121 because Alex meets the two-year ownership and use tests for the
home and has not excluded another gain in the previous two years.
Variation: Same facts as above except that Alex converted the vacation home to
his principal residence on December 31, 2008. Here, his period of nonqualified
use is zero, since only time after 2008 that the home is not used as a principal
residence is counted. Alex can exclude his entire gain.
 Note: Converting a principal residence to rental or investment
property will not create a period of nonqualified use because periods
after the last time the home was used as a principal residence are
not counted. However, the gain exclusion will only be available if the
taxpayer uses the home as a principal residence for two out of the five
years before the sale. Waiting too long after the conversion from a principal residence could prevent the taxpayer from excluding any gain.
Effect of depreciation recapture. The nonexcludable gain due
to a period of nonqualified use is based on the total gain less any
gain recognized due to post-May 6, 1997 depreciation.
Example #2: Same facts as Example 1, except that Alex claimed $20,000 of
depreciation on the home because he rented it out before it was converted
to his principal residence. His total gain from the sale is $170,000 [$350,000
– ($200,000 – $20,000)]. He must report $20,000 as unrecaptured Section
1250 gain. His nonexcludable gain due to the period of nonqualifying use is
$64,286 [3/7 × ($170,000 – $20,000)]. The remaining $85,714 ($170,000 –
$20,000 – $64,286) gain is excluded under Section 121.
Foreclosures
See also IRC §1038 and IRS Pubs. 544, 908 and 4681
If the borrower (owner) does not make payments due on a loan
secured by property, the lender may foreclose on the mortgage or
repossess the property. Or, the borrower may voluntarily transfer
the property to the lender (deed in lieu of foreclosure).
 Note: See Real Property Repossessions By Seller on Page
7-14 for the seller’s treatment when property sold on the installment method is repossessed.
Borrower’s Gain or Loss
When the property is repossessed or foreclosed on, the borrower
(owner) generally reports the transaction as if it is a sale.
Amount realized on sale (foreclosure) of property depends
on type of financing:
•Nonrecourse debt. The borrower is not personally liable to
repay the debt even if the value of the property is less than the
outstanding debt. The amount realized is the full amount of debt
canceled by the transfer of property.
•Recourse debt. The borrower is personally liable to pay any
amount of the debt not satisfied by the value of the property. The
amount realized is the lesser of the debt canceled or the FMV of
the transferred property.
Cancellation of Debt (COD) Income
A borrower who is personally liable on the debt (recourse debt)
may also have COD income when property securing the debt is
foreclosed, if the remaining loan balance is forgiven. The COD
income equals the excess (if any) of the loan balance over the
property’s FMV. This income is separate from any gain or loss
realized from the foreclosure.
Example: Chris bought a second home for $150,000. He paid $20,000 down
and borrowed the remaining $130,000. Chris was not personally liable for the
loan (nonrecourse), but pledged the property as security. When the balance
due on Chris’ loan was $100,000, the lender foreclosed because he had
stopped making payments. The property’s FMV was $90,000. Chris reports
the foreclosure as a sale as follows:
Amount realized..........................................................................
$ 100,000
Basis...........................................................................................
<150,000>
Loss on foreclosure (nondeductible personal loss)....................
$< 50,000>
Variation: Now assume Chris was personally liable for the loan (recourse debt).
The lender takes the property in full satisfaction of the debt. In this case, Chris
realizes a $60,000 loss of the foreclosure, as follows:
Amount realized (lesser of canceled debt or FMV)...................
$ 90,000
Basis..........................................................................................
<150,000>
Loss on foreclosure (nondeductible personal loss)...................
$< 60,000>
Chris also must report $10,000 of COD income on line 21 of Form 1040, which
equals the excess of the debt satisfied over the property’s FMV ($100,000 –
$90,000 = $10,000). This is the amount of the debt for which he was personally
liable and that was forgiven in the transaction.
See the Borrower’s Foreclosure Worksheet on Page 7-1.
Report COD income. COD income related to a business or rental
is reported as business or rental income (Sch. C, E, F, Form 4835)
(Pub. 4681). Report the income from cancellation of a nonbusiness
debt as miscellaneous income on line 21 of Form 1040.
Exceptions: Generally, debt forgiveness is taxable, unless one
of the exclusions under Section 108 applies—that is, the debt
forgiveness:
1) Occurs under Title 11 bankruptcy,
2) Occurs when the taxpayer is insolvent,
3) Is qualified farm indebtedness,
4) Is qualified real property business indebtedness (other than
C corporations) or
5) Is qualified principal residence acquisition debt (see COD on
Residence Foreclosure on Page 7-22).
If an exclusion applies, report the full amount of COD income on
Form 982 (which is attached to the tax return). Then, carry the
taxable amount (if any) to the proper place on the return.
COD on Residence Foreclosure
 Expired Provision Alert: The exclusion for COD income on
qualified principal residence debt expired on December 31, 2013.
Unless Congress extends the provision, it will not be available for
debt forgiven after 2013. This discussion is retained in the event
the provision is extended to 2014.
2014
For 2007–2013, the cancellation of qualified principal residence
indebtedness can be excluded from income. [IRC §108(a)(1)(E)]
Debt forgiven for a reason other than a decline in the home’s value
or the borrower’s financial condition (for example, in exchange for
services performed for the lender) is not excluded under these
rules.
N Observation: This exclusion will not apply when the loan is
nonrecourse, since the foreclosure is treated entirely as a sale or
exchange (there is no COD income to exclude). However, it could
apply (1) to a loan reduction that occurs outside a foreclosure,
regardless of whether the debt is recourse or nonrecourse and
(2) when a home subject to a recourse mortgage is foreclosed on.
Qualified principal residence indebtedness is up to $2,000,000
($1,000,000 if MFS) of debt incurred to acquire, construct or substantially improve the taxpayer’s principal residence. A refinancing of such debt also qualifies. The debt must be secured by the
residence. [IRC §108(h)]
The taxpayer’s basis in the residence must be reduced
by the amount of excluded COD income. This debt
relief provision takes precedence over the insolvency exclusion unless the taxpayer elects otherwise.
Nonqualified mortgages. If only a portion of a discharged debt is qualified principal residence indebtedness, only the discharged amount in excess of the
nonqualified portion of the debt can be excluded. [IRC §108(h)(4)]
Example: Phillip’s principal residence is secured by a $600,000 recourse mortgage, of which $500,000 is qualified principal residence indebtedness. (The
remaining $100,000 of debt was incurred when Phillip refinanced his original
mortgage, which had a $500,000 balance.) In 2013, Phillip’s lender forecloses
on the home when its FMV is $450,000 and relieves Phillip of the remaining
loan balance. Therefore, Phillip has $150,000 ($600,000 – $450,000) of COD
income. Only $50,000 ($150,000 total COD income – $100,000 nonqualified
debt) can be excluded under this provision.
æ Practice Tip: When COD income cannot be excluded under
the qualified principal residence acquisition rules, see whether
another exclusion (for example, insolvency) applies.
Forms 1099-A and 1099-C
A lender who acquires an interest in property in a foreclosure or
repossession generally reports the information needed to figure
gain or loss on Form 1099-A, Acquisition or Abandonment of Secured Property. This form includes a box that indicates whether
the debt was recourse or nonrecourse. However, a lender that
also cancels part of the debt must file Form 1099-C, Cancellation of Debt. In that case, the lender may include any information
about the foreclosure or repossession on that form instead of on
Form 1099-A.
N Observation: Lenders do not always forgive the debt when
property securing recourse debt is foreclosed on. Instead, they
may pursue a deficiency against the borrower. Here, they would
issue a Form 1099-A to report the foreclosure, but not a Form
1099-C, since the borrower has not yet been relieved of liability
for any amount of debt over the property’s FMV.
Report the sale. A foreclosure of business or rental property is
reported on Form 4797. Investment-use or personal-use property
(including a personal residence, unless there is a fully excludable
gain) is reported on Form 8949 (and carried to Schedule D). Losses
from personal-use property are not deductible.
Like-Kind Exchanges
Form 8824; see also IRC §1031 and IRS Pubs. 544 and 550
No gain or loss is recognized if property held for use in a trade or
business or for investment is exchanged solely for property of a
like kind to be held either for use in trade or business or for investment. However, the exchange must still be reported on Form 8824.
Any gain or loss realized, but not recognized, adjusts the basis of
like-kind property received in the exchange.
Like-Kind Property
Like-kind property means property of the same nature or character,
not necessarily of the same grade or quality. For example, improved
real estate can be exchanged for unimproved real estate.
Cars and light duty trucks (for example, crossovers, sport utility
vehicles, minivans and cargo vans) are considered like-kind property. (Ltr. Rul. 200912004)
Exchanges can include business for business, business for investment, investment for business or investment for investment
property. Property held for personal use, inventory and securities
do not qualify under the like-kind exchange provisions.
Nonrecognition treatment for like-kind exchanges is mandatory
rather than elective. A taxpayer who wants to recognize a realized
gain or loss must structure the transaction around the statutory
requirements for a like-kind exchange.
Other Highlights
Related taxpayers. If related taxpayers exchange properties and
either party disposes of the exchanged property within two years,
gain or loss deferred under the like-kind exchange rules is recognized in the year the disqualifying disposition occurs.
Boot. Property that is not like-kind property (including cash) included in the exchange is boot. The receipt of boot will cause a
realized gain on an exchange to be recognized. Gain is realized
if the FMV of the property received exceeds the tax basis of the
property given. The amount of gain to recognize is the lesser of
the boot received or the realized gain. Giving boot in the exchange
triggers gain to the extent the boot’s FMV exceeds its basis.
Liabilities. All liabilities transferred to the other party in an exchange are netted against all liabilities assumed by the taxpayer.
The taxpayer is treated as receiving boot only if relieved of greater
liabilities than those assumed.
Deferred exchanges. A deferred exchange is one in which the
like-kind property received in the exchange (replacement property)
is not received immediately upon the transfer
of property given up (relinquished property).
After transferring the relinquished property,
the replacement property must be identified
within 45 days and actually received within
180 days [or, if earlier, the due date (including extension) of the return for the year the
property is relinquished].
 Note: Like-kind exchanges are covered in detail at Tab 9 of the
Depreciation Quickfinder® Handbook.
Reimbursements
When an employer reimburses an employee for travel, meals or
entertainment expenses, the reimbursement is excluded from
the employee’s income if the reimbursement arrangement is an
accountable plan. Similar rules apply to independent contractors.
[Reg. §1.274-2(f)(2)]
Employees cannot deduct meal and entertainment expenses if the
employer reimburses the expenses under an accountable plan
and does not treat the reimbursement as wages. See Accountable
Plan/Nonaccountable Plan below. Independent contractors cannot
deduct meals and entertainment expenses if the customer or client makes direct reimbursement for the expenses and adequate
records are submitted to the customer or client. See Elements to
Prove Certain Business Expenses on Page 9-6.
Failure to claim reimbursement. Employees may not deduct
business expenses that are eligible for reimbursement from the
employer.
Accountable Plan/Nonaccountable Plan
Accountable plan. Reimbursements made to an employee under
an accountable plan are not included in the employee’s income,
and the employee does not deduct the expenses.
Nonaccountable plan. Reimbursements made to an employee
under a nonaccountable plan are treated as taxable wages and
reported on Form W-2. The employee deducts the expenses on
Form 2106, subject to the 2%-of-AGI limitation on Schedule A.
An employee who receives payments under a nonaccountable plan
cannot convert the payments to an accountable plan by voluntarily
accounting to the employer or returning excess payment.
Accountable plan requirements: [IRC §62(c)]
1) Business connection. The reimbursement must be for jobrelated expenses the employee would reasonably be expected
to incur. A plan that reimburses personal expenses does not
qualify as an accountable plan.
2) Substantiation. The employee must substantiate the expense
by providing receipts or other documentation to the employer
within a reasonable period of time.
3) Return of excess reimbursement. The employee must be
required to return any excess reimbursement to the employer
within a reasonable period of time.
U Caution: Individuals who receive a salary or commission with
the understanding that they will pay their own expenses are not
covered by an accountable plan. Also, employers cannot merely
treat a portion of compensation as a nontaxable reimbursement,
even if they require their employees to pay certain business expenses. (Rev. Rul. 2012-25)
Reasonable period of time. The following situations are considered within a reasonable period of time for the accountable
plan rules:
1) The employee receives an advance within 30 days of the time
the expense is incurred.
2) The employee adequately accounts for the expense within 60
days of the time the expense was paid or incurred.
3) Any excess reimbursement is returned to the employer within
120 days after the expense was paid or incurred.
4) The employer provides a statement to the employee (at least
quarterly) asking the employee to either return or adequately
account for outstanding advances, and the employee complies
within 120 days of the statement.
Part accountable plan or part nonaccountable plan. If an
employer makes reimbursements to an employee under an accountable plan, but some reimbursements do not qualify under
accountable plan rules, only the reimbursements falling under the
nonaccountable plan are considered taxable wages. Each plan is
viewed separately, and the employer treats the employee as having
received reimbursements under two different plans.
Above-the-Line Deduction
for Certain Employees
Government officials paid on a fee basis, qualified performing artists, Armed Forces reservists and educators can claim business
expenses as an adjustment to income. [IRC §62(a)(2) and 162]
Government fee basis officials (FBOs). Individuals who are
employed by a state or local government and paid in whole or in
part on a fee basis.
Qualified performing artists (QPAs):
1) Perform services as an employee in performing
arts for at least two employers during the
tax year and receive at least $200 from
any two of the employers,
2) Incur performing arts-related business expenses of more than
10% of the gross income from performing arts and
3) Have AGI of $16,000 or less before deducting performing arts
expenses. To qualify, married individuals must file a joint return
unless they lived apart for all of the tax year.
Armed Forces reservists. National Guard members and Armed
Forces reservists who must travel more than 100 miles away from
home and stay overnight to fulfill their training and service commitments can claim an above-the-line deduction for the cost of
transportation, meals (subject to the 50% disallowance rule) and
lodging. The deductible amounts are limited to general federal
government per diem amounts for the applicable locale.
Form 2106 is completed to report eligible expenses for FBOs,
QPAs and reservists. The expenses are then entered on line 24
of Form 1040.
2014
Educators. For 2013, grades K–12 teachers, instructors, counselors, principals and aides can deduct up to $250 of unreimbursed
expenses on line 23 of Form 1040 (up to $500 if MFJ and both
spouses are educators). Only expenses in excess of excludable
U.S. bond interest, nontaxable qualified tuition plan distributions
and nontaxable Coverdell ESA distributions can be deducted. The
taxpayer must spend at least 900 hours during a school year as
an educator. Qualified expenses include amounts paid for books,
supplies (other than nonathletic supplies for courses of instruction
in health and PE), computer software and equipment, and other
equipment and materials used in the classroom. Amounts that cannot be deducted above the line can be deducted as unreimbursed
employee business expenses, subject to the 2%-of-AGI limit.
 Expired
Provision Alert: The above-the-line deduction for
educators’ expenses expired on December 31, 2013. Unless
Congress extends it, the deduction will not be available in 2014.
This discussion is retained in the event the deduction is extended
to 2014.
Per Diem Rates
Per Diem Substantiation Methods
The federal per diem rates, which are accepted by the IRS for
meals, lodging and other incidental expenses vary depending on
the travel location. The per diem rates for travel are revised each
year on October 1. For the last three months of the year, taxpayers
use either the per diem rates effective October 1 of the preceding
year or the revised rates effective October 1 of the current year.
They must use either the current rates or the revised rates consistently for all travel during that period.
Meals and incidental expenses (M&IE) rate. Instead of deducting
actual expenses incurred for M&IE while traveling for business,
employees and self-employed individuals may deduct the per diem
amounts, if they document the time, place and business purpose
for the travel. Also, employees and self-employed individuals who
are reimbursed for their meals and incidental expenses are treated
as substantiating the amount of those expenses up to
the IRS per diem rate (or actual reimbursement, if
smaller) if they substantiate the time, place and
business purpose. If the reimbursement is made
under an accountable plan, only amounts over the
per diem rate are reported as taxable income on
Form W-2.
See the Meals and Incidental Expenses Per Diem
Rates table on Page 9-9.
U Caution: Only 50% of the M&IE rate is deductible.
Incidental expenses. Employees and self-employed individuals
who do not incur meal expenses while traveling can use the per
diem allowance for incidental expenses (IE) only (for any location, $5 per day for 2014). Incidental expenses include only fees
and tips given to porters, baggage carriers, hotel staff and staff
on ships (Notice 2014-57). Incidental expenses do not include
transportation to get meals, mailing costs for travel vouchers and
credit card payments, laundry, lodging taxes and telephone calls.
These amounts may be separately deducted or reimbursed.
Lodging expense. A per diem allowance for lodging may only
be used by employers for determining employee reimbursements
and income exclusion (if paid under an accountable plan). Sole
proprietors and employees may not use the per diem allowance
to substantiate a lodging deduction; actual receipts are needed.
(Bracey, TC Memo 1998-254)
Who Can Use Per Diem Rates?
Taxpayer
Self-employed (Schedule C or F)
Unreimbursed employee (Form 2106)
Employer reimbursement to unrelated employee
Employer reimbursement to 10% related employee
Payer reimbursement to partner
Payer reimbursement to volunteer
M&IE and M&IE
Lodging Only
No
Yes
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
IE
Only
Yes
Yes
Yes
Yes
Yes
Yes
Trucks with sleepers. A trucking company reimbursed drivers at
the federal per diem rate for lodging, even though the drivers usually slept in their trucks. The IRS found no reasonable basis for the
employer to believe the drivers were incurring lodging expenses.
Instead, the amounts designated as per diem for lodging should
be treated as wages. (Ltr. Rul. 9146003)
Switching Methods
Taxpayers can use either the M&IE rate or keep records of actual
expenses for each business trip. However, the taxpayer must
use the same method for all days within any single business trip.
High-Low Per Diem Method
The high-low method is a simplified per diem substantiation method
with only two sets of rates. It can be used to reimburse employees
for travel within the continental U.S. (CONUS). This method may
be used both when lodging expenses are incurred and when only
meal and incidental expenses are incurred.
An employer may use the high-low rate for some employees and
the federal travel per diem for others, but for a particular employee,
the same method must be used for all trips during the year.
 Notes:
•Used only by employers to calculate a per diem allowance.
•Only 50% of the per diem rate for meals is deductible.
The high-low rates and localities are revised on October 1 of each
year. Taxpayers who used the high-low method during January–
September of 2014 can continue to use the rates in effect for those
months for the remainder of the year. Or, they can use the rates
and localities effective October 1, 2014 for the last three months
of 2014. However, either the existing or the revised rates must
be used for all employees for the last three months of the year.
High-Low Per Diem Rates
Location
High-cost
All other
High-cost
All other
1
2
Lodging
Meals
Effective 10/1/13–9/30/141
$186
$65
118
52
Effective 10/1/14–9/30/152
$194
$65
120
52
Total
$251
170
$259
172
These rates (and the list of high-cost localities on Page 9-9) can be used for all
of 2014. Or, taxpayers can use these rates for January–September of 2014 and
the rates and localities effective October 1, 2014 for October–December of 2014.
See Notice 2014-57 for the list of high-cost localities effective October 1, 2014.
Outside Continental U.S.
Federal per diem rates for nonforeign (AK, HI, Puerto Rico,
Northern Mariana Islands and U.S. possessions) and foreign
localities outside CONUS are available at www.state.gov. Click on
the “Travel” tab.
Travel for Less Than 24 Hours
When traveling to more than one location in a single day, the last
stop of the day dictates the location and the per diem rate to use.
On the first and last day of business travel, the standard meal
allowance is prorated by either: (Rev. Proc. 2011-47)
1) Claiming 75% of the standard meal allowance or
2) Using any method that is consistently applied and in accordance
with reasonable business practice.
Example: Axel is on a temporary job assignment. He leaves home at 8 a.m.
on April 20th and returns home at 4 p.m. on April 23rd.
Method #1. Axel can be reimbursed for 31/2 days: 3/4 day on April 20th, two
full days (April 21 and April 22) and 3/4 day on April 23rd.
