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Pa 1040ez 4. Pa 1040ez Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Pa 1040ez However, the information shown on the filled-in forms is not from any actual person or scenario. Pa 1040ez Example 1—Mortgage loan modification. Pa 1040ez In 2007, Nancy Oak bought a main home for $435,000. Pa 1040ez Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Pa 1040ez The loan was secured by the home. Pa 1040ez The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Pa 1040ez In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Pa 1040ez In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Pa 1040ez The FMV of Nancy's home at the time of the refinancing was $500,000. Pa 1040ez Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Pa 1040ez After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Pa 1040ez In 2013, Nancy was unable to make her mortgage loan payments. Pa 1040ez On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Pa 1040ez Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Pa 1040ez Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Pa 1040ez Identifiable event code "F" appears in box 6. Pa 1040ez This box shows the reason the creditor has filed Form 1099-C. Pa 1040ez To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Pa 1040ez Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Pa 1040ez Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Pa 1040ez Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Pa 1040ez Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Pa 1040ez Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Pa 1040ez Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Pa 1040ez Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Pa 1040ez Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Pa 1040ez You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Pa 1040ez Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Pa 1040ez Please click the link to view the image. Pa 1040ez Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Pa 1040ez Please click the link to view the image. Pa 1040ez Form 1040, U. Pa 1040ez S. Pa 1040ez Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Pa 1040ez Please click the link to view the image. Pa 1040ez Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Example 2—Mortgage loan foreclosure. Pa 1040ez In 2005, John and Mary Elm bought a main home for $335,000. Pa 1040ez John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Pa 1040ez The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Pa 1040ez John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Pa 1040ez Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Pa 1040ez John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Pa 1040ez Identifiable event code "D" appears in box 6. Pa 1040ez This box shows the reason the creditor has filed Form 1099-C. Pa 1040ez In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Pa 1040ez In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Pa 1040ez Their sample Form 1099-C is shown on this page. Pa 1040ez John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Pa 1040ez However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Pa 1040ez John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Pa 1040ez Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Pa 1040ez Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Pa 1040ez As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Pa 1040ez Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Pa 1040ez Thus, John and Mary leave line 10b of Form 982 blank. Pa 1040ez John and Mary must also determine whether they have a gain or loss from the foreclosure. Pa 1040ez John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Pa 1040ez Because this loss relates to their home, it is a nondeductible loss. Pa 1040ez John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Pa 1040ez John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Pa 1040ez Please click the link to view the image. Pa 1040ez Form 1099-C, Cancellation of Debt Table 1-1. Pa 1040ez Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Pa 1040ez Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Pa 1040ez Otherwise, go to Part 2. Pa 1040ez 1. Pa 1040ez Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Pa 1040ez 00 2. Pa 1040ez Enter the fair market value of the transferred property $290,000. Pa 1040ez 00 3. Pa 1040ez Ordinary income from the cancellation of debt upon foreclosure or repossession. Pa 1040ez * Subtract line 2 from line 1. Pa 1040ez If less than zero, enter zero. Pa 1040ez Next, go to Part 2 $ 25,000. Pa 1040ez 00 Part 2. Pa 1040ez Gain or loss from foreclosure or repossession. Pa 1040ez 4. Pa 1040ez Enter the smaller of line 1 or line 2. Pa 1040ez If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Pa 1040ez 00 5. Pa 1040ez Enter any proceeds you received from the foreclosure sale 6. Pa 1040ez Add line 4 and line 5 $290,000. Pa 1040ez 00 7. Pa 1040ez Enter the adjusted basis of the transferred property $335,000. Pa 1040ez 00 8. Pa 1040ez Gain or loss from foreclosure or repossession. Pa 1040ez Subtract