Method #2. Axel can be reimbursed for four days (if applied consistently and
in accordance with reasonable business practice).
Note: Self-employeds are limited to 31/2 days for purposes of determining their
M&IE (or incidentals only) deduction. A federal employee is limited to 31/2 days.
Transportation Workers
Special M&IE per diem rate. Transportation workers can use the
rates shown below. If these rates are used, they must be used for
the entire calendar year. (Notices 2013-65 and 2014-57)
Transportation Workers—Special M&IE Rates
Travel Location
Within CONUS
Outside CONUS
10/1/2013
$59
10/1/2014
$59
65
65
Transportation worker defined. This is an employee or selfemployed individual whose work:
1) Directly involves moving people or goods by airplane, barge,
bus, ship, train or truck and
2) Requires the worker to travel away from home to areas with
different federal per diem rates during any one trip.
Individuals subject to Department of Transportation (DOT)
hours of service rules. These workers are allowed an 80% deduction for meals, instead of the regular 50% limit [IRC §274(n)(3)].
Workers subject to the rules include:
1) Certain air transportation employees such as pilots, crew,
dispatchers, mechanics and control tower operators.
2) Interstate truck operators and bus drivers.
3) Certain railroad employees such as engineers, conductors,
train crews, dispatchers and control operations personnel.
4) Certain merchant mariners.
Depreciation

Tab 10 Topics
Depreciation Rules................................................ Page 10-1
MACRS Recovery Periods (2014)......................... Page 10-1
MACRS Tables (Various)....................................... Page 10-4
Special Depreciation Allowance............................. Page 10-8
Alternative Minimum Tax Adjustments................... Page 10-8
Alternative Depreciation System............................ Page 10-9
Section 179 Deduction........................................... Page 10-9
Section 179 Recapture........................................ Page 10-11
Change of Use of MACRS Property.................... Page 10-11
Dispositions of MACRS Property......................... Page 10-12
Depreciation Recapture....................................... Page 10-12
Like-Kind Exchanges—Depreciation Rules......... Page 10-12
Computer Software.............................................. Page 10-12
Leasehold Improvements.................................... Page 10-13
Qualified Real Property........................................ Page 10-13
Correcting Depreciation Errors............................ Page 10-14
Intangible Assets.................................................. Page 10-14
Depreciation Rules
Form 4562; See also IRC §168 and IRS Pub. 946
What Property Can Be Depreciated?
Depreciable property must meet all these requirements:
1) It is owned by the taxpayer.
2) It is used in the taxpayer’s trade or business or
income-producing activity.
3) It has a determinable useful life (it must be
something that wears out, decays, gets used up,
becomes obsolete or loses its value from natural
causes).
4) It is expected to last more than one year.
5) It is not excepted property.
Excepted property includes:
•Property placed in service and disposed of in the same year.
•Equipment used to build capital improvements.
•Section 197 intangibles.
•Certain term interests.
Reporting Depreciation and Amortization
File Form 4562 if any of the following are claimed:
•Depreciation for property placed in service during the
current year.
•Section 179 deduction or carryover.
•Depreciation for listed property.
•Deduction for a vehicle reported on forms other than
Schedule C or Form 2106 (such as Schedules E and F).
•Amortization of costs beginning in the current year.
File a separate Form 4562 for each business activity. However, complete only one Form 4562, Part I, for the Section
179 expense deduction claimed for all business activities.
MACRS Depreciation Systems
MACRS applies to assets placed in service after 1986. See IRS
Publication 534 for assets placed in service before 1987.
MACRS Recovery Periods (2014)
See IRS Pub. 946 for more recovery periods. Note the
recovery periods assigned to certain assets used in
specific activities.
Recovery Period
(Years)
GDS
ADS
7
5
7
3
10
7
10
10
Race horses
Breeding hogs
Breeding sheep and goats
Farm buildings, other than single purpose
Fences (agricultural)
Grain bins
Single-purpose agricultural or horticultural structures
31
3
5
20
7
7
10
12
3
5
25
10
10
15
Trees and vines bearing fruit
Drainage facilities
Specialized Assets
Assets used in wholesale and retail trade and personal
and professional services
Section 1245 assets used in marketing petroleum and
petroleum products
Minerals
Assets used in drilling for oil and gas wells (onshore)
Assets used in exploration and production of oil and
gas
Office Related
Office furniture and fixtures (such as desks, files, safes)
Computers and peripheral equipment
Typewriters, calculators, copiers
Computer software. See Computer Software on Page 10-12.
Real Property
Billboards
Land improvements (sidewalks, roads, fences, etc.)
102
15
20
20
5
93
5
9
5
6
7
14
7
5
5
10
5
6
15
15
20
20
Qualified leasehold improvements
152,4
39
Qualified restaurant property
2,4
15
39
Qualified retail improvement property
152,4
39
Agriculture
Agricultural machinery and equipment
Breeding or dairy cattle
Breeding or work horses (12 years old or less)
Breeding or work horses (more than 12 years old)
Residential rental property—including mobile homes
Retail motor fuels outlet
27.52
15
40
20
Nonresidential real property
Transportation
Airplanes (noncommercial) and helicopters
Automobiles, taxis
Buses
Light general purpose trucks (less than 13,000 lbs.)
Heavy general purpose trucks (13,000 lbs. or more)
Tractor units (for over-the-road use)
Trailers (for over-the-road use)
Water transportation equipment
Other
Appliances, carpets and furniture used in residential
rental property
Personal property with no class life
392
40
5
5
5
5
5
3
5
10
6
5
9
5
6
4
6
18
5
7
9
12
Race horses that are more than 2 years old when placed in service. For 2009–
2013, the three-year recovery period applied to all race horses.
2
Must use SL.
2014
applies
3
Five years for high technology medical equipment.
4
For property placed in service before 2014, the GDS recovery period was 15-year
SL. See Qualified Real Property on Page 10-13.
1
MACRS provides two depreciation systems:
1) General depreciation system (GDS). 200% declining balance
(DB), 150% DB or straight-line (SL), depending on the type of
property and, if available, whether an elective method is used.
2) Alternative depreciation system (ADS). SL over a longer
recovery period. ADS may be elected instead of GDS. However,
in some cases, ADS is required. See Alternative Depreciation
System on Page 10-9.
The depreciation method is elected on Form 4562 the year the
property is placed in service. An election applies to all assets in a
property class (for example, three-year, five-year, etc.) placed in
service that year. Exception: The election is made on a property-byproperty basis for nonresidential real and residential rental property.
MACRS Depreciation Methods (2014)
Type of property
Available methods
Nonfarm 3-, 5-, 7- and 10-year property. GDS–200% DB
GDS–SL
GDS–150% DB
ADS–SL
• All farm property (except real
GDS–150% DB
ADS–SL
property).
GDS–SL
• 15- and 20-year property.
• Residential rental property.
GDS–SL
• Nonresidential real property.
ADS–SL
• Trees or vines bearing fruit or nuts.
• Water utility property.
Property for which ADS is required (see
ADS–SL
When ADS Must Be Used on Page 10-9).
Date Placed in Service
Depreciation begins when property is placed in service (ready and
available for use in a trade or business or income-producing activity, regardless of when it was purchased). First-year depreciation
is determined by applying the appropriate convention.
Conventions
Half-year convention. Treats all property placed in service or
disposed of during a tax year as placed in service, or disposed of,
on the midpoint of that tax year. The half-year convention applies
to all property except:
1) Residential rental and nonresidential real property and
2) Property subject to the mid-quarter convention.
Mid-quarter convention. If the depreciable basis of property
placed in service in the last three months of the year is more than
40% of the total depreciable basis of property placed in service
during the entire year, the mid-quarter convention applies to assets
placed in service that year. All property placed in service during
that tax year is treated as placed in service, or disposed of, at the
midpoint of the quarter it is placed in service or disposed of.
Mid-Quarter Percentages
Quarter
First
Second
Third
Fourth
Acquisition Year
87.5%
62.5
37.5
12.5
Disposition Year
12.5%
37.5
62.5
87.5
Note: Figure the deduction for the year the asset is placed in service (disposed of)
by multiplying full-year depreciation by the applicable percentage, based on the
quarter in which the asset was placed in service (disposed of).
Excluded items. To determine if the mid-quarter convention applies,
the following items are not counted:
1) Property depreciated under a method other than MACRS,
2) Residential rental property,
3) Nonresidential real property,
4) Property placed in service and disposed of in the same tax year
and
5) Property expensed under Section 179.
Mid-month convention. Treats all property placed in
service or disposed of during any month as placed in
service or disposed of on the midpoint of that month.
This convention applies to residential rental and
nonresidential real property.
Computing Depreciation
MACRS tables. The IRS provides tables that incorporate the applicable convention for the placed-in-service year. These tables,
based on the property’s recovery period and the depreciation
method, begin on Page 10-4. Depreciation is calculated by multiplying the property’s unadjusted depreciable basis by the applicable
percentage from the table each year.
Using the tables is optional, but once the MACRS table is used for
an asset, it generally must be used for that asset’s entire recovery
period. Exception: The tables cannot be used after the property’s
basis is adjusted for a reason other than depreciation or an addition
or improvement to that property that is depreciated as a separate
item of property. For example, the MACRS table cannot be used
after a basis reduction for a casualty loss.
 Note: The MACRS tables cannot be used for a short tax year.
See Tab J in the Small Business Quickfinder® Handbook for calculating depreciation in a short tax year.
If the MACRS tables are not used, depreciation is computed either
using the declining balance or the straight-line method.
Declining balance (DB) method. When the MACRS tables are not
used, DB depreciation is computed by applying the same depreciation
rate each year to the property’s adjusted basis, switching to straight
line (SL) in the year that SL gives an equal or greater deduction.
The amount computed must be pro-rated to consider the applicable
convention in the placed-in-service year and, if the asset is disposed
of before the end of the recovery period, the disposition year.
Declining Balance Rates
Recovery Period
3-year
5-year
7-year
10-year
15-year
20-year
DB Percentage
200%
200
200
200
150
150
DB Rate
66.667%
40.0
28.571
20.0
10.0
7.5
Year SL begins
3rd
4th
5th
7th
7th
9th
Note: Compute the DB rate by dividing the DB percentage (150% or 200%) by the
number of years in the property’s recovery period.
Example: In 2013, Cathy placed a $39,000 piece of used equipment (sevenyear property) in service. The half-year convention applied. Cathy elected a
$24,000 Section 179 deduction, so her adjusted basis for depreciation for 2013
was $15,000 ($39,000 – $24,000). Using the MACRS table, 2013 depreciation
was $2,143 ($15,000 × 14.29%).
In 2014, Cathy’s property was vandalized, resulting in a $3,000 deductible
casualty loss. She paid $3,500 to put the property back in operational order.
She cannot use the MACRS table to figure depreciation for this property after
2013 because of the basis adjustments. Instead, she must figure depreciation
using the declining balance method, as follows:
2013 adjusted basis for depreciation..................................................
2013 depreciation expense................................................................
Casualty loss......................................................................................
Repair cost.........................................................................................
2014 adjusted basis for depreciation..................................................
200% DB rate (200% ÷ 7)..................................................................
2014 depreciation expense................................................................
$ 15,000
< 2,143>
< 3,000>
3,500
$ 13,357
× 28.571%
$ 3,816
Straight line (SL) method. When the MACRS tables are not used,
a different depreciation rate is applied each year to the property’s
adjusted basis. The SL rate is determined by dividing
MACRS Nonresidential Real Property (31.5-Year)
See MACRS tables on Page 10-2.
For property placed in service after 1986 and before May 13, 1993
Straight-Line, Mid-Month Convention
Month Placed in Service
Year
1
1............. 3.042%
2–7......... 3.175
8............. 3.175
9............. 3.174
10........... 3.175
2
2.778%
3.175
3.174
3.175
3.174
3
2.513%
3.175
3.175
3.174
3.175
4
2.249%
3.175
3.174
3.175
3.174
5
1.984%
3.175
3.175
3.174
3.175
6
1.720%
3.175
3.174
3.175
3.174
7
1.455%
3.175
3.175
3.174
3.175
8
1.190%
3.175
3.175
3.175
3.174
9
0.926%
3.175
3.175
3.174
3.175
10
0.661%
3.175
3.175
3.175
3.174
11
0.397%
3.175
3.175
3.174
3.175
12
0.132%
3.175
3.175
3.175
3.174
11............ 3.174
12........... 3.175
13........... 3.174
14........... 3.175
15........... 3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
16........... 3.175
17........... 3.174
18........... 3.175
19........... 3.174
20........... 3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
21........... 3.174
22........... 3.175
23........... 3.174
24........... 3.175
25........... 3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
26........... 3.175
27........... 3.174
28........... 3.175
29........... 3.174
30........... 3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
31........... 3.174
32........... 1.720
33........... 0
3.175
1.984
0
3.174
2.249
0
3.175
2.513
0
3.174
2.778
0
3.175
3.042
0
3.174
3.175
0.132
3.175
3.174
0.397
3.174
3.175
0.661
3.175
3.174
0.926
3.174
3.175
1.190
3.175
3.174
1.455
11
0.321%
2.564
2.247
12
0.107%
2.564
2.461
11
0.313%
2.500
2.187
12
0.104%
2.500
2.396
Note: For an early disposition, pro-rate the depreciation from this table for the number of months in service (using mid-month convention).
MACRS Nonresidential Real Property (39-Year)
For property placed in service after May 12, 1993
Straight-Line, Mid-Month Convention
Year
1
1............. 2.461%
2–39....... 2.564
40........... 0.107
2
2.247%
2.564
0.321
3
2.033%
2.564
0.535
4
1.819%
2.564
0.749
5
1.605%
2.564
0.963
6
1.391%
2.564
1.177
7
1.177%
2.564
1.391
8
0.963%
2.564
1.605
9
0.749%
2.564
1.819
10
0.535%
2.564
2.033
MACRS Straight-Line—40-Year, Mid-Month Convention
• Alternative Depreciation System for residential rental or nonresidential real property.
• Can be elected for regular tax and AMT.
• AMT depreciation for residential rental or nonresidential property placed in service before 1999.
Year
1
1............. 2.396%
2–40....... 2.500
41........... 0.104
2
2.188%
2.500
0.312
3
1.979%
2.500
0.521
4
1.771%
2.500
0.729
5
1.563%
2.500
0.937
6
1.354%
2.500
1.146
7
1.146%
2.500
1.354
8
0.938%
2.500
1.562
9
0.729%
2.500
1.771
10
0.521%
2.500
1.979
•Computer software (other than computer software covered by Section 197),
Straight-Line Percentages
• Alternative depreciation system (use ADS recovery period for regular tax and
AMT). See When ADS Must Be Used on Page 10-9.
• SL MACRS depreciation (use GDS recovery period for regular tax and AMT).
Year
Half-Year
Convention
Mid-Quarter Convention—
Quarter in Which Acquired
1
2
3
4
1................... 16.67%
29.17%
20.83%
12.50%
2................... 33.33
33.33
33.33
33.33
33.33
3................... 33.33
33.33
33.34
33.34
33.33
4................... 16.67
4.17
12.50
20.83
29.17
1................... 10.00%
17.50%
12.50%
2–5............... 20.00
20.00
20.00
20.00
20.00
6................... 10.00
2.50
7.50
12.50
17.50
3-Year Property
4.17%
5-Year Property
7.50%
2.50%
7-Year Property
1................... 7.14%
12.50%
8.93%
5.36%
1.79%
2................... 14.29
14.29
14.29
14.29
14.29
3................... 14.29
14.28
14.28
14.28
14.28
4................... 14.28
14.29
14.29
14.29
14.29
5................... 14.29
14.28
14.28
14.28
14.28
6................... 14.28
14.29
14.29
14.29
14.29
7................... 14.29
14.28
14.28
14.28
14.28
8................... 7.14
1.79
5.36
8.93
12.50
1................... 5.00%
8.75%
6.25%
3.75%
1.25%
2–10............. 10.00
10.00
10.00
10.00
10.00
11.................. 5.00
1.25
3.75
6.25
8.75
10-Year Property
Special Depreciation Allowance
IRC §168(k)
 Expired Provision Alert: The special depreciation allowance
generally is not available for assets placed in service after
2013 unless legislation is enacted that extends the provision. This section is included in the event the rules are
extended to 2014.
2014
For 2013, a special (bonus) depreciation allowance
equal to 50% of the qualified property’s depreciable
basis (cost or other basis less Section 179 deduction
and credits) is available.
The amount of the special depreciation allowance is not affected by
a short taxable year or by the applicable convention. (See Conventions on Page 10-2.) But, assets for which the special depreciation
allowance is claimed are still counted for determining whether the
mid-quarter convention applies for the “normal” MACRS deduction.
If the special depreciation allowance is taken, there are no AMT
adjustments for depreciation for that asset for the year placed in
service or any later year.
Qualified Property
To qualify for the special depreciation allowance, the property must
be a new asset (see Original use in the next column) that is either:
•MACRS property with a recovery period of 20 years or less,
•Water utility property or
•Qualified leasehold improvement property.
See Qualified leasehold improvement property Page 10-13.
2014
Business vehicles. The Section 280F limit on depreciation that
applies to many vehicles is increased in 2013 by $8,000 for vehicles for which special depreciation is allowed. See the Business
Vehicles—Quick Facts table on Page 11-1.
Original use. To qualify for special depreciation, the asset must
generally be new, rather than used. However, new property that a
taxpayer acquired for personal use and later converted to business
use meets the original-use requirement. [Reg. §1.168(k)-1(b)(3)]
Electing Out
Taxpayers can elect not to claim special depreciation for any class
of property by attaching a statement to the tax return. The election
out applies to all additions to an asset class (for example, five-year
property) for the year. [IRC §168(k)(2)(D)]
Election Out of Special Depreciation Allowance
Taxpayer elects under IRC Sec. 168(k)(2)(D)(iii) not to claim the special
depreciation allowance for the following classes of property placed in service
during the tax year ended [insert year-end] : [List property classes for
which election is made.] Alternative Minimum
Tax Adjustments
For alternative minimum tax (AMT), depreciation must be computed using the AMT method. For assets placed in service after
1998, the GDS recovery period is used for both regular tax and
AMT. So for these assets, there is an AMT depreciation adjustment only if the AMT and regular tax depreciation methods differ.
AMT Depreciation Adjustment Required
Type of Property
Depreciation Method
Regular Tax
AMT
3-, 5-, 7- and 10-yr property
200% DB
150% DB
Certain Section 1250 property
150% DB
SL
Note: For property place in service after 1986 and before 1999, the ADS recovery
period generally applied for AMT. Then, the AMT adjustment is the result of differences in both the depreciation method and recovery period. See MACRS Recovery
Periods (2014) on Page 10-1 for ADS recovery periods.
N Observation: For
assets placed in service after 1998, no
AMT adjustment is required for assets depreciated SL for regular
tax. Common examples are: [IRC §168(b)(3)]
•Nonresidential real property.
•Residential rental property.
•Qualified leasehold improvement, restaurant
and retail improvement property placed in
service before 2014.
2015
•Trees and vines bearing fruit.
Other property without AMT adjustment:
•Property (other than Section 1250 property) placed in service
after 1998 that is depreciated for regular tax using the 150% DB
method or the SL method.
•Property depreciated using ADS for regular tax.
•Property for which the special depreciation allowance under
Section 168(k) is claimed. See Special Depreciation Allowance
on Page 10-8.
•Property to the extent a Section 179 election is made.
•Qualified disaster assistance property for which a special depreciation allowance under IRC §168(n) was claimed. See Federally
Declared Disasters on Page 5-16.
•Motion picture films, videotapes or sound recordings.
•Property depreciated under the unit-of-production method or any other method not expressed
in a term of years.
•Qualified Indian reservation property.
•Qualified revitalization expenditures for a
building for which an election is made to claim the
commercial revitalization deduction under Section 1400I.
AMT Taxable Income Adjustment
The AMT taxable income adjustment is the difference between the
depreciation computed for AMT purposes and the depreciation
claimed for regular tax.
•If the AMT depreciation is less than the depreciation claimed for
regular tax, the difference is added to AMT taxable income.
•If the AMT depreciation is greater than the depreciation claimed
for regular tax (which usually occurs in the later years of the
recovery period), the difference is subtracted from AMT taxable
income.
 Note: See Tab 12 for more information on AMT.
Alternative Depreciation System
The alternative depreciation system (ADS) applies SL depreciation
over the ADS recovery period. The ADS method may be elected for
most property, but is mandatory in some situations. See MACRS
Recovery Periods (2014) on Page 10-1 for ADS recovery periods
for commonly used assets. See the Straight-Line Percentages
table on Page 10-8 for the MACRS table that can be used to
compute depreciation under the SL method.
Electing ADS Method
•Election is irrevocable, and applies to all property in that class that
is placed in service during the tax year of the election. Exception:
The election for residential rental and nonresidential real property
is made on a property-by-property basis.
•Election must be made by completing Part III, Section C of Form
4562 by the due date (including extensions) of the return for the
year in which the property is placed in service.
•The half-year, mid-quarter and mid-month conventions apply.
When ADS Must Be Used
•Listed property with 50% or less qualified business use. See
Listed Property on Page 11-9.
•Tangible property used predominantly outside the U.S.
•Tax-exempt use property.
•Tax-exempt bond financed property.
•Imported property covered by an executive order
of the President of the U.S.
•Property used predominantly in a farming business and placed in service during any tax year
in which the taxpayer elects out of the Section
263A(d)(2) uniform capitalization (UNICAP) rules.
Section 179 Deduction
Section 179 allows a taxpayer to expense certain property in the
year placed in service. To qualify, property must be used more
than 50% in a trade or business and be acquired by purchase
from an unrelated party.
Section 179 Property (2014)
Qualifying Property
• Tangible personal property (such as machines, equipment, furniture).
• Certain other tangible property used for specified purposes.
• Single-purpose agricultural or horticultural structures. • Qualified real property.
• Certain storage facilities.
• Off-the-shelf computer software.
Nonqualifying Property
• Property not used in a trade or business (investment property, most rentals).1
• Buildings and their structural components, air conditioning and heating units.
• Property used in connection with furnishing lodging, except for hotel/motel
operations.
(except qualifed real
• Property used 50% or less in a trade or business.
property)
• Property acquired by gift, inheritance or trade.
• Property purchased from certain related parties.
• Property used outside the U.S.
• Property used by tax-exempt organizations, governmental units.
• Property used by foreign persons or entities.
• Property held by an estate or trust.
• Intangible property.
, except for certain computer software
1
Property rented to others generally doesn’t qualify unless the taxpayer purchases
it, the lease term is less than 50% of the property’s class life and for the first
12 months of the lease, business deductions on the property exceed 15% of its
rental income.
Property Eligible for Section 179 Expense (2014)
Not an Exhaustive List
• Airplanes.
• Automobiles.
• Billboards (if movable).
• Computers.
• Drain tiles used to improve the drainage
of a pasture.
• Fences used in farming business.
• Gasoline storage tanks and pumps and
retail service stations.
• Helicopters.
• House trailers (movable, wheels
attached).
• Livestock (including horses, cattle,
hogs, sheep, goats and mink and other
fur-bearing animals).
• Machinery and equipment.
• Office equipment—copiers, typewriters,
fax machines, etc.
• Office furniture—desks, chairs, file
cabinets, book shelves, etc.
• Oil and gas well and drilling
equipment.
• Paved barnyards to keep
livestock out of mud and load
them onto trucks. (Rev. Rul. 6689)
• Signs (if movable).
• Single-purpose agricultural or
horticultural structures.1
• Storage facility with no additional
workspace (such as grain bins,
corn cribs, silos).
• Store counters.
• Tractors.
• Trucks.
• Vineyards (not including
nondepreciable land
improvements). (CCA
201234024)
• Water wells that provide water for
raising livestock.
1
See Section 179 Deduction—Farm Property on Page 6-21.
Expired Provision Alert: Before 2014, off-the-shelf computer software and
qualified real property (see Qualified Real Property on Page 10-13) were eligible
for the Section 179 deduction. Unless Congress enacts legislation extending the
provisions, the Section 179 deduction cannot be claimed for such property in 2014.
Property Not Eligible for Section 179 Expense (2014)
Not an Exhaustive List
• Air conditioning units.
• Elevators.
• Barns.
• Escalators.
• Billboards (if not movable). • Fences.
• Bridges.
• Heating units.
• Buildings.
• Land.
• Car washes.
• Landscaping.
• Docks.
• Roads.
• Shrubbery.
• Sidewalks.
• Stables.
• Swimming pools.
• Trailers (nonmobile).
• Warehouses.
• Wharves.
Property eligible for the Section 179 deduction does not include
that part of the property’s basis that is determined by reference to
the basis of other property held at any time by the person acquiring
the property. [Reg. §1.179-4(d)]
Example: Arnold trades a copier (used in his business) for a new copier that
costs $20,000. Arnold is granted a trade-in allowance of $2,000 on his old
copier. Arnold’s adjusted basis in his old copier was $1,200. The basis of the
new copier is $19,200 ($1,200 basis of old copier plus $18,000 cash expended).
Only $18,000 of the basis of the new copier qualifies for Section 179 deduction; the remaining $1,200 is basis determined by reference to other property.
2014
can
Election
The Section 179 election is made on an item-by-item basis
for qualifying property by completing Part I of Form 4562. For
2003–2013, a taxpayer could irrevocably revoke the expensing
election and any “specification” in the election on a timely filed
amended return. For 2014, however, the election cannot be revoked without IRS consent, unless Congress enacts legislation
extending the prior rule.
Dollar Limit on Section 179 Deduction
The total cost of property that can be expensed any
year is limited to a maximum deduction. In addition,
for each dollar of Section 179 property placed in
service during the year over the qualifying property
threshold, the maximum deduction is reduced (but
not below zero) by one dollar.
A married couple, whether filing joint or separate returns, are
treated as one taxpayer for the maximum deduction and the
qualifying property threshold. The maximum deduction (after any
reduction for qualifying property additions over the threshold) is
divided equally between the spouses, unless they agree to a different allocation.
Section 179 Annual Limits
Year
Maximum
Qualifying Property
Deduction
Threshold
2010–2013....................$ 500,000.............................. $ 2,000,000
2014................................ 25,000.............................. 200,000
2014
Note: Tax professionals should be alert for possible legislation that would increase
the maximum deduction amount and qualifying property threshold for 2014.
$2,040,000
enacts legislation extending it again to 2014. Tax professionals
should watch for developments.
2014
For tax years beginning in 2010–2013, qualified real property,
which is (1) qualified leasehold improvement property, (2) qualified
restaurant property and (3) qualified retail improvement property
is eligible for Section 179 expensing. See Qualified Real Property
on Page 10-13 for definitions.
Taxpayers could elect to treat qualified real property as Section 179
property by attaching a statement to their original or amended return.
The total Section 179 election for qualified real property is limited
to $250,000 per year. Any Section 179 deduction for qualified real
property that is unused due to the business taxable income limit
(see Business Taxable Income Limit below) cannot be carried to
a year after 2013.
2014
2013
Any carryforward remaining at the end of 2013 is treated as property placed in service in 2013. If the unused carryforward is due to
property actually placed in service in 2010–2012, it is treated as
placed in service on January 1, 2013. If the unused carryforward
is due to property placed in service in 2013, the property is treated
as if the Section 179 election was never made. [IRC §179(f)]
Business Taxable Income Limit
The Section 179 deduction is limited to the taxpayer’s total taxable
income from the active conduct of any trade
or business. Taxable income is computed
without regard to any Section 179 deduction,
net operating losses (NOLs), the deduction for
self-employment (SE) taxes or any unreimbursed
employee business expenses.
Active trade or business income includes: (Reg. §1.179-2)
•Wages, salaries, tips and other compensation;
•Proprietorship (Schedule C or F) net income;
•A partner’s or S corporation shareholder’s pass-through share
of entity business income or loss (if the taxpayer is engaged in
the active conduct of at least one of the entity’s trades or businesses);
•Section 1231 business asset gains (or losses) from a trade or
business and
•Section 1245 and 1250 depreciation recapture income from a
trade or business.
The active conduct of a trade or business for the Section 179 taxable income limit is not the same as “material participation” under
the Section 469 passive activity rules. Income is derived from an
active trade or business for the Section 179 test if the taxpayer
meaningfully participates in the business’s management or operations. [Reg. §1.179-2(c)]
@ Strategy: Business taxable income does not have to be generated by the business in which the Section 179 property is used to
count toward the business taxable income limit. In fact, the trade
or business in which the Section 179 property is used can generate a loss, as long as the taxpayer’s net business taxable income
from all sources is positive.
Example: James placed $210,000 of Section 179-eligible property in service
in his business in 2014. The maximum amount he can elect to expense under Section 179 is $15,000 ($25,000 – $10,000 qualifying property over the
$200,000 threshold).
$460,000 ( $500,000 – $40,000
Example: In 2014, Anne received wages of $130,000. She purchased $15,000
worth of equipment to begin a sole proprietorship. Even though she received
only $5,500 of net income from her Schedule C operations, she may claim
a $15,000 Section 179 deduction since her business taxable income was
$135,500 ($130,000 + $5,500).
Section 179 Expensing—Qualified Real
Property
 Expired Provision Alert: Before 2014, qualified real property
Joint return. If a joint return is filed, the business taxable incomes
(or losses) of both spouses are aggregated,
even though the Section 179 deduction
may be related to the activities of only
one spouse.
$2,000,000
was eligible for Section 179 expensing. Congress extended this
rule in the past so this section is included in the event Congress
month it is placed in service [IRC §167(f)(1)]. Include depreciation
on line 16 of Form 4562, as “other depreciation.” 2015
 Expired Provision Alert: For tax years beginning after 2002
and before 2014, off-the-shelf computer software is eligible for
the Section 179 deduction. Tax professionals should
watch for possible legislation that would extend the
rule to 2014.
•Purchased software with a useful life of less than
one year is deductible as a current expense.
Cost of developing computer software: (Rev.
Proc. 2000-50)
•Deduct in accordance with the rules for research
and experimental expenditures or
•Capitalize and amortize ratably over 60 months from the date
development is completed or 36 months from the date the software is placed in service.
Leased or licensed software. Deduct as a rental expense.
Software included in purchase price of a trade or business.
Amortize over 15 years beginning with the month acquired. Exception: This rule does not apply to off-the-shelf software. (IRC §197)
Leasehold Improvements
Generally, any improvement to depreciable property has the
same recovery period and method as the improved property (but
is treated as placed in service when the improvement is made).
So an improvement to a commercial building [whether made by
the lessor (landlord) or the lessee (tenant)] generally would be depreciated straight-line over 39 years. But, see Qualified leasehold
improvement property below for special rules.
Lessee (tenant) makes the improvement. Any remaining undepreciated basis is deductible by the lessee when the lease
terminates.
Lessor (landlord) makes the improvement. The lessor can
deduct the undepreciated basis of the improvement at the end
of the lease term only if the actual improvement is irrevocably
disposed of or abandoned by the lessor at the termination of the
lease. [IRC §168(i)(8)]
Qualified Real Property
 Expired Provision Alert: Before 2014, special rules for Sec-
tion 179 expensing and MACRS recovery periods applied to qualified real property. However, these provisions are not available for
2014 unless Congress enacts legislation that extends them. This
section is included in the event that the special rules are extended
to 2014. If the rules are not extended, the property discussed in
this section is depreciated under the general MACRS rules.
Qualified real property is any of the following:
•Qualified leasehold improvement property.
•Qualified restaurant property.
•Qualified retail improvement property.
Qualified real property placed in service in
2013 is assigned a 15-year recovery period (SL depreciation
required). It is also eligible for Section 179 expensing if placed in
2014
service in a tax year beginning in 2013.
Qualified leasehold improvement property. Qualified leasehold
improvement property is generally any improvement to an interior
part of a building that is nonresidential real property if:
1) The improvement was made pursuant to a lease by the tenant, sub-tenant or the landlord to a part of the property to be
occupied exclusively by the tenant (or sub-tenant).
2) The improvement is placed in service more than three years
after the date the building was first placed in service (by any
taxpayer).
3) The expenses are not for the enlargement of the building, any
elevator or escalator, any structural components benefiting a
common area or the internal structural framework of the building.
U Caution: The IRS says that heating, air-conditioning and
ventilation units installed on a building’s roof or on a concrete
pad next to the building aren’t qualified leasehold improvement
property. (CCA 201310028)
Leases between related parties are not treated as leases for purposes of qualified leasehold improvement property [IRC §168(k)(3)].
Related parties include taxpayers and their spouses, parents,
grandparents, children, grandchildren and siblings. Taxpayers are
also considered related to certain entities that they own (directly
or indirectly) 80% or more.
If a landlord transfers ownership of qualified leasehold improvement property, the improvement will not be qualified property to
any subsequent owner. (Exceptions exist for transfers because
of death, corporate merger, formations of business entities where
the taxpayer retains significant control, like-kind exchanges and
involuntary conversions.) [IRC §168(e)(6)]
Qualified restaurant property. This is any Section 1250 property
that is a building or an improvement to a building if more than 50% of
the building’s square footage is devoted to preparation of, and seating
for on-premises consumption of, prepared meals. [IRC §168(e)(7)]
Qualified retail improvement property. This is generally any improvement to an interior portion of a building that is nonresidential
real property if: [IRC §168(e)(8)]
1) Such portion is open to the general public and is used in the
retail business of selling tangible personal property to the
general public.
2) Such improvement is placed in service more than three years
after the date the building was first placed in service.
3) The expenses are not for the enlargement of the building, any
elevator or escalator, any structural components benefiting a
common area or the internal structural framework of the building.
If an owner transfers ownership of qualified retail improvement
property, the improvement will not be qualified retail improvement
property to any subsequent owner. (Exceptions exist for transfers
because of death, corporate merger, formations of business entities
where the taxpayer retains significant control, like-kind exchanges
and involuntary conversions.)
Qualified Real Property—Special Rules (2013)
2014
Caution: The special rules summarized here do not apply to 2014 unless Congress
enacts legislation extending them beyond 2013. See the Expired Provision Alert
in the previous column.
MACRS recovery period
Eligible for special (bonus)
depreciation?
Eligible for Section 179
deduction?
Must be placed in service more
than three years after building
placed in service?
Must be made pursuant to a
lease?
Qualified
Qualified
Leasehold
Qualified
Retail
Improvement Restaurant Improvement
Property
Property
Property
15
15
15
Yes
No1
No1
Yes2
Yes2
Yes2
Yes
No
Yes
Yes
No
No
Exception: If property also meets the definition of qualified leasehold improvements,
it qualifies for special depreciation allowance.
2
Heating and air conditioning units are not eligible.
1
Correcting Depreciation Errors
File Form 3115, Application for Change in Accounting Method, to
report depreciation changes that qualify as accounting method
changes. Changes that are not accounting method changes are
reported on amended returns.
Depreciation corrections made on From 3115:
•The treatment of an asset from nondepreciable to depreciable
or vice versa.
•Change to the depreciation method, recovery period or convention of a MACRS asset.
•Change from improperly expensing to capitalizing
an asset.
 Note: Generally, an impermissible accounting method is not established until the taxpayer
uses it for two consecutive tax years. Thus, an
impermissible accounting method used on only
one return is generally corrected on an amended
return. However, taxpayers can change an impermissible depreciation accounting method used on a single return either by filing
an amended return or by filing a Form 3115. [Rev. Proc. 2011-14,
Appendix Section 6.01(1)(b)]
Depreciation corrections made on an amended return.
•Correcting mathematical or posting errors.
•A change in useful life (non-MACRS assets).
•A change in salvage value (other than to zero).
•A change in the placed-in-service date.
Automatic permission for changing depreciation accounting
method. The IRS grants automatic consent to certain accounting method changes, including changing from an impermissible
to permissible method of computing depreciation (which enables
taxpayers who have claimed less than the allowable amount of
depreciation to catch up to the allowable amount). Form 3115,
Application for Change in Accounting Method, is filled out in duplicate. The original is attached to a timely filed tax return (including
extensions) for the year of change. The copy is normally filed with
the IRS in Ogden, UT, no later than the time when the tax return is
filed. See Form 3115 instructions (revised March 2012) for mailing
address. There is no user fee under this procedure.
U Caution: Automatic permission is not given to change from
expensing an item to capitalizing and depreciating it.
A Section 481(a) adjustment is usually required when an accounting method is changed to ensure that income or expense items
are not omitted or duplicated. It is calculated on Form 3115. The
481(a) adjustment is then reported as income (or a deduction) on
the tax return, starting in the year of change. A negative adjustment
(depreciation in previous years was understated) is recognized in
full that year. A positive adjustment (depreciation was overstated)
is spread over four years. Exception: A positive adjustment less
than $25,000 can be recognized in the year of change.
 Note: The Section 481(a) adjustment is computed for all prior
tax years, not just those that are still open. (Rev. Proc. 2011-14)
Example: Brad purchased a rental duplex on January 1, 2011 for $250,000 (not
including land). While preparing the 2014 return, the preparer discovers that
no depreciation had been claimed for the duplex on the previous three returns.
Straight-line depreciation over 27.5 years for the years 2011–2013 equals
$26,894 ($9,091 per year with mid-month convention in 2011). A Form 3115
to change the accounting method is attached to Brad’s 2014 Form 1040. The
negative Section 481(a) adjustment of $26,894 is reported on his Schedule E
reporting income and deductions from the duplex. 2014 depreciation of $9,091
is claimed on Form 4562.
Intangible Assets
Certain intangible assets can be amortized over 15 years beginning in the month they are acquired, even if there is no way to
determine their useful life. 15-year amortization applies to the
following intangible assets that are purchased by a taxpayer in
connection with the acquisition of a trade or business: (IRC §197)
•Goodwill and going concern value.
•Workforce in place.
•Covenant not to compete.
•Copyrights and patents.
•Franchise, trademark, trade names.
•Information bases such as client files, customer lists and direct
mail and telemarketing lists.
•Contracts with customers or suppliers (unless the contracts have
a fixed duration and are nonrenewable).
•Computer software not available to the general public.
•Mortgage servicing rights.
 Note: The following assets are amortizable
even if they are not acquired as part of a business acquisition:
•Covenant not to compete.
•Franchise, trademark and trade name.
•Interest in a patent or copyright.
•Interest in a sound recording, book, movie or videotape.
•License or permit (such as liquor license or taxi medallion).
•Mortgage servicing rights.