line 7 from line 6 ($ 45,000. Pa 1040ez 00) * The income may not be taxable. Pa 1040ez See chapter 1 for more details. Pa 1040ez Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Pa 1040ez Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Pa 1040ez Credit card debt $ 5,500 2. Pa 1040ez Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Pa 1040ez Car and other vehicle loans $ 4. Pa 1040ez Medical bills owed $ 5. Pa 1040ez Student loans $ 6. Pa 1040ez Accrued or past-due mortgage interest $ 7. Pa 1040ez Accrued or past-due real estate taxes $ 8. Pa 1040ez Accrued or past-due utilities (water, gas, electric) $ 9. Pa 1040ez Accrued or past-due child care costs $ 10. Pa 1040ez Federal or state income taxes remaining due (for prior tax years) $ 11. Pa 1040ez Judgments $ 12. Pa 1040ez Business debts (including those owed as a sole proprietor or partner) $ 13. Pa 1040ez Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Pa 1040ez Other liabilities (debts) not included above $ 15. Pa 1040ez Total liabilities immediately before the cancellation. Pa 1040ez Add lines 1 through 14. Pa 1040ez $ 320,500 Part II. Pa 1040ez Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before the Cancellation 16. Pa 1040ez Cash and bank account balances $ 6,000 17. Pa 1040ez Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Pa 1040ez Cars and other vehicles $ 19. Pa 1040ez Computers $ 20. Pa 1040ez Household goods and furnishings (for example, appliances, electronics, furniture, etc. Pa 1040ez ) $ 21. Pa 1040ez Tools $ 22. Pa 1040ez Jewelry $ 23. Pa 1040ez Clothing $ 24. Pa 1040ez Books $ 25. Pa 1040ez Stocks and bonds $ 26. Pa 1040ez Investments in coins, stamps, paintings, or other collectibles $ 27. Pa 1040ez Firearms, sports, photographic, and other hobby equipment $ 28. Pa 1040ez Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Pa 1040ez Interest in a pension plan $ 30. Pa 1040ez Interest in education accounts $ 31. Pa 1040ez Cash value of life insurance $ 32. Pa 1040ez Security deposits with landlords, utilities, and others $ 33. Pa 1040ez Interests in partnerships $ 34. Pa 1040ez Value of investment in a business $ 35. Pa 1040ez Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Pa 1040ez Other assets not included above $ 37. Pa 1040ez FMV of total assets immediately before the cancellation. Pa 1040ez Add lines 16 through 36. Pa 1040ez $ 309,000 Part III. Pa 1040ez Insolvency 38. Pa 1040ez Amount of Insolvency. Pa 1040ez Subtract line 37 from line 15. Pa 1040ez If zero or less, you are not insolvent. Pa 1040ez $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Pa 1040ez Please click the link to view the image. Pa 1040ez Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Pa 1040ez In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Pa 1040ez Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Pa 1040ez Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Pa 1040ez In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Pa 1040ez The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Pa 1040ez On December 26, 2013, the lender canceled the remaining debt. Pa 1040ez Kathy and Frank have no tax attributes other than basis of personal-use property. Pa 1040ez The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Pa 1040ez Identifiable event code "D" appears in box 6. Pa 1040ez This box shows the reason the creditor has filed Form 1099-C. Pa 1040ez Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Pa 1040ez Kathy and Frank are filing a joint return for 2013. Pa 1040ez Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Pa 1040ez Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Pa 1040ez Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Pa 1040ez Because this loss relates to their home, it is a nondeductible loss. Pa 1040ez Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Pa 1040ez Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Pa 1040ez Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Pa 1040ez The household furnishings originally cost $30,000. Pa 1040ez The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Pa 1040ez Kathy and Frank had no adjustments to the cost basis of the car. Pa 1040ez Kathy and Frank had no other assets or liabilities at the time of the cancellation. Pa 1040ez Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Pa 1040ez At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Pa 1040ez Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Pa 1040ez Kathy and Frank had no other assets or liabilities at that time. Pa 1040ez Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Pa 1040ez Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Pa 1040ez The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Pa 1040ez The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Pa 1040ez Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Pa 1040ez Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Pa 1040ez This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Pa 1040ez Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Pa 1040ez Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Pa 