Autos and Listed Property

Tab 11 Topics
Business Vehicles—Quick Facts........................... Page 11-1
Deducting Vehicle Expenses................................. Page 11-2
Depreciating Vehicles............................................ Page 11-2
Maximizing Vehicle Section 179 Expense............. Page 11-4
Depreciation After Recovery Period Ends............. Page 11-5
Depreciation Recapture......................................... Page 11-5
Basis—Autos......................................................... Page 11-6
Auto Trade-In Rules............................................... Page 11-6
Selling a Business Auto......................................... Page 11-7
Alternative Motor Vehicle Tax Credit...................... Page 11-7
Credits for Plug-In Vehicles................................... Page 11-7
Commuting Expenses............................................ Page 11-8
Autos—Documenting Business Use...................... Page 11-9
Employer-Provided Vehicles.................................. Page 11-9
Listed Property....................................................... Page 11-9
Leased Vehicles................................................... Page 11-10
Basis Worksheet—Vehicle Acquired in
a Trade-In.......................................................... Page 11-14
Section 280F Depreciation Limits for Cars—
Placed in Service Before 2010.......................... Page 11-14
Section 280F Depreciation Limits for
Trucks and Vans—Placed in Service
Before 2010....................................................... Page 11-14
Vehicles Subject to Section 280F Limit
Depreciation Worksheet.................................... Page 11-14
Business Vehicles—Quick Facts
For business vehicles placed in service
2014
2013
2012
2011
2010
Passenger Autos—Unloaded Gross Vehicle Weight 6,000 lbs. or Less
Depreciation limits (Section 280F limits)1,2
Placed in service year if special depreciation allowed
Placed in service year if no special depreciation allowed
Second-year limit
Third-year limit
All years thereafter
$ 11,160
3,160
5,100
3,050
1,875
$ 11,160
3,160
5,100
3,050
1,875
$ 11,160
3,160
5,100
3,050
1,875
$ 11,060
3,060
4,900
2,950
1,775
$ 11,060
3,060
4,900
2,950
1,775
Leased auto income inclusion applies when FMV exceeds
$ 18,500
$ 19,000
$ 18,500
$ 18,500
$ 18,500
Trucks and Vans—Loaded Gross Vehicle Weight 6,000 lbs. or Less
Depreciation limits (Section 280F limits)1,2
Placed in service year if special depreciation allowed
Placed in service year if no special depreciation allowed
Second-year limit
Third-year limit
All years thereafter
$ 11,460
3,460
5,500
3,350
1,975
$ 11,360
3,360
5,400
3,250
1,975
$ 11,360
3,360
5,300
3,150
1,875
$ 11,260
3,260
5,200
3,150
1,875
$ 11,160
3,160
5,100
3,050
1,875
Leased auto income inclusion applies when FMV exceeds
$ 19,000
$ 19,000
$ 19,000
$ 19,000
$ 19,000
Heavy Vehicles—Over 6,000 lbs. (unloaded GVW for autos, loaded GVW for trucks and vans) and GVW 14,000 lbs. or less
Section 179 expensing limit—per vehicle4
Depreciation limit (annual Section 280F limit)
$ 25,000
$ 25,000
N/A
N/A
$ 25,000
N/A
$ 25,000
$ 25,000
N/A
N/A
Vehicles Not Subject to Depreciation Limits
Autos with unloaded gross vehicle weight (GVW) more than 6,000 lbs., trucks and vans with GVW (loaded) more than 6,000 lbs., and qualified nonpersonal-use vehicles
are not subject to the Section 280F depreciation limits.
Standard Mileage Rates
Business miles
56¢
56.5¢
55.5¢
Depreciation component of business standard mileage rate
22¢
14¢
23¢
14¢
23¢
14¢
23.5¢
24¢
23¢
Charitable miles
Medical or moving miles
Section 280F Limit Applies When
(Vehicles Placed in Service in 2014)
Description
Qualifies for 50% special depreciation
Doesn’t qualify for special depreciation or taxpayer elects out
51¢: 1/1–6/30
55.5¢: 7/1–12/31
22¢
14¢
19¢: 1/1–6/30
23.5¢: 7/1–12/31
50¢
23¢
14¢
16.5¢
If any personal use, the limits must be reduced to reflect
actual business/investment-use percentage.
2
This limit applies to the sum of any special depreciation
allowance, MACRS depreciation and Section 179 expense
claimed.
3
Special depreciation allowance expired and is not available
for vehicles placed in service after 2013 (see Special
Depreciation Allowance on Page 10-8).
4
Overall limit on Section 179 expensing also applies.
5
Assumes half-year convention applies.
1
Basis equals or exceeds:5
Truck or
Auto
Van
$ 18,600
$ 15,800
$ 19,100
$ 17,300
Deducting Vehicle Expenses
See also IRS Pubs. 463 and 535
Taxpayers eligible to deduct vehicle expenses can compute their
deduction using either the standard mileage rate
method or the actual expense method.
Information needed to deduct expenses:
•Total miles driven for year.
•Total business/investment miles driven for year.
•Date vehicle placed in service.
•Basis in automobile (if actual cost method used).
Five or More Vehicles Used at the Same Time
Taxpayers who own or lease five or more vehicles used for business at the same time cannot use the standard mileage rate. This
rule does not apply to taxpayers who use the vehicles at different
times for business.
Example # 1: Marcia owns three cars and two vans that she uses at different
times to call on her customers. She can use the standard mileage rate for all
five vehicles because she does not use them all at the same time.
Example # 2: Tony and his employees use his four pickup trucks in his landscaping business. During the year, he traded in two of his old trucks for two
newer ones. Tony can use the standard mileage rate for all six of the trucks
he owned during the year, since he didn’t use five or more at the same time.
Example #3: Chris owns a repair shop and an insurance business. He and
his employees use his two pickup trucks and a van for the repair shop. Chris
alternates between his two cars for the insurance business. No one else uses
the cars for business purposes. Chris can use the standard mileage rate for the
pickup trucks, van and the cars because he never has five or more vehicles
used for business at the same time.
Depreciating Vehicles
Depreciation Limits for Passenger Autos
Depreciation (including the Section 179 deduction) for passenger
autos is limited by annual caps under Section 280F. The depreciation limit is based on the year the vehicle is first placed in service.
See the Business Vehicles—Quick Facts table on Page 11-1.
Passenger auto. A passenger auto is any four-wheeled vehicle
that is made primarily for use on public streets, roads and highways
and rated at 6,000 pounds or less of unloaded gross vehicle weight
(GVW). Exception: Vehicles described at Qualified nonpersonaluse vehicles on Page 11-9 are not passenger
automobiles.
Trucks and vans. Trucks and vans are subject to different Section 280F limits than cars.
A truck or van is a passenger automobile that
is classified by the manufacturer as a truck or
van and has a loaded GVW of 6,000 pounds or less.
Comparison of Standard Mileage Rate and Actual Cost Methods (2014)1
Available to
Calculating the
deduction
Additional
deductible
expenses
Depreciation
and Section 179
rules
Standard Mileage Rate Method
• Self-employed individuals and employees using a car for business
(including rental activities) (business mileage rate).
• Individuals using a car for charitable, medical or job-related moving
purposes (charitable, medical or job-related move rates).
• Taxpayers who use the car for hire (such as a taxi).
Exceptions: Not available to taxpayers who:
• Use five or more cars simultaneously in their business.
• Claimed depreciation using a method other than SL, a Section 179
deduction or special depreciation allowance for the car.
• Previously claimed actual car expense for a car they lease.
• Are using an employer-provided vehicle for business.
• Are rural mail carriers and receive a qualified reimbursement.
Multiply the following rates per mile by the number of miles driven:
• Business—56¢ per mile.
• Charitable—14¢ per mile.
• Medical—23.5¢ per mile.
• Job-related move—23.5¢ per mile.
No additional deductions are allowed for the actual costs of owning and
operating the car (such as depreciation or lease payments, maintenance,
repairs, tires, gasoline, oil, insurance and registration fees).
Actual Cost Method
Any taxpayer using a car for business (including rental activities),
charitable, medical or job-related moving purposes.
Taxpayers can convert from the standard mileage rate method to the
actual cost method any year. If the vehicle is not fully depreciated, the
taxpayer must use SL depreciation based on remaining useful life.
Determine percentage of use (based on miles driven) for business,
charitable, medical or job-related moving purposes. Apply that percentage
to actual expenses of owning and operating the vehicle, including: gasoline
and oil, tires, lease payments, maintenance and repairs, insurance,
registration fees and licenses and basis for depreciation/Section 179
expensing.
Exception: For charitable, medical or job-related moving use may deduct
actual out-of-pocket costs directly attributable to use. No portion of
depreciation, Section 179, insurance or general maintenance expenses
can be deducted.
• Parking fees and tolls for business, charitable, medical or moving use.
• Business percentage of interest and personal property taxes. (Employees must treat all interest as personal interest.)
• Nonbusiness percentage of personal property taxes (itemized deduction).
• Basis reduced (but not below zero) for business miles driven:
• Generally, 200% DB balance/five-year recovery period. But, can elect
SL over five years (ADS) or 150% DB over five years (AMT method).
Cents
Cents
Cents
Year
Year
Year
See Tab 10 for MACRS depreciation tables.
per mile
per mile
per mile
1994–1999.......12¢
2005–2006....... 17¢
2011..................22¢ • Annual depreciation and first-year Section 179 expense limited under
Section 280F for passenger autos, trucks and vans.
2000.................14
2007.................19
2012.................23
• If used 50% or less for business, must use SL/five-year recovery
2001–2002.......15
2008–2009.......21
2013.................23
period. No Section 179 expense available.
2003–2004.......16
2010.................23
2014.................22
• No Section 179 expense available.
These methods are available for cars, which includes a van, pickup or panel truck.
Note: See Revenue Procedure 2010-51 for detailed definitions and discussion of using standard mileage rates. Annual mileage rates are published in an IRS Notice. See
Notice 2013-80 for 2014 amounts.
1
See the Business Vehicles—Quick Facts table on Page 11-1 for the
limits that apply to vehicles placed in service during 2010–2014.
Special use vehicles. These vehicles are not subject to the Section 280F depreciation limits. This category includes the following:
1) An ambulance, hearse or combination ambulance-hearse used
in a trade or business.
2) A vehicle used in the trade or business of transporting persons
or property for compensation or hire (for example, a taxicab).
3) Qualified non-personal use vehicles. See Qualified nonpersonal-use vehicles on Page 11-9.
Deduction Limits for Vehicles Placed in Service in 2014
§280F
Depreciation
Limit1
$ 3,1604
$ 3,4604
N/A
Description
Maximum
§179
Deduction
$ 3,1604
$ 3,4604
$ 25,0002
Car—GVW (unloaded) up to 6,000 lbs.
Truck or van—GVW (loaded) up to 6,000 lbs.
• Car—GVW (unloaded) over 6,000 lbs. but
GVW not over 14,000 lbs.
• Truck or van—GVW (loaded) over 6,000 lbs.
but not over 14,000 lbs.
Vehicles described in the preceding row that:
N/A
$500,0003
• Are designed to seat more than nine
passengers behind the driver seat (for
example, a hotel shuttle van),
• Have an open cargo area or covered box that is
at least six feet long and not readily accessible
from the passenger compartment (for example,
a pick-up with full-size cargo bed) or
• Have an integral enclosure fully enclosing the
driver compartment and load carrying device,
do not have seating behind the driver’s seat
and have no body section protruding more
than 30 inches ahead of the windshield (for
$500,000
example, a delivery van).
Truck or van—GVW (loaded) over 14,000 lbs.
N/A
$500,0003
1
First year limit; reduce by any Section 179 expense claimed.
2
Per vehicle limit. Also subject to annual overall limit ($25,000 for 2014).
3
Annual limit for all assets expensed.
4
Plus $8,000 if vehicle qualifies for special (bonus) depreciation.
Section 179 Limit for Heavy Vehicles
Any four-wheeled vehicle primarily designed to carry passengers
over public streets, roads or highways that is not subject to the
Section 280F depreciation limits and is rated at 14,000 pounds
GVW or less is subject to a $25,000 limit on the Section 179 deduction. [IRC §179(b)(5)]
Thus, cars with an unloaded GVW over 6,000
pounds (over 6,000 loaded GVW if a truck or
van) and that are rated at no more than 14,000
pounds GVW are subject to the limit. For exceptions, see the Deduction Limits for Vehicles
Placed in Service in 2014 table above.
 Note: Even though these vehicles are not subject to the 280F
depreciation limits, they are still listed property.
The $25,000 limit is per vehicle. It is not pro-rated for vehicles with
less than 100% business use.
Website: GVWs for many vehicles can be found at www.intellichoice.com and www.carsdirect.com/new_cars/search. These
amounts might also be found on a label attached to the inside
edge of the driver’s door.
Calculating Vehicle Depreciation
Step 1: Determine the business/investment use percentage by
dividing business/investment miles driven during the year by total
miles driven.
Step 2: Multiply the Section 280F limit for the year by the business/investment use percentage. This is the maximum amount
that can be claimed as depreciation (including any Section 179
deduction) for the year.
Step 3: Determine the Section 179 deduction. The Section 179
deduction can only be claimed in the year the vehicle is placed
in service and only if qualified business use is more than 50%.
Step 4: Determine the special depreciation allowance, if applicable. Note: The special depreciation allowance is not available
for vehicles placed in service in 2014 unless Congress enacts
legislation extending it to 2014.
Step 5: Determine MACRS depreciation based on a five-year recovery period. If qualified business use is 50% or less, depreciation
must be calculated SL. See the Vehicle Depreciation—MACRS
Percentages table below.
Special rule if 100% special depreciation allowance claimed in
prior year. The special depreciation rate was 100% for qualifying
assets purchased and placed in service from September 9, 2010–
December 31, 2011.
Generally, when depreciation is limited under Section 280F, the
disallowed amount (called unrecovered basis) cannot be deducted
until after the end of the vehicle’s recovery period (subject to the
Section 280F limits then in effect) [IRC §280F(a)(1)(B)]. Under that
rule, claiming 100% special depreciation results in all of the vehicle’s
basis (assuming 100% business use) over the first year Section 280F
limit becoming unrecovered basis, which cannot be depreciated until
after the end of the vehicle’s recovery period. To mitigate this result,
taxpayers who claimed 100% special depreciation that was limited by
Section 280F can elect a safe-harbor method for their unrecovered
basis (Rev. Proc. 2011-26). Under the safe-harbor method, taxpayers compute depreciation after the first year by assuming special
depreciation in the first year was 50% rather than 100%.
The safe-harbor method is elected by applying it to deduct depreciation on a vehicle subject to the Section 280F limit for the first
year after the placed-in-service year.
Vehicle Depreciation—MACRS Percentages
These rates are for a five-year recovery period. Apply the applicable rate to the vehicle’s basis for depreciation each year of the recovery period. Basis for depreciation is the
original basis multiplied by the business/investment use percentage, reduced by any Section 179 deduction, special depreciation allowance and credits.
Straight Line—Used 50% or less for business or SL elected
200% DB—Used more than 50% for business1
Year
1
2
3
4
5
6
1
HY
20.00%
32.00
19.20
11.52
11.52
5.76
MQ1
35.00%
26.00
15.60
11.01
11.01
1.38
MQ2
25.00%
30.00
18.00
11.37
11.37
4.26
MQ3
15.00%
34.00
20.40
12.24
11.30
7.06
MQ4
5.00%
38.00
22.80
13.68
10.94
9.58
HY
10.00%
20.00
20.00
20.00
20.00
10.00
MQ1
17.50%
20.00
20.00
20.00
20.00
2.50
MQ2
12.50%
20.00
20.00
20.00
20.00
7.50
MQ3
7.50%
20.00
20.00
20.00
20.00
12.50
MQ4
2.50%
20.00
20.00
20.00
20.00
17.50
Incorporates the switch from the 200% declining-balance (DB) method to the straight-line (SL) method when that method provides a greater deduction. Taxpayers can elect
to use the 150% DB or the SL method with a five-year recovery period.
Example: In 2011, Matt purchased a new car for $20,000 that he used 100%
for business. The half-year convention applied. The car qualified for the 100%
special depreciation allowance, but Matt’s 2011 depreciation was limited to
$11,060 (the Section 280F limit). In 2012, Matt adopts the safe-harbor method.
So, for 2012 and later, he is treated as if he claimed 50% special depreciation
in 2011 for figuring his unrecovered basis and depreciation:
Deemed 2011 depreciation [($20,000 × 50%) + ($10,000 × 20%)]..... $ 12,000
Actual 2011 depreciation.................................................................. < 11,060>
Unrecovered basis............................................................................ $
940
The $940 unrecovered basis is recovered beginning in 2017, subject to the
280F limits in effect.
For 2014, the car’s depreciation is $1,152 (11.52% per MACRS table × $10,000
unadjusted depreciable basis if 50% special depreciation had been claimed in
2011). Because this amount is less than the 280F limit ($1,775), Matt deducts
$1,152 in 2014.
Variation: Assume the same facts except the car cost $18,400. For 2011,
Matt’s 100% special depreciation allowance is limited to $11,060 (the Section
280F limit). Under the safe-harbor accounting method, he is deemed to have
claimed 50% special depreciation for determining the car’s unrecovered basis
and its remaining adjusted depreciable basis, as follows:
Deemed 2011 depreciation [($18,400 × 50%) + ($9,200 × 20%)].... $ 11,040
Actual 2011 depreciation.................................................................. < 11,060>
Unrecovered basis (cannot be less than zero)................................. $ 0
Because there is no unrecovered basis under the safe-harbor method, Matt
cannot use the MACRS depreciation tables to compute depreciation on his
car for years after the placed-in-service year. Instead, he must compute
depreciation using the 200% declining balance method (using the half-year
convention) as follows:
Beginning unadjusted basis.............................................................. $ 18,400
2011 actual depreciation................................................................... < 11,060>
2012 and 2013 actual depreciation ($2,936 + $1,762)1.................... < 4,698>
Adjusted basis at 12/31/13............................................................... $ 2,642
200% declining balance rate............................................................
40%
2014 depreciation............................................................................. $ 1,057
Because this amount is less than the 280F depreciation limit ($1,775) Matt
deducts $1,057 as depreciation for 2014.
1
2012 depreciation is computed by multiplying the adjusted basis for depreciation
at 12/31/11 ($18,400 – 11,060 = 7,340) by 40% (the DDB percentage). 2013
depreciation of $1,762 is computed the same way.
Business Use 50% or Less
Passenger automobiles (see Passenger auto on Page 11-2) used
50% or less for business purposes are not eligible for Section
179 expense and must be depreciated over five years using the
SL method. The half-year or mid-quarter conventions still apply.
See the Vehicle Depreciation—MACRS Percentages table on
Page 11-3.
Investment use. Investment use is not
counted for determining whether a vehicle
meets the more-than-50% business-use
test (to qualify for accelerated depreciation
and Section 179 expensing). But, the combined business/investment percentage is used to compute the depreciable portion of
the vehicle’s basis.
Example #1: An auto is used 40% in a trade or business and 25% for investment.
Method: SL depreciation must be used based on 65% business/investment use.
Example #2: An auto is used 80% in a trade or business and 10% for investment. Method: Accelerated depreciation (200% DB) may be used and
calculated based on 90% business/investment use.
Electing Straight-Line Depreciation
Even if business use exceeds 50%, a taxpayer may elect to depreciate an auto under the five-year SL method instead of using 200%
declining balance. Electing SL depreciation avoids the recapture
of excess deductions if business use drops to 50% or less in a
later year. The election is made by entering “SL” in column (g) of
Part V, Form 4562. The election applies to all five-year property
placed in service in the year the election is made.
Maximizing Vehicle
Section 179 Expense
The Section 179 deduction is available only if a
vehicle is used more than 50% for business
in the year it is purchased and placed in
service. Any amount claimed reduces the
basis for computing MACRS depreciation.
The total of the Section 179 expense plus MACRS depreciation
may not exceed the Section 280F limit. See limits (based on year
placed in service) in the Business Vehicles—Quick Facts table on
Page 11-1. See Section 179 Deduction on Page 10-9 for details.
@ Strategy: If a vehicle’s depreciation deduction equals (or exceeds) the Section 280F limit, it is better to make the Section 179
expensing election for other assets (since the full amount of the
allowed deduction for the vehicle can be reached with depreciation deductions). But, for low-basis vehicles or vehicles subject
to the mid-quarter convention and placed in service during the
fourth quarter, a Section 179 deduction can be used to reach the
Section 280F limit.
See the Section 280F Limit Applies When table on Page 11-1 to
determine whether first-year depreciation exceeds the 280F limit.
Example #1: A used car is purchased on June 1, 2014, for $8,000 and is used
100% for business. MACRS depreciation (using the half-year convention) is
$1,600 ($8,000 × 20%). Since this is below the 280F limit ($3,160), the taxpayer
should elect to expense $1,560 of the auto under Section 179 to bring the total
deduction allowed up to $3,160 for the year.
Example #2: Assume the same facts as Example #1, except the vehicle
costs $18,000. MACRS depreciation using the half-year convention is $3,600
($18,000 × 20%), limited to a maximum deduction of $3,160. A Section 179
expense election for the vehicle would not be advantageous in this situation.
Use the following formula to calculate the Section 179 deduction
needed to maximize the first-year deductions for an auto when
100% special depreciation is not claimed.
Optimal Section 179 Deduction for Vehicles
1) Multiply auto’s basis by business-use percentage..............
1) 2) Multiply the annual Section 280F depreciation limit by
the business-use percentage..............................................
2) 3) Multiply line 1 by Factor A in table below.............................
3) 4) Line 2 minus line 3. If zero or less, STOP.
No Section 179 deduction should be claimed.....................
4) 5) Divide the result in line 4 by Factor B in table below.
Result equals Section 179 deduction..................................
5) Convention
Factor A
Factor B
Half year.....................................................
.20
.80
MQ—1st quarter.........................................
.35
.65
MQ—2nd quarter........................................
.25
.75
MQ—3rd quarter.........................................
.15
.85
MQ—4th quarter.........................................
.05
.95
Example: Jim purchased a used Honda car in February 2011 for $20,000.
He used it 100% in his business. In November 2014, Jim exchanges, in a
like-kind exchange, his Honda plus $14,000 cash for a used Mazda car that
will also be used solely in his business. Jim claims a Section 179 deduction
on the Mazda’s excess basis. The 2014 Section 280F limit for the Honda (if
the trade hadn’t occurred) is $1,775. The 2014 280F limit for the used Mazda
is $3,160. The depreciation and basis calculations for 2014 are as follows:
Depreciation
Basis
Honda basis at December 31, 2013 ($20,000 cost –
$3,060 – $4,900 – $2,950)...................................................................... $ 9,090
2014 depreciation on Honda ($20,000 × 11.52% ÷ 2,
limited to $1,775).................................................................. < 1,152>
Exchanged basis in Mazda...................................................................... $ 7,938
2014 depreciation on Mazda exchanged basis ($7,938 ×
11.52% ÷ 2, limited to $1,775 – $1,152)............................... < 457>
Mazda exchanged basis at December 31, 2014..................................... $ 7,481
Mazda excess basis ............................................................................... $ 14,000
Sec. 179 deduction (limited to $3,160 – $1,152 – $457)..... < 1,551>
Depreciation on Mazda excess basis [($14,000 – $1,551)
× 20%, limited to $3,160 – $1,152 – $457 – $1,551]............ < 0>
Mazda excess basis at December 31, 2014............................................ $ 12,449
Total 2014 depreciation ($1,152 + $457 + $1,551)............... < 3,160>
Basis of Mazda at end of 2014 ($7,481 + $12,449)................................ $ 19,930
Selling a Business Auto
For a 100% business-use auto, the basis for
computing gain or loss is generally the original cost or other basis less the amount of
depreciation and Section 179 expense
allowed. If the standard mileage rate was
used, basis is reduced by the depreciation
component of the business standard mileage rate (see the Business Vehicles—Quick Facts table on Page 11-1). For an auto with
both business and personal use, gain or loss must be figured as
though two separate assets were sold. The business-use percentage is determined, then the selling price and basis are allocated
between the business and personal portions. Total depreciation is
subtracted from the business portion of the basis.
When the business-use percentage varies from year to year, use
the following formula to determine the business-use percentage
for the year of sale.
Total Business Miles All Years
Total Miles Driven All Years
=
Business-Use
Percentage
Example: Bob used the standard mileage rate method to report expenses
from his used car purchased on August 2, 2013, for $18,000. He drove 9,000
and 20,000 business miles during 2013 and 2014, which represented 80%
business use. On December 24, 2014, Bob sells the car.
Bob’s adjusted basis for a sale or trade:
Original cost or basis..........................
Total
80%
Business
$ 18,000
$ 14,400
20%
Personal
$ 3,600
Less: Depreciation component of
standard mileage rate:
2013 (9,000 × 23¢ per mile)...............
< 2,070 >
< 2,070 >
0
2014 (20,000 × 22¢ per mile).............
< 4,400 >
< 4,400 >
0
Adjusted basis of car..........................
$ 11,530
$ 7,930
$ 3,600
Example continued in the next column
Bob sells the car for $12,500:
Total
80%
Business
Sales proceeds...................................
$ 12,500
$ 10,000
Adjusted basis....................................
< 11,530 >
< 7,930 >
< 3,600 >
Gain (loss) on sale..............................
$
$ 2,070
< 1,100 >
970
20%
Personal
$ 2,500
The $2,070 gain on the business portion is a taxable Section 1231 gain (subject
to Section 1245 recapture) and is reported on Form 4797. The $1,100 loss
on the personal portion is a nondeductible personal loss and is not reported
on Bob’s return. If a gain had been realized on the personal portion, it would
have been reported as long-term capital gain on Form 8949.
Alternative Motor Vehicle
Tax Credit
Form 8910
The only alternative motor vehicle credit available
for vehicles placed in service in 2014 is the credit
for qualified fuel cell motor vehicles. These are
propelled by power derived from one or more
cells that convert chemical energy directly into
electricity. A list of qualified vehicles and the
credit amount is available at www.irs.gov. Search
for “qualified fuel cell vehicles.”
Credits for Plug-In Vehicles
Form 8936
Plug-In Electric Drive Motor Vehicles
Taxpayers can claim a credit for each new qualifying vehicle
purchased for use or lease but not for resale. The portion of the
credit attributable to the business-use percentage of the vehicle
is treated as part of the taxpayer’s general business credit. The
remainder is treated as a nonrefundable personal credit that can
offset both regular tax and AMT. (IRC §30D)
Qualifying vehicles are new four-wheeled plug-in electric vehicles manufactured primarily for use on public streets, roads and
highways that meet certain technical requirements. The credit
amount ranges from $2,500 to $7,500. However, the following
do not qualify:
1) Vehicles manufactured primarily for off-road use (such as golf
carts).
2) Vehicles weighing 14,000 pounds or more.
3) Low-speed vehicles (four-wheeled vehicles that can obtain a
speed of 20 but not more than 25 miles per hour and a gross
vehicle weight rating of less than 3,000 pounds).
Manufacturers’ certification. The IRS will acknowledge a
manufacturer’s (or in the case of a foreign vehicle manufacturer,
its domestic distributor’s) certifications that a vehicle
meets the standards to qualify for the credit. Taxpayers may rely on such a certification (Notice 2009-89).
A list of qualified vehicles and the credit amount is
available at www.irs.gov. Search for “plug-in electric
drive motor vehicles.”
Phase-out based on vehicle sales. The credit phases
out when the manufacturer has sold 200,000 qualifying
vehicles after 2009 [IRC §30D(e)]. As of publication
date, no manufacturer had reached the threshold. Search
for “plug-in electric drive motor vehicles” at www.irs.gov to check
the status of manufacturer’s quarterly sales.
Congress did not extend the credit with the Tax Increase Prevention Act of 2014; so the credit is not available for 2014.
2- and 3-Wheeled Electric Vehicles
 Expired Provision Alert: The credit for purchasing qualified
Example #2: Walter’s principal place of business is in his home. He can
deduct the cost of round-trip transportation between his home and his client’s
or customer’s place of business.
2- and 3-wheeled plug-in electric vehicles expired on December 31,
2013. This section is retained in the event Congress enacts legislation extending the credit to 2014.
Deducting Commuting Expense
A credit is available for certain 2- and 3-wheeled plug-in electric
vehicles placed in service in 2013. [IRC §30D(g)]
Is taxpayer’s home the principal place of business?
New vehicles with two or three wheels qualify if they:
•Are capable of achieving a speed of 45 miles per hour or greater.
No
Yes
•Are propelled to a significant extent by an electric motor that
Is this job temporary
Commuting expenses
draws electricity from a battery with a capacity of at least 2.5
(one year or less)?
between home and
kilowatt hours and that is capable of being recharged from an
another work location
No
external electricity source.
in the same trade or
Yes
business are deductible.
•Have a gross vehicle weight of less than 14,000 pounds.
Commuting
Is this job outside
Page
14 ofexpenses
50 are
Fileid: … tions/P463/2013/A/XML/Cycle03/source
the taxpayer’s
The portion of the credit attributable to business/investment use
of
nondeductible.
metropolitan area?
the vehicle is part of the general business credit. The remainder is a
Yes
personal nonrefundable credit that can offset regular tax and AMT.
The type and rule above prints on all proofs including departmental
reproduction proofs. MUS
No
Commuting expenses
are deductible.
Does the taxpayer have one or more
regular work locations away from home?
Commuting Expenses
In general, the costs of commuting between a taxpayer’s home
and work location are nondeductible personal expenses.
Deductible Commuting
No
Yes
Commuting expenses to
temporary job in the same trade
or business are deductible.
Commuting expenses
are nondeductible.
w
Al
Figure B. When Are Transportation Expenses Deductible?
Commuting expenses are allowed in going between a taxpayer’s
Most employees and self-employed persons can use this chart. (Do not use this chart if your home
home and work location if: (Rev. Rul. 99-7)
is your principal place
of business.
See Office in theExpenses
home.)
When
Local Transportation
Are Deductible
1) The expense is for going between the taxpayer’s home and a
Taxpayer’s Home Is Not The Principal Place of Business
temporary work location outside the metropolitan area where
a
the taxpayer lives and normally works,
e
av b
h
2)The taxpayer has one or more regular work locations away
u jo n
yo in io
if ma cat
from home and the expenses are for going between home
e
l r o
ib o r l
and a temporary work location in the same trade or business,
Temporary
ct lar he
du gu not
work location
e
regardless of distance or
D re t a
a
3) The taxpayer’s home is the taxpayer’s principal place of busiAlways
deductible
ness, and the expenses are for going between home and another work location in the same trade or business, regardless
of whether the other work location is regular or temporary and
Never deductible
regardless of the distance.
Temporary work location. A work location is considered tempoHome
rary if employment is expected to last and actually does last for
Regular or
main job
one year or less. See the Temporary vs. Indefinite Assignment
on Page 9-4.
Always
deductible
Principal place of business. To determine whether the home is
the taxpayer’s principal place of business, consider:
•The relative importance of the activities
performed at each place where he conducts
business and
•The amount of time spent at each place
Second job
where business is conducted.
Home: The place where you reside. Transportation expenses between your home and
A home office qualifies as the principal place
your Hauling
main or regular
place ofor
workEquipment
are personal commuting expenses.
Tools
of business if the taxpayer:
Regular
or
main
job:
Your
principal
place for
of business.
If you have more than one job,
If a taxpayer incurs expenses
transporting
•Uses it exclusively and regularly for administrative or manage- you must
determine
which
one
is your regular
orthe
main
job. Consider the time you
job-related
tools
and
materials
above
ordinary
ment activities of his trade or business.
spend at each, the activity you have at each, and the income you earn at each.
nondeductible expenses of commuting, the addiwork location: A place where your work assignment is realistically
•Has no other fixed location where substantial administrative or Temporary
tionaltoexpense
may be deducted. For example, cost
last (and does in fact last) one year or less. Unless you have a regular
management activities for the trade or business are conducted. expected
of renting a trailer that is towed by the taxpayer’s car.
p
g
e
o
t
v
ay
s
de
du
le
ib
ct
e
G
w
w
w
m
m
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uc
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tib
Example #1: Sherman regularly works in an office in the city where he lives.
His employer sends him to a one-week training session at a different office in
the same city. He travels directly from his home to the training location and
returns each day. He can deduct the cost of his daily round-trip transportation
between his home and the training location.
T
T
d
n
c
t
c
T
a
place of business, you can only deduct your transportation expenses to a temporary
workAlocation
outside
metropolitan
area.
deduction
is your
available
only for
that portion of the
Second
If you regularly the
workwork
at two
or more places
in oneofday, whether or not
costjob:
of transporting
materials
in excess
for the
you can
your transportation
expenses of getting from
thesame
costemployer,
of commuting
bydeduct
that same
mode of transporone workplace to another. If you do not go directly from your first job to your second
tation
the work
materials. Itexpenses
is immaterial
that
the employee
job, you
canwithout
only deduct
the transportation
of going
directly
from your first
would
have used
a less
expensive
mode
of transportation
if itbetween
were
job to
your second
job. You
cannot
deduct your
transportation
expenses
your not
home
second job of
on carrying
a day off from
your main job.
forand
thea necessity
the tools.
them for their business. They paid $80 for each
gift basket, or $240 total. Three of Local Company's executives took the gift baskets home for
Exceptions. The following items are not considered gifts for purposes of the $25 limit.
T
value if it covers at least 60% of the expected total allowed costs
for covered services. Beginning in 2014, employers will provide
employees with a Summary of Benefits and Coverage, which will
state whether the plan provides minimum value.
U Caution: Individuals who enroll in an employer-sponsored
plan, including retiree coverage, are not eligible for the PTC even
if the plan is unaffordable or fails to provide minimum value.
æ Practice Tip: While not required to do so for 2014, employers
may file Form 1095-C, Employer-Provided Health Insurance Offer
and Coverage, with the IRS (with a copy to the employee). That form
gives information about the health coverage it offered the employee,
including whether the plan offered minimum essential coverage.
Credit Amount
The PTC is based on a sliding scale. Those with lower incomes
get a larger credit. The PTC for the year is the sum of the monthly
credit amounts. The credit amount for each month is the lesser of:
1) The premiums for the month for one or more qualified health
plans in which the taxpayer or any individual in his tax family
enrolled; or
2) The monthly premium for the taxpayer’s applicable second
lowest cost silver plan less his monthly contribution amount.
Qualified health plan. This is a health insurance plan purchased
through the Marketplace at the bronze, silver, gold or platinum level.
Second lowest-cost silver plan (SLCSP). The applicable premium is the age-based premium for the SLCSP offered through
the Marketplace where the taxpayers resides that applies to his
coverage family. The coverage family includes anyone in an individual’s tax family who is enrolled in a qualified health plan and
who is not eligible for minimum essential coverage (other than
coverage in the individual market). The individuals included in a
coverage family may change from month to month.
Monthly contribution amount. This amount, computed in Part 1
of Form 8962, is the taxpayer’s household income multiplied by an
applicable factor (ranging from 2%–9.5%, depending on household
income) and divided by 12.
Form 1095-A
The Health Insurance Marketplace must file Form 1095-A with the
IRS each year to report information on enrollments in qualified
health plans through the Marketplace. The following information
is reported:
•Members of the coverage household.
•Monthly premiums.
•Monthly premium amount of the applicable SLCSP.
•Monthly advance payments of the credit.
Individuals use this information to compute their PTC. A copy of
the Form 1095-A is furnished to the recipient, who is the person
identified at enrollment who is expected to file a tax return and
who, if qualified, would claim the premium tax credit for the year
of coverage for his household.
Advance Payment of the Credit
Individuals can choose to have some or all of the estimated credit
paid in advance directly to their insurance company. Advance payments received during the year are subtracted from the amount
of the premium tax credit. If the advance payments exceed the
credit, the difference (up to certain limits—see Excess Advance
Premium Tax Credit Repayment Limitations on Page 4-20) is an
additional amount of tax due, reported on line 46 of Form 1040.
Shared Policies
See Form 8962 instructions for allocation rules when:
•An individual or someone in his tax family was enrolled in a qualified health plan by someone outside his tax family.
•The individual or someone in his tax family enrolled someone
outside the tax family in a qualified health plan.
•An individual marries during the year. Residential Energy Tax Credits
Form 5695; See also IRC §25C and §25D and IRS Pub. 17
Personal (Nonbusiness) Energy Property
 Expired Provision Alert: The credit for personal energy prop-
erty expired on December 31, 2013. Unless Congress extends it,
the credit will not be available for 2014. This discussion is retained
in the event that credit is extended to 2014.
Taxpayers can claim a credit for certain home improvements placed
in service in 2013 (IRC §25C). The nonrefundable credit can offset
regular tax and AMT. (Notice 2013-70)
2014
Allowable credit:
•The credit is equal to 10% of the cost of
qualified energy-efficient improvements
plus 100% of the cost of residential energy property expenditures.
•The credit is limited to (1) $50 for each advanced main air circulating fan; (2) $150 for each natural gas, propane or oil furnace
or hot water boiler and (3) $300 for each item of: (a) electric heat
pump water heaters, (b) electric heat pumps, (c) biomass fuel
stoves, (d) high-efficiency central air conditioners or (e) natural
gas, propane or oil water heaters.
•The credit is subject to a $500 ($200 for exterior windows and
skylights) lifetime limit.
Qualifying property. The property must be installed on or in the
taxpayer’s principal residence that is located in the U.S. (new
construction doesn’t qualify). The improvement must be new (not
used) property.
Qualifying property must meet technical requirements related to
energy savings. Taxpayers can rely on a manufacturer’s certification statement (that the property meets the technical requirements)
to claim the credit. (Notice 2009-53)
Property used partly for business. If the home is used partly for
business (for example, a home office), any qualified expenditure
must be allocated between nonbusiness and business use if the
improvement is used more than 20% for business. If allocation is
required, only the portion of the expenditure allocated to nonbusiness use qualifies for the credit.
Residential Energy Efficient Property
Taxpayers can claim a tax credit for residential energy efficient
property placed in service in 2014. (IRC §25D)
The credit is equal to 30% of the cost of the following property:
•Solar energy systems (water heating and electricity).
•Fuel cells.
•Small wind energy systems.
•Geothermal heat pumps.
There is no limit on the credit amount except in the case of fuel
cells, where the credit limit is $1,000 per kW of capacity. The credit
is allowed against regular tax and AMT.
Other rules:
•The credit (other than for fuel cells) is restricted to equipment
for the taxpayer’s personal residence, which must be in the U.S.
The credit for fuel cell property is only available for a principal
residence.
•No credit is allowed for equipment used to heat swimming pools
or hot tubs.
Continued on the next page
•The cost includes labor costs properly allocable to the onsite
preparation, assembly or original installation of the property and
for piping or wiring to interconnect such property to the home.
•The taxpayer’s basis in the credit property is reduced
by the amount of the credit.
•Taxpayers can rely on manufacturer’s statement that
property qualifies for the credit. (Notice 2009-41)
•Credit is available for new construction as well as
improvements to existing homes. (Notice 2013-70)
Retirement Saver’s Credit
Form 8880; See also IRC §25B and IRS Pub. 590
Qualified individuals are allowed a nonrefundable credit of up to
$1,000 ($2,000 MFJ) for eligible contributions to an IRA or to an
employer-sponsored retirement plan. The credit can offset both
regular tax and AMT.
The amount of the credit is the eligible contribution multiplied by
the credit rate, based on filing status and AGI.
Retirement Saver’s Credit Phase-Out (2014)
Adjusted Gross Income1
Credit
Rate
$
$
HOH
Single, MFS, QW
0 – 27,000
$
0 –
36,000
20%
36,001 –
39,000
27,001 – 29,250
18,001 – 19,500
10%
39,001 –
60,000
29,251 – 45,000
19,501 – 30,000
0%
60,001 and over
45,001 and over
30,001 and over
50%
1
MFJ
0 – 18,000
AGI must be increased by any exclusion or deduction for foreign earned income,
foreign housing cost, income for residents of American Samoa and income from
Puerto Rico.
The credit is in addition to any deduction or exclusion that otherwise
applies with respect to the contribution.
Qualified individuals must:
1) Be at least age 18 by the end of the year,
2) Not be a dependent claimed on another person’s return and
3) Not be a full-time student.
Eligible contributions. Limited to $2,000 per year for each individual. Eligible contributions include the sum of:
1) Contributions (other than rollover contributions) to traditional
or Roth IRAs.
2) Contributions to tax-exempt employee-funded pension plans
under Section 501(c)(18)(D).
3) Elective deferrals to 401(k) plans, 403(b)
annuities, nonqualified deferred-compensation plans maintained by state or local
governments (457 plans), SIMPLE
plans and SARSEPs.
4) Voluntary after-tax employee contributions to any qualified
retirement plan, annuity plan or IRA.
Reduction of eligible contributions. For 2014, eligible contributions are reduced by the total amount of distributions the taxpayer
(and spouse, if MFJ) received from January 1, 2012 through the
due date (including extensions) of the 2014 return from:
1) Traditional or Roth IRAs;
2) 401(k), 403(b), governmental 457, 501(c)(18), SEP or SIMPLE
plans and
3) Qualified retirement plans.
The reduction does not include:
•Distributions not taxable as the result of a rollover or a trusteeto-trustee transfer.