1040ez Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Pa 1040ez Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Pa 1040ez Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Pa 1040ez Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Pa 1040ez Thus, Kathy and Frank leave line 10b of Form 982 blank. Pa 1040ez However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Pa 1040ez As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Pa 1040ez Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Pa 1040ez Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Pa 1040ez Kathy and Frank reduce the basis in the car by $14,956. Pa 1040ez 52 ($43,000 x $16,000/$46,000). Pa 1040ez And they reduce the basis in the household furnishings by $28,043. Pa 1040ez 48 ($43,000 x $30,000/$46,000). Pa 1040ez Following are Kathy and Frank's sample forms and worksheets. Pa 1040ez Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Pa 1040ez Please click the link to view the image. Pa 1040ez Form 1099-C, Cancellation of Debt Table 1-1. Pa 1040ez Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Pa 1040ez Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Pa 1040ez Otherwise, go to Part 2. Pa 1040ez 1. Pa 1040ez Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Pa 1040ez 00 2. Pa 1040ez Enter the fair market value of the transferred property $1,750,000. Pa 1040ez 00 3. Pa 1040ez Ordinary income from the cancellation of debt upon foreclosure or repossession. Pa 1040ez * Subtract line 2 from line 1. Pa 1040ez If less than zero, enter zero. Pa 1040ez Next, go to Part 2 $0. Pa 1040ez 00 Part 2. Pa 1040ez Gain or loss from foreclosure or repossession. Pa 1040ez 4. Pa 1040ez Enter the smaller of line 1 or line 2. Pa 1040ez If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Pa 1040ez $1,750,000. Pa 1040ez 00 5. Pa 1040ez Enter any proceeds you received from the foreclosure sale 6. Pa 1040ez Add line 4 and line 5 $1,750,000. Pa 1040ez 00 7. Pa 1040ez Enter the adjusted basis of the transferred property $3,000,000. Pa 1040ez 00 8. Pa 1040ez Gain or loss from foreclosure or repossession. Pa 1040ez Subtract line 7 from line 6 ($1,250,000. Pa 1040ez 00) * The income may not be taxable. Pa 1040ez See chapter 1 for more details. Pa 1040ez Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Pa 1040ez Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Pa 1040ez Credit card debt $ 18,000 2. Pa 1040ez Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Pa 1040ez Car and other vehicle loans $ 4. Pa 1040ez Medical bills owed $ 5. Pa 1040ez Student loans $ 6. Pa 1040ez Accrued or past-due mortgage interest $ 7. Pa 1040ez Accrued or past-due real estate taxes $ 8. Pa 1040ez Accrued or past-due utilities (water, gas, electric) $ 9. Pa 1040ez Accrued or past-due child care costs $ 10. Pa 1040ez Federal or state income taxes remaining due (for prior tax years) $ 11. Pa 1040ez Judgments $ 12. Pa 1040ez Business debts (including those owed as a sole proprietor or partner) $ 13. Pa 1040ez Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Pa 1040ez Other liabilities (debts) not included above $ 15. Pa 1040ez Total liabilities immediately before the cancellation. Pa 1040ez Add lines 1 through 14. Pa 1040ez $ 768,000 Part II. Pa 1040ez Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before the Cancellation 16. Pa 1040ez Cash and bank account balances $ 15,000 17. Pa 1040ez Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Pa 1040ez Cars and other vehicles $ 10,000 19. Pa 1040ez Computers $ 20. Pa 1040ez Household goods and furnishings (for example, appliances, electronics, furniture, etc. Pa 1040ez ) $ 17,000 21. Pa 1040ez Tools $ 22. Pa 1040ez Jewelry $ 23. Pa 1040ez Clothing $ 24. Pa 1040ez Books $ 25. Pa 1040ez Stocks and bonds $ 26. Pa 1040ez Investments in coins, stamps, paintings, or other collectibles $ 27. Pa 1040ez Firearms, sports, photographic, and other hobby equipment $ 28. Pa 1040ez Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Pa 1040ez Interest in a pension plan $ 30. Pa 1040ez Interest in education accounts $ 31. Pa 1040ez Cash value of life insurance $ 32. Pa 1040ez Security deposits with landlords, utilities, and others $ 33. Pa 1040ez Interests in partnerships $ 34. Pa 1040ez Value of investment in a business $ 35. Pa 1040ez Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Pa 1040ez Other assets not included above $ 37. Pa 1040ez FMV of total assets immediately before the cancellation. Pa 1040ez Add lines 16 through 36. Pa 1040ez $ 42,000 Part III. Pa 1040ez Insolvency 38. Pa 1040ez Amount of Insolvency. Pa 1040ez Subtract line 37 from line 15. Pa 1040ez If zero or less, you are not insolvent. Pa 1040ez $ 726,000 Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Pa 1040ez Please click the link to view the image. Pa 1040ez Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev Up Next Home More Online Publications