•Distributions taxable because of an in-plan rollover to a designated Roth account.
•Distributions related to a Roth IRA conversion.
•Loans from a qualified employer plan treated as a distribution.
•Distributions of excess contributions or deferrals (and income
allocable to such contributions or deferrals).
•Distributions of contributions made during a tax year and returned
(with any income allocable to such contributions) on or before
the due date (including extensions) for that tax year.
•Distributions of dividends paid on stock held by an employee
stock-ownership plan under Section 404(k).
•Distributions from a military retirement plan.
•Distributions from an inherited IRA by a nonspousal beneficiary.
Small Employer Health
Insurance Credit
Form 8941; See also IRC §45R
Qualified small employers (including sole proprietors) can claim a
nonrefundable credit for health insurance premiums they pay for
their employees. The credit is part of the general business credit
and offsets regular tax and AMT.
The credit is up to 50% of the lesser of:
1) The employer’s contribution to a qualified health insurance arrangement for
employees for the year or
2) The amount that would have been contributed if the total premium for each employee equaled the average premium for
the small group market in which the employer offered health
insurance coverage. These amounts are available in the Form
8941 instructions.
Example: Mark, who lives and runs his business in Connecticut, paid 80%
of the premiums for family coverage for his six FTE employees in 2014. His
employees pay the remaining 20%. Assume the 2014 average premium for
family coverage for the small group market for employers in Connecticut is
$14,096. The premiums considered for the credit are the lesser of 80% of the
total actual premiums paid or $67,661 [80% × ($14,096 × 6)].
Credit reduces deduction for health insurance. The employer’s
deduction for employee health plans is reduced by the small employer health insurance credit.
Qualified Small Employer
A qualified small employer is generally one that:
•Employs fewer than 25 full-time equivalent (FTE) employees
during its tax year.
•Pays average annual wages of less than $51,000 (for 2014).
•Pays premiums for its employees under a qualified health insurance arrangement. Note: For 2014, the coverage generally must
be provided through a Small Business Health Options Program
(SHOP) marketplace. Some exceptions apply.
FTE employees are determined by dividing the total hours worked
by all employees (up to 2,080 per employee) by 2,080 (rounded
down to the next lowest whole number). Count hours worked by
seasonal workers only if they work more than 120 days during
the tax year.
Average annual wages are computed by dividing total Medicare
wages paid by the number of FTE employees, rounded down to
the nearest $1,000.
Earned income credit. A foster child must live with the taxpayer
in the U.S. for more than six months (and meet other EIC requirements) to be a qualifying child for the EIC [IRC §32(c)(3)]. See
Earned Income Credit on Page 12-6.
Child Employed By Parents
Paying wages to a child can be an effective income-shifting strategy
for a taxpayer who owns a business or income-producing property.
•Earned income is not subject to kiddie tax regardless of age.
•Income may be sheltered by the child’s standard deduction
and, to the extent it’s not, the remainder is taxed at the child’s
tax rate.
•A child with earned income can contribute to a retirement
plan (such as a traditional or Roth IRA).
•A child with taxable income during college years
may be able to claim an education credit that the
parents cannot because of the AGI limitation.
•Favorable payroll tax rules may apply (see the Parent-Child
Employment—Payroll Taxes table below).
 Note: A child’s wages are deductible by a parent-employer
only if: (1) the work is done in connection with the parent’s trade
or business (or income-producing property), (2) the child actually
renders the services and (3) the payments are actually made. The
payments must be reasonable in relation to the services rendered.
Maintain records showing services performed and wages paid.
(Rev. Rul. 72-23; Jenkins, TC Memo 1988-292)
Example #1: Phil is in the 35% tax bracket and owns rental property. Phil pays
his 17-year-old son $5,000 during the year to help manage and maintain the
property. The deduction for wages reduces Phil’s tax by $1,750 ($5,000 ×
35%). Since Phil’s son has no other income, his standard deduction reduces
his taxable income to zero.
Example #2: Marty and Trish are married, operate a business as a partnership,
and are in the 35% tax bracket. They hire their 17-year-old daughter, Abby,
to perform services for the partnership, and pay her $9,300 in wages. Abby
contributes $5,500 to an IRA. Her IRA deduction combined with the standard
deduction reduces Abby’s taxable income to zero. The deduction for wages
reduces the parents’ income tax by $3,255 ($9,300 × 35%).
Parent-Child Employment—Payroll Taxes
Income
Tax W/H
Required?
FICA
FUTA
Child employed by parent
(unincorporated business)
Yes
Exempt if
under age 18
Exempt if
under age 21
Child employed by parentowned corporation
Yes
Taxable
Taxable
Child employed by parent for
domestic work
No
Exempt if
under age 21
Exempt if
under age 21
Note: FICA and FUTA exemptions for a child apply only for sole proprietorships
(including single-member LLCs) and partnerships where the only partners are the
child’s parents.
Family Loans
A loan to a family member to finance a first home, start a new
business or pay personal expenses should be made in a businesslike manner.
The lender should have an enforceable note that shows: (1)
fixed loan amount, (2) definite payment date, (3) stated rate of
interest and (4) collateral or security, if applicable.
Interest on loans between related parties. As a lender, it is best
to charge the family member interest at the market rate. On loans
between related parties, the IRS establishes minimum interest
rates (called the applicable federal rates, or AFRs) that change
monthly. If the interest on the loan is less than the AFR, see Imputed
Interest on Below Market Loans on Page 5-24.
Interest paid by the borrower is:
•Deductible if the loan is for business, investments or is a qualified home mortgage (subject to investment interest expense and
mortgage interest expense limits).
•Not deductible if the loan is for personal purposes or used to pay
personal expenses, including qualified education expenses (see
Restrictions on Page 13-4).
Advantages to a lender of a bona fide loan:
•May deduct a bad-debt loss if loan is not repaid. (See Nonbusiness Bad Debt on Page 7-10.)
•Principal not subject to gift tax rules.
Family loans safe from below-market loan rules:
•Loans of $10,000 or less that are not used for buying incomeproducing assets (for example, stocks). [IRC §7872(c)(2)]
•Loans of $100,000 or less if the borrower’s net investment income (as defined in Section 163) does not exceed $1,000. [IRC
§7872(d)(1)]
Example: Chester makes an interest-free loan to his daughter, Sally, to start
a business, forgoing $3,500 in interest each year (based on AFR). The IRS
treats the forgone interest as a $3,500 gift. There are no gift tax consequences
in 2014 since the forgone interest plus Chester’s other gifts to Sally total
less than $14,000. No income tax is owed on the forgone interest if Sally
has $1,000 or less of net investment income. However, if her net investment
income is $2,500 (more than $1,000), Chester must include $2,500 as income
(the lesser of Sally’s net investment income or the $3,500 of forgone interest).
Custodial Accounts
Uniform Gifts to Minors Act (UGMA)
Uniform Transfers to Minors Act (UTMA)
Generally, minors are not legally allowed to own money or property. For this reason, each state has a uniform gifts to minors or
uniform transfers to minors act, which is used to facilitate ownership of assets by children. A custodial account created under a
state’s UGMA or UTMA is similar to a trust, except terms are set
in statute instead of requiring a separate trust document. Most
banks, brokers and other financial institutions will set up UGMA
or UTMA accounts for minor beneficiaries.
Under a state’s UGMA or UTMA, legal title to money or property is
held in a custodial account. The custodian, often a parent, has a
fiduciary responsibility to manage the account in a prudent manner
for benefit of the child. When the child reaches the age of majority
(usually 18 or 21, depending on the state) control of the account
transfers to the child. Some states allow the custodian to retain
control over UTMA accounts until the child reaches age 25.
Income tax. An UGMA or UTMA account is set up using the child’s
Social Security number and income is taxed to the child. Exception:
Income used by the parent to pay for support of the minor child is
taxable to the parent if the parent has a legal obligation to make
such payments. (Rev. Ruls. 59-357 and 56-484)
Gift and estate tax. A gift in trust generally does not
qualify for the $14,000 (for 2014) annual gift exclusion
because the gift represents a future interest. However,
gifts made to UGMA and UTMA accounts are
considered gifts of present interests and therefore
qualify for the annual gift exclusion.
Savings Bonds Interest Exclusion
All or part of the interest earned on Series EE bonds issued after
December 31, 1989 or on Series I bonds, is excluded from income
for certain taxpayers if the bonds are used for qualified
educational expenses. (IRC §135)
Requirements
•Bond owner must be at least 24 years old
before bond’s issue date.
•Interest is tax-free if the amount of bonds redeemed (principal
plus interest) is less than qualified educational expenses in year
of redemption. If redemption amount is more than expenses, the
excludable amount is based on the ratio of expenses to redemption amount.
•Qualified educational expenses are tuition and fees for the bond
owner or his dependent or spouse at a qualifying educational
institution (college, university or vocational education school).
Room, board and books do not qualify. Qualified expenses
include contributions to a qualified tuition program (QTP) or an
education savings account (ESA).
•Qualified expenses do not include those paid with tax-free scholarships, tax-free withdrawals from ESAs and QTPs, nontaxable
veterans’ educational assistance benefits, tax-free employerprovided educational assistance or any expenses used in computing education credits.
•Exclusion not available to married taxpayers filing separately.
•Exclusion phases out for 2014 when modified AGI is between
$76,000–$91,000 ($113,950–$143,950 MFJ or QW). Modified
AGI is AGI (before the savings bond interest exclusion) increased
by: (1) foreign earned income and housing exclusion, (2) foreign
housing deduction, (3) exclusion for income from certain U.S.
possessions and Puerto Rico, (4) exclusion for employer adoption benefits, (5) student loan interest deduction, (6) domestic
production activities deduction and (7) tuition and fees deduction.
The AGI phase-out applies to the year the bonds are redeemed
and interest is excluded from income.
assistance, nontaxable distributions from an ESA or QTP, savings
bond interest education exclusion or veterans’ educational benefits.
Eligible educational institutions include colleges, vocational
schools and other post-secondary institutions that are eligible
to participate in Department of Education student aid programs.
Eligible student. Students must take at least one half the normal
full-time load in a degree, certificate or other qualified program at
an eligible institution.
Restrictions
1) Not available to taxpayers who are claimed as dependents
(listed on line 6c of Form 1040) on another taxpayer’s return.
2) Not available to married taxpayers filing separately.
3) The taxpayer must be legally obligated to repay the loan and
actually pay the interest during the tax year to deduct the interest.
4) Interest on a loan from a related person does not qualify. Related persons include: siblings, spouses, ancestors (parents,
grandparents, etc.) and lineal descendants, as well as certain
corporations, partnerships, trusts and exempt organizations.
5) Loans from a qualified employer plan [for example, 401(k) plan]
do not qualify.
N Observation: Because of restrictions 1 and 3, a student loan
interest deduction often will not be allowed when the student takes
out the loan and his parents claim a dependency deduction for the
student/child. Reason: If the parents are not legally obligated to
repay, they cannot deduct any interest they pay. Alternatively, if the
student pays interest on the loan, he cannot deduct the interest if
his parents claim a dependency exemption deduction for him. But,
even if a dependency exemption deduction is claimed by the parents
for the student/child, it may make sense for the student/child to take
out the loan when payments will not be due until after graduation,
at which point the child will likely no longer be claimed as a dependent and can, therefore, deduct the interest on his return. If parents
make payments on the student/child’s loan as a gift after the child
graduates, the child is eligible to deduct the interest on his tax return.
Tuition and Fees Deduction
Student Loan Interest Deduction
See also IRC §221 and IRS Pub. 970
2014
Taxpayers can deduct up to $2,500 of interest paid on qualified
education loans for college or vocational school expenses as an
adjustment to income (above-the-line) (IRC §221). The deduction
is available for interest on qualifying loans for the benefit of the
taxpayer or the taxpayer’s spouse or dependent at the time that
the debt was incurred.
For 2014, the deduction is phased out when modified AGI is between
$65,000 and $80,000 ($130,000 and $160,000 MFJ). Modified AGI
is AGI (before the student loan interest deduction) increased by: (1)
foreign earned income or housing, (2) foreign housing deduction, (3)
income from certain U.S. possessions or Puerto Rico, (4) domestic
production activities deduction and (5) tuition and fees deduction.
Qualified Loans
Qualified education loans are loans taken out solely to pay qualified education expenses, including tuition, fees, room and board,
books, equipment and transportation for an eligible student to
attend an eligible educational institution.
Coordination with other education benefits. Qualified education
expenses must be reduced by amounts paid with nontaxable education benefits received, such as employer-provided educational
 Expired
Provision Alert: The tuition and fees deduction
expired on December 31, 2013. Unless Congress extends it, the
deduction will not be available in 2014. This discussion is retained
in the event the deduction is extended to 2014.
For 2013, taxpayers are allowed to claim an above-the-line tuition
and fees deduction for qualified higher education expenses paid.
The deduction is limited based on the taxpayer’s modified AGI.
The deduction is not allowed for MFS filers or for any taxpayer
who qualifies as a dependent (whether or not claimed) on another
taxpayer’s return.
Tuition and Fees Deduction Limit
If Modified AGI is:
Deduction
Limit1
Single, HOH, QW
MFJ
$ 4,000
$ 0 – $ 65,000
$ 0 – $130,000
2,000
65,001 – 80,000
130,001 – 160,000
0
Over $ 80,000
Over $160,000
1
Deduction equals qualified higher education expenses, if less.
Note: There is no AGI phase-out range. Thus married taxpayers with $4,000 of
qualifying educational expenses and modified AGI of $130,000 or less would be
entitled to deduct the full $4,000.
Modified AGI is AGI before the tuition and fees deduction, increased
by: (1) foreign earned income and housing exclusion, (2) foreign housing deduction, (3) exclusion for income from certain U.S. possessions
and Puerto Rico and (4) domestic production activities deduction.
Tuition and fees;
books, supplies and
equipment.5
Taxpayer, spouse or
dependent.
Undergraduate and
graduate.
Available for unlimited
number of years for
both degree and
non-degree programs;
parents can shift credit
to student by not
claiming student as a
dependent.
Tuition and fees;
books, supplies and
equipment.4
Taxpayer, spouse or
dependent.
First four years of
undergraduate.
Must be enrolled
at least half-time in
a degree program;
parents can shift credit
to student by not
claiming student as a
dependent.
Qualified
Education
Expenses (QEE)3
QEE Must
Be For
Qualifying
Education
$ 160,000 – 180,000
80,000 – 90,000
Do Not Qualify
Single, HOH, QW ....
MFS.........................
Do Not Qualify
54,000 – 64,000
N/A
Penalty waived on IRA
distributions up to the
amount of qualified
expenses for the year.
Undergraduate and
graduate.
Taxpayer, spouse, child
or grandchild.
Tuition and fees;
books, supplies and
equipment;4 room and
board if at least halftime attendance.
Amount of qualifying
expenses.
10% early withdrawal
penalty is waived.
72(t)
IRA
Withdrawals
Do Not Qualify
76,000 – 91,000
$ 113,950 – 143,950
Applies only to qualified
Series EE bonds issued
after 1989 or Series
I bonds; bond owner
must be at least 24
years old when bond
issued.
Undergraduate and
graduate.
Taxpayer, spouse or
dependent.
Tuition and fees;
contributions to QTPs
and ESAs.
Amount of qualifying
expenses.
Tax-free interest.
135
Savings Bond
Interest Exclusion
Do Not Qualify
65,000 – 80,000
$ 130,000 – 160,000
Loan must be incurred
solely to pay qualified
education expenses of
student enrolled at least
half-time in a degree
program. Payer must
be legally obligated to
repay debt.
Undergraduate and
graduate.
Taxpayer, spouse or
dependent.
Tuition and fees;
books, supplies and
equipment; room and
board, transportation,
other necessary
expenses.
Deduction of up to
$2,500 of interest paid
on education loan.
Above-the-line
deduction.
221
Student Loan
Interest Deduction
Do Not Qualify
80,000
$ 160,000
Not allowed if MAGI
exceeds:8
Not allowed if education
expenses are deducted
under another provision
or education credit is
claimed.
Undergraduate and
graduate.
Taxpayer, spouse or
dependent.
Tuition and fees;
book, supplies and
equipment.5
Deduction of up to
$4,000 of qualifying
expenses paid.
Above-the-line
deduction.
222
Tuition and Fees
Deduction
Caution: Expired1
2
1
N/A
Account owner can
change beneficiary
or reclaim funds; can
elect to spread gift
over five years; some
states allow deduction
to residents; beneficiary
can be anyone.
Undergraduate and
graduate.
Account beneficiary.
Tuition and fees;
books, supplies and
equipment;4 room and
board if at least halftime attendance.
Nondeductible
contributions limited
to amount necessary
to cover qualified
expenses.
Tax-free earnings
(savings plan) or taxfree education credits
(prepaid plan).
529
Qualified Tuition
Program (QTP)
Expired Provision Alert: The tuition and fees deduction expired at the end of 2013. It’s possible Congress will extend it to 2014, but had not done so at the time of this publication.
Exception: Not refundable for certain children under age 24.
3
Qualifying educational expenses must be reduced by any tax-free scholarships and grants. The same educational expenses cannot be used for figuring more than one benefit.
4
Must be required for enrollment or attendance at an eligible educational institution.
5
Must be paid to the eligible educational institution as a condition of the student’s enrollment or attendance at the institution.
6
See Qualified elementary and secondary expenses (K–12th grade) on Page 13-7 for additional QEE for K–12 students.
7
For savings bond interest exclusion, QW is subject to the same phase-out range as MFJ.
8
No AGI phase-out range. Up to $4,000 is deductible if MAGI does not exceed $65,000 ($130,000 for MFJ). Up to $2,000 is deductible if MAGI does not exceed $80,000 ($160,000 for MFJ).
7
MFJ..........................
2014 Modified
AGI Phase-Out
$ 108,000 – 128,000
Credit up to $2,000 per
return (20% of up to
$10,000 of expenses).
Credit up to $2,500 per
student (100% of first
$2,000 of expenses
and 25% of next
$2,000).
2014 Annual
Limits
Other Rules and
Requirements
Tax credit—
nonrefundable.
Tax credit—
40% refundable;2
60% nonrefundable.
25A
25A
Tax Benefit
IRC §
Lifetime
Learning Credit
American
Opportunity Credit
Education Tax Incentives Comparison Chart (2014)
95,000 – 110,000
95,000 – 110,000
$ 190,000 – 220,000
Contributions must be
made by the original
return due date; may
also contribute to QTP;
mandatory distributions
at age 30; beneficiary
can be anyone.
K–12, undergraduate
and graduate.
Account beneficiary.
Tuition and fees;
books, supplies and
equipment;4 room
and board if at least
half-time attendance;
contributions to QTP;
computer and internet
service (K–12 only).6
$2,000 nondeductible
contribution per child
under age 18 and any
age special-needs
child.
Tax-free earnings.
530
Education Savings
Account (ESA)
Qualified Higher Education Expenses
•Tuition and fees required for the enrollment or attendance at
an eligible educational institution for the taxpayer, spouse or a
dependent. Charges and fees associated with books, supplies
and equipment are qualified expenses if the amount must be
paid to the eligible educational institution as a condition of the
enrollment or attendance of the student. [Reg. §1.25A-2(d)(2)]
•Expenses qualify in the tax year paid. Payment must be for
education that begins either in the same tax year or in the first
three months of the following tax year.
•An eligible institution is any accredited college, university, vocational school or other accredited post-secondary education
institution.
 Note: Students should receive Form 1098-T, Tuition Statement,
from each educational institution they attended during the year that
shows either the payments the institution received (box 1) or the
amount it billed (box 2) for tuition and fees. However , the amount
in boxes 1 and 2 of Form 1098-T might be different than what the
taxpayer actually paid. When figuring the deduction, use only the
amounts paid in 2014 for qualified education expenses.
Nonqualified expenses include: insurance, medical expenses,
room and board, transportation or similar personal, living or family
expenses.