Pa 1040ez Publication 334 - Introductory Material Table of Contents IntroductionOrdering forms and publications. Pa 1040ez Tax questions. Pa 1040ez Future Developments What's New for 2013 What's New for 2014 Reminders Photographs of Missing Children Introduction The purpose of this publication is to provide general information about the federal tax laws that apply to small business owners who are sole proprietors and to statutory employees. Pa 1040ez This publication has information on business income, expenses, and tax credits that may help you file your income tax return. Pa 1040ez Are you self-employed? You are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor. Pa 1040ez Sole proprietor. Pa 1040ez A sole proprietor is someone who owns an unincorporated business by himself or herself. Pa 1040ez However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. Pa 1040ez Trade or business. Pa 1040ez A trade or business is generally an activity carried on to make a profit. Pa 1040ez The facts and circumstances of each case determine whether or not an activity is a trade or business. Pa 1040ez You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. Pa 1040ez You do need to make ongoing efforts to further the interests of your business. Pa 1040ez You do not have to carry on regular full-time business activities to be self-employed. Pa 1040ez Having a part-time business in addition to your regular job or business may be self-employment. Pa 1040ez Independent contractor. Pa 1040ez People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. Pa 1040ez However, whether they are independent contractors or employees depends on the facts in each case. Pa 1040ez The general rule is that an individual is an independent contractor if the payer has the right to control or to direct only the result of the work and not how it will be done. Pa 1040ez The earnings of a person who is working as an independent contractor are subject to self-employment tax. Pa 1040ez For more information on determining whether you are an employee or independent contractor, see Publication 15-A, Employer's Supplemental Tax Guide. Pa 1040ez Statutory employee. Pa 1040ez A statutory employee has a checkmark in box 13 of his or her Form W-2, Wage and Tax Statement. Pa 1040ez Statutory employees use Schedule C or C-EZ to report their wages and expenses. Pa 1040ez Limited liability company (LLC). Pa 1040ez A limited liability company (LLC) is an entity formed under state law by filing articles of organization. Pa 1040ez Generally, a single-member LLC is disregarded as an entity separate from its owner and reports its income and deductions on its owner's federal income tax return. Pa 1040ez An owner who is an individual may use Schedule C or C-EZ. Pa 1040ez Business owned and operated by spouses. Pa 1040ez If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Pa 1040ez Do not use Schedule C or C-EZ. Pa 1040ez Instead, file Form 1065, U. Pa 1040ez S. Pa 1040ez Return of Partnership Income. Pa 1040ez For more information, see Publication 541, Partnerships. Pa 1040ez Exception—Community income. Pa 1040ez If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Pa 1040ez S. Pa 1040ez possession, you can treat the business either as a sole proprietorship or a partnership. Pa 1040ez The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Pa 1040ez A change in your reporting position will be treated as a conversion of the entity. Pa 1040ez Exception—Qualified joint venture. Pa 1040ez If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Pa 1040ez Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Pa 1040ez For an explanation of "material participation," see the Instructions for Schedule C, line G. Pa 1040ez To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Pa 1040ez Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Pa 1040ez For more information, see Qualified Joint Ventures in the Instructions for Schedule SE. Pa 1040ez This publication does not cover the topics listed in the following table. Pa 1040ez IF you need information about: THEN you should see: Corporations Publication 542 Farming Publication 225 Fishermen (Capital Construction Fund) Publication 595 Partnerships Publication 541 Passive activities Publication 925 Recordkeeping Publication 583 Rental Publication 527 S corporations Instructions for Form 1120S What you need to know. Pa 1040ez Table A provides a list of questions you need to answer to help you meet your federal tax obligations. Pa 1040ez After each question is the location in this publication where you will find the related discussion. Pa 1040ez Table A. Pa 1040ez What You Need To Know About Federal Taxes (Note. Pa 1040ez The following is a list of questions you may need to answer so you can fill out your federal income tax return. Pa 1040ez Chapters are given to help you find the related discussion in this publication. Pa 1040ez ) What must I know Where to find the answer What kinds of federal taxes do I have to pay? How do I pay them? See chapter 1. Pa 1040ez What forms must I file? See chapter 1. Pa 1040ez What must I do if I have employees? See Employment Taxes in chapter 1. Pa 1040ez Do I have to start my tax year in January, or can I start it in any other month? See Accounting Periods in chapter 2. Pa 1040ez What method can I use to account for my income and expenses? See Accounting Methods