Adjustments to qualified expenses. Qualified expenses must be
reduced by the amount paid with tax-free educational assistance
such as scholarships, Pell grants, employer-provided assistance,
veterans’ educational assistance and any other nontaxable payment (other than gifts, bequests or inheritances) received for
education expenses. Qualified expenses must also be reduced
by the expenses considered to figure:
•U.S. savings bond interest excluded under Code Section 135.
•Tax-free distributions from an ESA or QTP.
Coordination With Other Education Benefits
For each eligible student, the taxpayer can claim either the tuition
and fees deduction or an education credit, but not both. The tuition
and fees deduction is not allowed (for a particular student) if the
education expenses are deducted under any other provision of
the law.
Qualified Tuition Programs
See also IRC §529 and IRS Pub. 970
A qualified tuition program (QTP) allows a taxpayer to make contributions to an account or program to be used to pay qualified
higher education costs. (QTPs are sometimes called Section 529
plans.) Two types of plans are available:
1) Prepaid programs. Contributions are used to purchase tuition
credits for a designated beneficiary (student).
2) Savings account plans. Contributions are made to an account
established to pay for the qualified higher education expenses
of a beneficiary (student).
Contributions
1) The contributor is not subject to any AGI limitations.
2) The amount that can be contributed to a QTP is limited to the
amount necessary to provide for qualified expenses of the
beneficiary (as determined by the plan).
3) The contribution is considered a completed gift; it is excluded
from the contributor’s estate.
4) Contributors can elect to take contributions larger than the
annual gift exclusion into account ratably over five years. For
example, an individual can contribute $70,000 to a QTP in 2014
without gift tax consequences provided no other gifts are made
to the account beneficiary in 2014. For years 2014–2018, the
$14,000 ($70,000 ÷ 5) gift allocated to that year is taken into
account for the annual gift tax exclusion in effect for those years.
æ Practice Tip: The election is made on Form 709 by checking the box on Schedule A and attaching an explanation statement.
5) Contributions to a QTP are not deductible for federal
tax.
Distributions
1) Distributions of earnings from QTPs are excluded
from income if used for qualified higher education
expenses (no tax return reporting requirements in
that case). If distributions are more than the beneficiary’s qualified expenses, the earnings portion of the excess is included
in the beneficiary’s income (reported on line 21 of Form 1040).
2) The earnings portion of distributions not used for qualified higher
education expenses also is subject to a 10% penalty (computed
on Form 5329).
3) Taxpayers should receive Form 1099-Q, Payments from Qualified Education Programs (Under Sections 529 and 530), from
the QTP showing earnings and basis related to a QTP distribution.
The 10% penalty does not apply:
•When the distribution is due to the beneficiary’s death or disability.
•When the distribution is included in income because the beneficiary received a tax-free scholarship, veteran’s educational
assistance or employer-paid educational assistance.
•When the beneficiary attends a U.S. Military Academy. (See
Publication 970.)
•When the distribution is included in income because the qualified education expenses were reduced by the amount of those
expenses used in determining an education credit.
Qualified higher education expenses include:
•Tuition, fees, books, supplies and equipment required for attending an eligible school.
•Reasonable costs of room and board for those who are at least
half-time students in a degree program.
•Expenses for special needs services incurred in connection with
enrollment or attendance at an eligible school.
Example: In 2014, Sally incurred $6,700 of qualified education expenses,
which were paid from the following sources:
Partial tuition scholarship (tax-free)...................................................... $3,100
QTP distribution.................................................................................... 3,700
To compute the taxable portion of her QTP distribution, Sally must reduce her
total qualified education expenses by any tax-free educational assistance.
Total qualified education expenses....................................................... $6,700
Tax-free educational assistance .......................................................... <3,100>
Adjusted qualified education expenses (AQEE)................................... $3,600
Since the remaining expenses ($3,600) are less than the QTP distribution,
part of the earnings will be taxable. Sally’s Form 1099-Q shows that $1,200
of the QTP distribution is earnings so she computes the taxable part of the
distributed earnings as follows:
$3,600 AQEE
=
$3,700 distribution
$1,200 – $1,168 = $32 (taxable earnings)
$1,200 ×
$1,168 (tax-free earnings)
Sally must include $32 in income on Form 1040, line 21; however, the amount
is not subject to the 10% penalty since it’s taxable because of her receiving a
tax-free scholarship. (Form 5329 must be filed with the return, but it will show
that no 10% penalty is due.)
Box 7. A distribution code to indicate the type of distribution and
whether there are any known exceptions to the early distribution tax. (See Reporting Penalty Taxes on Page 14-15.) If the
distribution is from a traditional IRA, SEP IRA or SIMPLE IRA,
the “IRA/SEP/SIMPLE” box will be checked.
2014
Form 1099-R, Box 7 Distribution Codes
1
2
3
4
5
6
7
8
9
A
B
►Early distribution, no known exception (in most cases, under age 591/2).
►Early distribution, exception applies (under age 591/2).
►Disability.
►Death.
►Prohibited transaction.
►Section 1035 exchange (a tax-free exchange of life insurance, annuity,
qualified long-term care insurance or endowment contracts).
►Normal distribution.
►Excess contributions plus earnings/excess deferrals (and/or earnings)
taxable in 2014.
►Cost of current life insurance protection.
►May be eligible for 10-year tax option (see Form 4972).
►Designated Roth account distribution.
Note: If Code B is in box 7 and an amount is reported in box 10, see the
instructions for Form 5329.
►Annuity
payments from nonqualified annuities that may be subject to tax
D
under Section 1411.
E ►Distributions under Employee Plans Compliance Resolution System (EPCRS).
F ►Charitable gift annuity.
G ►Direct rollover of a distribution (other than a designated Roth account
distribution) to a qualified plan, a Section 403(b) plan, a governmental
Section 457(b) plan or an IRA.
►Direct
rollover of a designated Roth account distribution to a Roth IRA.
H
►Early
distribution
from a Roth IRA, no known exception (in most cases,
J
under age 591/2).
K ►Distribution of IRA assets without a readily available FMV.
L ►Loans treated as distributions.
N ►Recharacterized IRA contribution made for 2014 and recharacterized in 2014.
P ►Excess contributions plus earnings/excess deferrals (and/or earnings)
taxable in 2013.
Q ►Qualified distribution from a Roth IRA.
R ►Recharacterized IRA contribution made for 2013 and recharacterized in 2014.
S ►Early distribution from a SIMPLE IRA in first two years, no known exception
(under age 591/2).
T ►Roth IRA distribution, exception applies.
U ► Dividend distribution from ESOP under Section 404(k). Note: This distribution
is not eligible for rollover.
►Charges
or payments for purchasing long-term care insurance contracts
W
under combined arrangements.
Box 8. The value of an annuity contract received as part of a distribution. This amount should not be included in boxes 1 and 2a. Periodic
payments from the contract are taxable when they are received.
Box 9a. The percentage received by the person whose name appears on the Form 1099-R (for a total distribution made to more
than one person).
Box 9b. For a life annuity from a qualified plan or Section 403(b)
plan (with after-tax contributions), an amount may be shown for the
employee’s total investment in the contract. It is used to compute
the taxable part of the distribution. See Publication 575.
Box 10. The amount of the distribution allocable to an in-plan Roth
rollover made within the five-year period beginning with the first
day of the year in which the rollover was made. (See In-plan Roth
rollover on Page 14-11.)
Box 11. Shows the first year a contribution was made to the designated Roth account reported on the Form 1099-R.
Boxes 12-17. State and local tax information provided for the
recipient’s convenience.
Qualified Charitable Distributions (QCDs)
 Expired Provision Alert: The QCD rules expired on Decem-
ber 31, 2013. Unless Congress extends this provision, taxpayers
will not be able to make a QCD in 2014. This discussion is retained
in the event that Congress extends the provision to 2014.
For 2013, individuals age 701/2 or older can make QCDs, which
are transfers from their IRAs (other than ongoing SIMPLE or SEP
IRAs) directly (by the trustee) to a qualified charity [IRC §408(d)(8)].
QCDs (limited to $100,000 per individual per year) are not included
in the individual’s income or allowed as a charitable deduction. Also,
QCDs count toward the individual’s required minimum distribution
(RMD). See Required Minimum Distributions on Page 14-14.
QCDs are included in the amount reported on line 15a of Form
1040, but not in the taxable amount reported on line 15b. Enter
“QCD” on the line next to line 15b.
The amount of a QCD is limited to the amount of the distribution
that would otherwise be included in income. If the distribution is
made from an IRA that includes nondeductible contributions, it is
first considered to be paid out of otherwise taxable income.
Special rules for January 2013 QCDs. QCDs made in January
2013 could be treated as made on December 31, 2012. These are
reported on a 2013 Form 1099-R. See Publication 590 for details
on reporting on the 2013 return.
U Caution: A QCD is tax-free only if the entire amount transferred to the charity would otherwise be deductible as a charitable
contribution (ignoring the percentage-of-AGI limits). So, if the deductible amount would be reduced because a benefit is received
in exchange, or if a deduction would not be allowable because
the donor did not obtain sufficient substantiation, the exclusion is
not available for any part of the amount transferred to the charity.
(Notice 2007-7)
Hardship Distributions
Employees generally cannot withdraw funds from a 401(k) or
403(b) plan until they leave the employer or reach age 591/2.
However, employees may qualify to withdraw elective contributions
before then if there is an immediate and heavy financial need.
[Reg. §1.401(k)-1(d)(3)]
Expenses that satisfy the financial need requirement:
•Medical expenses, including expenses not yet incurred.
•Purchase of principal residence.
•Tuition for post-secondary education (one full year’s payment for
the employee, spouse, children or dependents).
•To prevent eviction or to halt a mortgage foreclosure on the
taxpayer’s principal residence.
•Amounts to cover anticipated federal and state income taxes,
plus early withdrawal penalties due to the hardship distribution.
•Cost of burial or funeral expenses for the employee, parent, child
or other dependent.
•Certain expenses relating to the repair of damage to the employee’s principal residence that qualify for the casualty loss
deduction without regard to whether loss exceeds 10% of AGI.
A hardship of the employee’s spouse or dependent is deemed to
be a hardship of the employee. Also, a plan that permits hardship
distributions may allow distributions for medical, tuition and funeral
expenses for a primary beneficiary under the plan (even if not a
spouse, child or dependent of the employee). (Notice 2007-7)
 Note: Section 457 plans may also allow hardship distributions but
only if the participant or beneficiary has an unforeseeable emergency,
which is similar to the immediate and financial need requirement described above. See Regulation Section 1.457-6(c) for details.
Tax treatment. There are no income tax or penalty exceptions specifically for hardship distributions. Thus, they are taxable and subject to a
10% penalty, unless a penalty exception applies. See the Exceptions
to 10% Early Withdrawal Penalty Before Age 591/2 on Page 14-3.
Required Minimum Distributions
See also Reg. §1.401(a)(9)-0 through -9,
Reg. §1.408-8 and IRS Pub. 590
Annual required minimum distributions (RMDs) from traditional
IRAs, SIMPLE IRAs and SEP IRAs must begin starting for the year
the taxpayer reaches age 701/2. Taxpayers can delay receipt of the
first distribution until as late as the required beginning date, which
is April 1 of the year following the year they turn 701/2. Thereafter,
the RMD for each year must be made by December 31. If the
first distribution is delayed until April 1 of the following year, the
second distribution must be made by December 31 of that year.
[Reg. §1.408-8, Q&A-2]
RMDs from qualified employer plans generally must begin by
April 1 of the year following the year the individual reaches age 701/2
or, if later, the year the individual retires from the employer. However,
this exception for individuals who work past age 701/2 doesn’t apply
to more-than-5% owners of the employer sponsoring the qualified
plan. [IRC §401(a)(9)(C)]
 Note: The RMD rules do not apply to Roth IRAs. Distributions
from Roth IRAs are required only after the death of the participant.
RMD Calculation—Lifetime Distributions
The RMD for each calendar year is the account balance on
December 31 of the preceding year divided by the distribution
period from the Uniform Lifetime Table in the next column, for
the owner’s age at the end of the distribution year.
Example: Carter and Ann each have an IRA valued at $90,000 on December 31, 2014. Carter was born on September 5, 1944. Ann was born on March 5,
1945. Both reach age 701/2 in 2015. Carter will be 71 at the end of 2015; Ann
will be 70. Their minimum distributions for 2015 are:
Carter............... $90,000 ÷ 26.5 = $3,396
Ann.................. $90,000 ÷ 27.4 = $3,285
Note: Since they turned age 701/2 in 2015, the distributions for 2015 can be
delayed until as late as April 1, 2016 (the required beginning date).
Exception: An account owner whose sole beneficiary at all times
during the year is a spouse who is more than 10 years younger
can use the distribution period from the Joint Life and Last Survivor
Expectancy Table in IRS Publication 590 (Table II of Appendix C)
to compute the RMD, which will be less than the amount computed
using the Uniform Lifetime Table. Marital status is determined on
January 1 of the distribution year. The account owner does
not fail to have a spouse as beneficiary because of
death or divorce later in the year unless the account
owner changes beneficiaries before the end of the
year (or before the spouse’s death). [Reg. §1.401(a)
(9)-5, Q&A-4(b)]
Account balance rules:
•If a rollover from a retirement plan or IRA is pending
on December 31 (distribution was made but the funds
did not reach the receiving IRA), increase the account balance
of the receiving plan by the rollover amount.
•See Regulation Section 1.401(a)(9)-5, Q&A-3, for account balance adjustments for qualified plans.
Excess Accumulation Penalty (Form 5329)
An excess accumulation is any amount of an RMD that is not
timely distributed. Any excess accumulation in a tax year is
subject to a 50% penalty.
æ Practice Tip: The IRS can waive the 50% penalty if the
individual can establish that the shortfall was due to reasonable
error and steps are being taken to remedy it (Reg. §54.4974-2,
Q&A-7). To request a waiver, file Form 5329, completing lines 50,
51 and 52. On line 52, enter “RC” and the amount of shortfall the
taxpayer wants waived in parenthesis on the dotted line, reducing
the amount otherwise entered on line 52 by this amount. Attach a
letter of explanation to establish that the cause was a reasonable
error and that steps are being taken to remedy the shortfall. The
penalty will only have to be paid if the waiver is denied.
Uniform Lifetime Table
(Table III of Appendix C in IRS Pub. 590)
Age
Distribution Age
Distribution Age
Distribution
Period
Period
Period
70....................27.4
86....................14.1
101................. 5.9
71....................26.5
87....................13.4
102................. 5.5
72....................25.6
88....................12.7
103................. 5.2
73....................24.7
89....................12.0
104................. 4.9
74....................23.8
90....................11.4
105................. 4.5
75....................22.9
91....................10.8
106................. 4.2
76....................22.0
92....................10.2
107................. 3.9
77....................21.2
93.................... 9.6
108................. 3.7
78....................20.3
94.................... 9.1
109................. 3.4
79....................19.5
95.................... 8.6
110.................. 3.1
80....................18.7
96.................... 8.1
111.................. 2.9
81....................17.9
97.................... 7.6
112.................. 2.6
82....................17.1
98.................... 7.1
113.................. 2.4
83....................16.3
99.................... 6.7
114.................. 2.1
84....................15.5
100.................. 6.3
115+................ 1.9
85....................14.8
Use this table for:
• Unmarried owners.
• Married owners, unless spouse is (1) the sole beneficiary and (2) more than
10 years younger than the owner. In that case, use Table II (Joint Life and Last
Survivor Expectancy) in Pub. 590, Appendix C.
Other Rules
Multiple distributions allowed. The annual RMD can be taken
in more than one payment as long as the total distributions for the
year are at least as much as the required amount.
Multiple IRAs. A taxpayer who holds more than one traditional
IRA as the account owner must determine a separate RMD for
each IRA. However, the total amount can be taken from any one
or more of the IRAs. [Reg. §1.408-8, Q&A-9]
Distributions total more than RMD. If, in any year, the taxpayer
receives more than that year’s RMD, he cannot apply the excess
against the RMD required for the next or any future tax year [Reg.
§1.401(a)(9)-5, Q&A-2]. (Exception: Any amount distributed in the
year the taxpayer turns age 701/2 counts toward the amount that
must be distributed by April 1 of the following year.)
Lump-Sum Distributions
A taxpayer has three choices when a lump-sum distribution is
received from a retirement plan.
1) Defer tax by rolling it over to an eligible retirement plan. See
Rollovers and Transfers on Page 14-9.
2) Keep the money and pay tax on it. If the taxpayer elects to
pay the tax, the lump-sum distribution may qualify for 10-year
averaging.
 Note: 10-year averaging is available to individuals born
before January 2, 1936 (and beneficiaries of such individuals). See instructions for Form 4972 for qualifications to use
10-year averaging.
3) Roll the funds over to a Roth IRA. Although tax must be
paid on the distribution, future earnings in the Roth IRA are
potentially tax-free. See Roth IRA Conversions on Page 14-7.
What’s New

Tab 17 Topics
Inflation-Adjusted Amounts.................................... Page 17-1
Expired Tax Provisions........................................... Page 17-1
Affordable Care Act—New for 2014....................... Page 17-1
New Forms and Reporting..................................... Page 17-2
Affordable Care Act (ACA) Glossary...................... Page 17-3
Tax Provisions That Expired on
December 31, 2013............................................. Page 17-4
Inflation-Adjusted Amounts
For a complete summary of the inflation-adjusted amounts for
2014 (plus 2015 and 2013 and prior years) see the Quick Facts
Data Sheet on Page 3-1.
Expired Tax Provisions
On December 31, 2013, a number of tax provisions expired. Many
of these provisions have expired in the past and Congress has
retroactively extended them (in some cases, many times). At the
time of this publication, Congress had not extended any of the
expired provisions, but it is possible that some of them will be
extended to be effective in 2014.
 Note: In this Handbook, we’ve retained the discussions of
these expired provisions, preceded by an “Expired Provision Alert.”
This will make it easier to see important law changes in the context of each discussion. If, after this Handbook’s publication date,
legislation extends any of these provisions to 2014, an update will
be posted to the Handbook Updates section at tax.thomsonreuters.
com/Quickfinder.
The Tax Provisions That Expired on December 31,
2013 table on Page 17-4 summarizes key provisions
affecting individuals that expired on December 31,
2013. It describes the provisions in effect for 2013
and the provisions that, as of the publication date,
are in effect for 2014. Note that a provision in effect
for 2013 could be modified in conjunction with any
extension, so the law in effect for 2013 might not be exactly the
same as that in effect for 2014 if a provision is extended.
æ Practice Tip: If any of the expired tax provisions are extended
to 2014, an update will be posted to the Handbook Updates section
at tax.thomsonreuters.com/Quickfinder.
Affordable Care Act—
New for 2014
Two key provisions of the Affordable Care Act (ACA) that affect
individuals first became effective in 2014. Also, starting in 2014,
there are changes to the credit for employer-provided health insurance and the rules for self-insured medical reimbursement plans.
 Note: See the Affordable Care Act (ACA) Glossary on Page 17-3.
Shared Responsibility Payment
Starting in 2014, every individual and each member of his family
must have qualifying health insurance (called minimum essential
coverage) or make a shared responsibility payment when filing his
federal income tax return. Exception: Individuals with a coverage
exemption are not required to make the payment.
Minimum essential coverage. Generally, individuals who have
employer-sponsored coverage, coverage obtained through a
Health Insurance Marketplace (Marketplace) or coverage through
most government-sponsored programs (as well as
certain other plans) have minimum essential coverage (MEC) if they maintain the
coverage for each month of the calendar
year.
Coverage exemptions. The following individuals are exempt from
the requirement to make a shared responsibility payment if they
fail to maintain MEC:
•Individuals for whom coverage was unaffordable (generally, cost
more than 8% of household income).
•Individuals suffering a hardship.
•Individuals whose income is below the threshold for filing an
income tax return.
•Individuals who are uninsured for less than three consecutive
months of the year.
•Members of certain religious sects.
•Members of a federally-recognized Indian tribe.
•Members of a health care sharing ministry.
See Health Care: Individual Responsibility on Page 4-22 for details
on computing and reporting the payment.
Premium Tax Credit
Starting in 2014, individuals who get their health insurance coverage through the Marketplace may be eligible for the premium tax
credit. Generally, individuals are eligible for the credit if they meet
all of the following:
•Buy health insurance through the Marketplace.
•Are ineligible for coverage through an employer or government
plan.
•Are within certain income limits.
•Do not file MFS (exceptions apply to victims of abuse and to
taxpayers described at Considered unmarried on Page 4-8).
•Cannot be claimed as a dependent by another person.
During enrollment, the Marketplace will estimate the amount of
the premium tax credit that will be available on the enrollee’s tax
return, based on information provided about projected income and
family composition for the year.
Taxpayers eligible for the credit can choose to have some or all
of the estimated credit paid in advance directly to their insurance
company to lower their out-of-pocket cost for monthly premiums.
This is known as advance payment.
The credit claimed on the return is the credit
computed (based on actual family size and
income) less any advance payments. If the
advance payments are greater than the actual credit
computed on the tax return, the individual must repay the excess
advanced amounts (subject to certain limits).
æ Practice Tip: Individuals who choose advance payment of
the credit should report income and family size changes to the
Marketplace throughout the year to avoid getting too much or too
little advanced.
See Premium Tax Credit on Page 12-10 for details.
 Note: The Tax Increase Prevention Act of 2014 extending most
of the expired provisions was signed into law on December 19, 2014.
Small Employer Health Insurance Credit
Qualified small employers who offer health insurance to their
employees may qualify for a tax credit. For 2013, the credit was
allowed for up to 35% (25% for tax exempt employers) of premiums
paid. There was no requirement that coverage be offered through
the Small Business Health Options Program (SHOP) marketplace.
For 2014, the credit can be up to 50% of premiums paid by a qualified small employer (35% for tax-exempt employers). To be eligible
for the credit, premiums must be paid on behalf of employees
enrolled in a plan offered through the SHOP marketplace. Some
exceptions apply. See Small Employer Health Insurance Credit
on Page 12-12 for details.
Self-Insured Medical Reimbursement Plans
U Caution: Beginning in 2014, group health plans must meet
certain requirements under the ACA regarding preventive services
and annual limits on benefits. Plans that fail to meet these requirements can be subject to harsh penalties (IRC §4980D). Self-insured
medical reimbursement plans (including health reimbursement
arrangements and employer payment plans) may be considered
group health plans for these rules. Exception: Plans that reimburse
only certain excepted benefits, such as accident-only coverage,
disability income, certain limited-scope dental and vision benefits
and certain long-term care benefits, are not considered group
health plans. See Medical reimbursement plans on Page 6-6 for
details.
New Forms and Reporting
Form 1095-A, Health Insurance Marketplace
Statement
Starting for 2014, the Marketplace must file Form 1095-A to report
certain information to the IRS about family members who enroll in
a qualified health plan through the Marketplace. The information
reported includes the following monthly amounts:
•The premium for the coverage provided.
•The premium for the second lowest cost silver plan that the
Marketplace determines applies to the family members enrolled
in coverage.
•Any advance payment of the premium credit.
Individuals enrolled in health insurance coverage through the
Marketplace should receive a copy of Form 1095-A reporting
2014 coverage on or before January 31, 2015. The Form 1095A information is used to compute the premium tax credit and to
reconcile the credit computed on the return with any advance
payments of the credit. See Premium Tax Credit on Page 12-10
for more information.
Form 1095-B, Health Coverage
This form must be filed by insurers (including employers who
sponsor a self-insured plan) to report minimum essential coverage provided to a covered individual. Exception: Applicable large
employers who offer a self-insured plan can report the coverage
offered on Form 1095-C.
Form 1095-B is filed with the IRS and a copy furnished to the
covered individual. Providers of MEC are required to furnish only
one Form 1095-B for all individuals whose coverage is reported on
that form (for example, an employee and his spouse and dependents). Individuals use this information to determine the months
for which they had MEC (and are therefore not required to make
an individual shared responsibility payment).
æ Practice Tip: Reporting for coverage provided in 2014 is
voluntary. However, reporting for coverage offered in 2015 will
be mandatory.
Form 1095-C, Employer-Provided Health
Insurance Offer and Coverage
Applicable large employers use Part II of this form to report whether
health insurance was offered to their employees and if so, information about the coverage, such as whether it was affordable and/
or provided minimum value. The IRS will use this information to
administer the employer shared responsibility rules.
If they self insure, applicable large employers use
Part III to report the months that the employee was
covered under the self-insured plan.
Form 1095-B is filed with the IRS and a copy
furnished to the employee. Employees use the
information about coverage offered to determine
whether they qualify for the premium tax credit.
Individuals use the information about months of
coverage under an employer’s self-insured plan reported in Part
III to determine whether they must make an individual shared
responsibility payment.
æ Practice Tip: Form 1095-C reporting for coverage offered/
provided in 2014 is voluntary. However, reporting for coverage
offered in 2015 will be mandatory.
Form 8962, Premium Tax Credit
This form is used to claim the premium tax credit, which is available to certain people who enroll, or whose family member enrolls,
in a qualified health plan offered through the Marketplace. Also,
some individuals may claim an advance payment of the premium
tax credit. If an advance payment was made, Form 8962 must be
filed to reconcile the advance payments with the actual credit. See
Premium Tax Credit on Page 12-10 for more information.
Form 8965, Health Coverage Exemptions
Individuals who do not maintain qualified health insurance for the
entire year must make a shared responsibility payment unless
they have a coverage exemption. Form 8965 is used to report a
coverage exemption. See Health Care: Individual Responsibility
on Page 4-22 for more information.
If an individual is not required to file a tax return, his tax household is exempt from the shared responsibility payment. In that
case, Form 8965 does not have to be filed to claim the coverage
exemption. But, individuals who are not required to file a return
but choose to do so anyway should file Form 8965 and claim their
coverage exemption on line 7a or 7b.
 Note: Some coverage exemptions are available only from the
Marketplace, others are available only by claiming them on the tax
return, and others are available from either the Marketplace or by
claiming them on the tax return.
æ Practice Tip: The Form 8965 instructions provide the information for calculating the shared responsibility payment, if required.
Affordable Care Act (ACA) Glossary
Adopted children. If a child is adopted during the year, the child
is included in the taxpayer’s household only for the full months
that follow the month in which the adoption occurs. Similarly, if
the taxpayer places a child for adoption or foster care, the child is
included in the tax household only for the full months before the
month in which the placement occurs.
Applicable taxpayer. A taxpayer must be an applicable taxpayer
to claim the premium tax credit (PTC). Generally, an applicable
taxpayer is one who has household income at least 100% but not
more than 400% of the federal poverty line (FPL) for his family
size, and cannot be claimed as a dependent. If the taxpayer is
married at the end of the year, he must file a joint return to be an
applicable taxpayer unless an exception is met.
A taxpayer with household income below 100% of the FPL is an
applicable taxpayer if all of the following requirements are met:
•The taxpayer, his spouse or a dependent is enrolled in a policy
through the Marketplace.
•The Marketplace estimated at the time of enrollment that the
taxpayer’s household income would be between 100% and 400%
of the FPL for the taxpayer’s family size.
•Advance credit payments were made for the coverage for one
or more months during the year.
•The taxpayer otherwise qualifies as an applicable taxpayer.
A taxpayer with household income below 100% of the FPL can
be an applicable taxpayer as long as the taxpayer, his spouse
or a dependent who is enrolled in a qualified health plan is not a
U.S. citizen but is lawfully present in the U.S. and not eligible for
Medicaid because of immigration status.
Coverage family. All members of the taxpayer’s tax family who are enrolled in a qualified health plan and are not eligible for MEC (other than
coverage in the individual market). The members of the coverage family
may change from month to month. A taxpayer is allowed a PTC only
for health insurance purchased for members of the coverage family.
Dependents of more than one taxpayer. The tax household does
not include someone that can, but is not, claimed as a dependent if
the dependent (1) is properly claimed on another taxpayer’s return
or (2) can be claimed by a taxpayer with higher priority under the
tie-breaker rules.
Exchange. See Health Insurance Marketplace (Marketplace) below.
Exemption certificate number (ECN). The number the taxpayer
received from the Marketplace for the individual listed in Part I
(Marketplace-Granted Coverage Exemptions for Individuals) on
Form 8965, column c.
Family coverage. If taxpayer (or spouse if filing jointly) is eligible
for family coverage under an employer’s plan, the required contribution amount for any member of the family is the premium the
taxpayer would pay for the lowest cost family coverage that would
cover the taxpayer and everyone in the non-exempt family. This
required contribution amount is used to determine if coverage is
unaffordable in order to claim a coverage exemption.
Family size. For the PTC, family size includes the individuals for
whom the taxpayer can claim a personal exemption deduction on the
tax return (taxpayer, spouse if filing a joint return and dependents).
Federal poverty line (FPL). An income amount considered poverty level for the year, adjusted for family size. The Department
of Health and Human Services determines the federal poverty
guideline amounts annually. The government adjusts the income
limits annually for inflation.
Health Insurance Marketplace (Marketplace). A governmental
agency or nonprofit entity that makes qualified health plans available to individuals. The term Marketplace refers to state Marketplaces, regional Marketplaces, subsidiary Marketplaces and a
federally-facilitated Marketplace. Also known as the Exchange.
Household income. The sum of the taxpayer’s modified adjusted
gross income (MAGI), the spouse’s MAGI (if MFJ) and the MAGI
of all dependents required to file a tax return.
Incarceration. The taxpayer can claim a coverage exemption for a
member of the tax household for any month in which the individual
was incarcerated for at least one day in the month. An individual is
incarcerated if he was confined, after the disposition of charges, in
a jail or similar penal institution or correctional facility.
Medicaid expansion. The ACA provides states with additional federal
funding to expand their Medicaid programs to cover adults under 65
who make up to 133% of the FPL. Children (18 and under) are eligible
up to that income level or higher in all states. The U.S. Supreme Court
ruled that the Medicaid expansion is voluntary with states. As a result,
some states have not expanded their Medicaid programs. Many adults
in those states with incomes below 100% of the FPL fall into a gap.
Their incomes are too high to get Medicaid under their state’s current
rules but their incomes are too low to qualify for the PTC.
Minimum essential coverage (MEC). Coverage under a government-sponsored program, an eligible employer-sponsored plan, a plan
in the individual market, a grandfathered health plan or other coverage
recognized by the Department of Health and Human Services (HHS),
in coordination with the Secretary of the Treasury, as MEC.
Modified adjusted gross income (MAGI). For purposes of Form
8962, MAGI is a taxpayer’s adjusted gross income plus certain
income that is not subject to tax (foreign earned income, tax-exempt
interest and Social Security benefits not included in income).
For purposes of Form 8965, MAGI is a taxpayer’s adjusted gross
income plus certain income that is not subject to tax (foreign earned
income and tax-exempt interest).
National Average Bronze Plan Premium (NABPP). This figure
is used in calculating the shared responsibility payment. A table of
NABPP amounts can be found in the Instructions for Form 8965. Premium tax credit (PTC). A tax credit for certain people who
enroll in a qualified health plan offered through the Marketplace). If
applicable, the taxpayer is allowed a credit amount for any month
during the year that he or one or more of his family members [spouse
or dependent(s)] were (1) enrolled in one or more qualified health
plans through a Marketplace and (2) not eligible for other MEC.
Second Lowest-Cost Silver Plan (SLCSP). The second lowestcost silver plan offered through the Marketplace for the rating area
in which the taxpayer resides. A taxpayer who enrolled in a qualified
health plan through the Marketplace will receive Form 1095-A from
the Marketplace which will include the SLCSP amount. This figure
is used to calculate the PTC.
Self-only coverage. If a member of a tax household is eligible for
self-only coverage under his employer’s plan, the required contribution
amount is the amount the individual would pay for the lowest cost selfonly coverage. This required contribution amount is used to determine
if coverage is unaffordable in order to claim a coverage exemption.
Shared responsibility payment (SRP). If the taxpayer or any
other member of the tax household did not have either MEC or an
exemption for any month during the tax year, the taxpayer must
compute the shared responsibility payment.
Spousal abandonment. A taxpayer is a victim of spousal abandonment for a tax year if, taking into account all facts and circumstances,
he is unable to locate his spouse after reasonable diligence.
Tax family. For purposes of Form 8962, the tax family consists of
the individuals for whom the taxpayers claims a personal exemption on his tax return (taxpayer, spouse with whom a joint return
is filed and dependents).
Tax household. For purposes of Form 8965, includes the taxpayer,
the taxpayer’s spouse (if filing a joint return), and any individual
claimed as a dependent on the tax return. It also generally includes
each person the taxpayer can, but does not, claim as a dependent.
Unaffordable coverage. For purposes of Form 8965, coverage is
unaffordable if the individual’s required contribution is more than
8% of household income.
Source: IRS Publication 5157.
Tax Provisions That Expired on December 31, 2013
Not Available in 2014 (Unless Extended By Legislation)
Note: This table summarizes significant tax provisions that affect individuals that expired on December 31, 2013. It’s possible that
Congress will extend some or all of them to 2014, but it had not done so at the date of this publication. Quickfinder will post an update
at tax.thomsonreuters.com/Quickfinder if any of these provisions are extended to 2014.
Item
IRC §
QF
Page
Provision in Effect for 2014
2013 Law
Extended
to 2014?1
Individual Deductions and Exclusions
Educator’s
Expenses
62(a)(D)
9-7
No provision. Deduction expired on
12/31/13.
Grades K–12 teachers, instructors,
counselors, principals and aides
could deduct up to $250 of out-ofpocket costs above the line.
Yes
108(a)(1)(E)
7-21
No provision. Exclusion expired on
12/31/13.
Individuals could exclude up to $2
million ($1 million for MFS) of COD
income from qualified principal
residence indebtedness that is
canceled because of their financial
condition or decline in value of the
residence.
Yes
163(h)(3)
5-11
12/31/13.
Taxpayers with AGI no greater than
$109,000 could treat qualified mortgage insurance premiums as home
mortgage interest.
Yes
25C
12-11
No provision. Credit expired on
12/31/13.
A credit (subject to a $500 lifetime
cap) was available for qualified
energy efficiency improvements
and expenditures to a taxpayer’s
principal residence.
Yes
170(b)(1)(E)(vi),
170(b)(2)(B)(iii)
5-13
No special rules for qualified
conservation contributions so they
are subject to the 30%-of-AGI limit
and have a five-year carryforward
period.
The deduction limit for qualified
conservation contributions by individuals was increased from 30% of
AGI to 50% of AGI (100% of AGI for
qualified farmers and ranchers) and
the carryforward period for qualified
contributions in excess of the AGI
limit is 15 years.
Yes
Qualified Small
Business Stock
(QSBS) Gain
Exclusion
1202(a)(4)
7-5
The 100% gain exclusion for QSBS
acquired after 12/31/13 is reduced
to 50% [60% for QSBS issued by
a qualified business entity (QBE)].
Also, 7% of the excluded gain is an
AMT preference item.
QSBS acquired 9/28/10–12/31/13
qualifies for 100% gain exclusion (if
the holding period is met). For stock
acquired during that period, the following rules also apply:
•None of the 60% gain exclusion
rules for QSBS issued by a QBE
apply.
•No portion of the excluded gain is
added back to determine alternative
minimum taxable income.
Yes
State and Local
Sales Taxes
Deduction
164(b)(5)
5-5
No provision. Election expired on
12/31/13.
Individuals could elect to deduct
state and local general sales taxes
instead of state and local income
taxes.
Yes
222
13-4
12/31/13.
Individuals could claim an abovethe-line deduction for tuition and
fees for qualified higher education
expenses.
Yes
Cancellation of
Debt (COD)—
Mortgage Debt
Mortgage
Insurance
Premiums
Deduction
Personal
Energy
Property
Credit
Qualified
Conservation
Contributions
Tuition and
Fees
Deduction
1
2
Use this column to indicate whether or not a provision is extended to 2014.
Reference is to the 2014 Small Business Quickfinder® Handbook.
Tax Provisions That Expired on December 31, 2013 (Continued)
Item
IRC §
QF
Page
2013 Law
Extended
to 2014?1
Individual Retirement Accounts
Qualified
Charitable
Distributions
(QCDs)
408(d)
14-13
No provision. Income exclusion for
QCDs expired on 12/31/13.
Taxpayers age 70½ or older could
make tax-free transfers from an IRA
directly to a charity. Any amounts
so transferred count toward the
individual’s required minimum distribution, but are not deductible as
charitable contributions.
Yes
Qualified
Leasehold,
Restaurant
and Retail
Improvement
Property
168(e)(3)(E)
10-13
The 15-year recovery period expired for property placed in service
after 2013. Qualified leasehold
improvements, qualified restaurant property and qualified retail
improvements placed in service
after 2013 are assigned a 39-year
(straight-line) recovery period.
Qualified leasehold improvements,
qualified restaurant property and
qualified retail improvements were
assigned a 15-year (straight-line)
recovery period.
Yes
Section 179—
Deduction
Limit and
Eligible
Property
179(b), (c) and
(d)
10-9,
10-13
After 2013, the deduction and qualifying property limits are $25,000
and $200,000, respectively. Offthe-shelf software does not qualify
for Section 179 expensing and the
election generally is irrevocable
without IRS consent.
The Section 179 deduction and
qualifying property limits were
$500,000 and $2,000,000, respectively. In addition, off-the shelf computer software qualified for Section
179 expensing and taxpayers could
amend or revoke a Section 179
election without IRS consent.
Yes
Section 179—
Qualified Real
Property
179(f)
10-13
Qualified real property is not eligible Taxpayers could claim the Section
for Section 179 expensing.
179 deduction on up to $250,000
of qualified real property (qualified
leasehold improvements, qualified
restaurant property and qualified
retail improvement property).
Yes
Special
(Bonus)
Depreciation
168(k)
10-8
Special deprecation is only available for long production-period
property and certain aircraft.
50% special depreciation was
allowed for qualified property additions placed in service in 2013.
Note: For 2013, the Section 280F
limit on depreciation for passenger autos was also increased by
$8,000.
Yes
30C(g)(1)
O-82
The credit is only available for
hydrogen refueling property.
Certain alternative fuel vehicle refueling property qualified for a credit.
Note: Both business and personaluse property qualified for the credit.
Yes
Differential
Wage Payment
Credit
45P(f)
O-92
12/31/13.
A credit for differential wage payments (certain payments made to
employees while they are on active
duty military service) was available.
Yes
New Energy
Efficient
Homes
45L(g)
O-82
12/31/13.
A credit was available to the seller
of homes that meet certain energy
efficiency standards.
Yes
Business Property
Tax Credits
Alternative
Fuel Vehicle
Refueling
Property
1
2
Tax Provisions That Expired on December 31, 2013 (Continued)
Item
IRC §
QF
Page
2013 Law
Extended
to 2014?1
Tax Credits (Continued)
Plug-in Electric
Vehicles—2- or
3-Wheeled
Vehicles
Research
Credit
Work
Opportunity
30D(g)
11-7
12/31/13.
Taxpayers who purchased a qualifying vehicle could take a credit of
up to $2,500.
No
41(f) and (h)(1)
O-92
12/31/13.
A credit for the cost of increasing
research activity was available.
Yes
51(c)(4)
O-92
12/31/13.
Employers were allowed a credit
for wages paid to new employees
who belonged to certain targeted
groups.
Yes
Other Business (Including Sole Proprietor) Provisions
Donation of
Food Inventory
170(e)(3)
—
Like other contributions of inventory, the deduction for contributions
of food inventory is limited to the
taxpayer’s basis in the property.
An above-basis deduction was
allowed for charitable donations of
apparently wholesome food inventory.
Yes
Domestic
Producer
Deduction—
Puerto Rican
Activities
199(d)(8)
6-22
No provision. Special rule for
activities performed in Puerto Rico
expired on 12/31/13.
Qualified production activities
performed in Puerto Rico were
included as domestic production
gross receipts as long as the activity in Puerto Rico was subject to
U.S. tax.
Yes
1
2
Notes
—End of Tab 17—

Quickfinder® 1040 Quickfinder® Handbook

Transcription

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