in chapter 2. Pa 1040ez What kinds of business income do I have to report on my tax return? See chapter 5. Pa 1040ez What kinds of business expenses can I deduct on my tax return? See Business Expenses in chapter 8. Pa 1040ez What kinds of expenses are not deductible as business expenses? See Expenses You Cannot Deduct in chapter 8. Pa 1040ez What happens if I have a business loss? Can I deduct it? See chapter 9. Pa 1040ez What must I do if I disposed of business property during the year? See chapter 3. Pa 1040ez What are my rights as a taxpayer? See chapter 11. Pa 1040ez Where do I go if I need help with federal tax matters? See chapter 12. Pa 1040ez IRS mission. Pa 1040ez Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Pa 1040ez Comments and suggestions. Pa 1040ez We welcome your comments about this publication and your suggestions for future editions. Pa 1040ez You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Pa 1040ez NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Pa 1040ez Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Pa 1040ez You can send your comments from www. Pa 1040ez irs. Pa 1040ez gov/formspubs/. Pa 1040ez Click on “More Information” then on “Comment on Tax Forms and Publications. Pa 1040ez ” Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Pa 1040ez Ordering forms and publications. Pa 1040ez Visit www. Pa 1040ez irs. Pa 1040ez gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Pa 1040ez Internal Revenue Service 1201 N. Pa 1040ez Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Pa 1040ez If you have a tax question, check the information available on IRS. Pa 1040ez gov or call 1-800-829-1040. Pa 1040ez We cannot answer tax questions sent to either of the above addresses. Pa 1040ez Future Developments For the latest information about developments related to Publication 334, such as legislation enacted after it was published, go to www. Pa 1040ez irs. Pa 1040ez gov/pub334. Pa 1040ez What's New for 2013 The following are some of the tax changes for 2013. Pa 1040ez For information on other changes, go to IRS. Pa 1040ez gov. Pa 1040ez Tax rates. Pa 1040ez . Pa 1040ez For tax years beginning in 2013, the social security part of the self-employment tax increases to 12. Pa 1040ez 4%. Pa 1040ez The Medicare part of the tax remains at 2. Pa 1040ez 9%. Pa 1040ez As a result, the self-employment tax is 15. Pa 1040ez 3%. Pa 1040ez Maximum net earnings. Pa 1040ez The maximum net self-employment earnings subject to the social security part of the self-employment tax increases to $113,700 for 2013. Pa 1040ez There is no maximum limit on earnings subject to the Medicare part. Pa 1040ez Standard mileage rate. Pa 1040ez For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Pa 1040ez 5 cents per mile. Pa 1040ez For more information, see Car and Truck Expenses in chapter 8. Pa 1040ez Simplified method for business use of home deduction. Pa 1040ez . Pa 1040ez The IRS now provides a simplified method to determine your expenses for business use of your home. Pa 1040ez For more information, see Business Use of Your Home in chapter 8. Pa 1040ez What's New for 2014 The following are some of the tax changes for 2014. Pa 1040ez For information on other changes, go to IRS. Pa 1040ez gov. Pa 1040ez Standard mileage rate. Pa 1040ez For 2014, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56 cents per mile. Pa 1040ez Self-employment tax. Pa 1040ez The maximum net self-employment earnings subject to the social security part of the self-employment tax is $117,000 for 2014. Pa 1040ez Reminders Accounting methods. Pa 1040ez Certain small business taxpayers may be eligible to adopt or change to the cash method of accounting and may not be required to account for inventories. Pa 1040ez For more information, see Inventories in chapter 2. Pa 1040ez Reportable transactions. Pa 1040ez You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. Pa 1040ez You may have to pay a penalty if you are required to file Form 8886 but do not do so. Pa 1040ez You may also have to pay interest and penalties on any reportable transaction understatements. Pa 1040ez Reportable transactions include: Transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, Transactions offered to you under conditions of confidentiality for which you paid an advisor a minimum fee, Transactions for which you have, or a related party has, contractual protection against disallowance of the tax benefits, Transactions that result in losses of at least $2 million in any single tax year ($50,000 if from certain foreign currency transactions) or $4 million in any combination of tax years, and Transactions the same or substantially similar to one of the types of transactions the IRS has identified as a transaction of interest. Pa 1040ez For more information, see the Instructions for Form 8886. Pa 1040ez Photographs of Missing Children The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Pa 1040ez Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Pa 1040ez You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Pa 1040ez Prev Up Next Home More Online Publications