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Free State Tax File

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Free State Tax File

Free state tax file 30. Free state tax file   How To Figure Your Tax Table of Contents Introduction Figuring Your Tax Alternative Minimum Tax (AMT) Tax Figured by IRSFiling the Return Introduction After you have figured your income and deductions as explained in Parts One through Five, your next step is to figure your tax. Free state tax file This chapter discusses: The general steps you take to figure your tax, An additional tax you may have to pay called the alternative minimum tax (AMT), and The conditions you must meet if you want the IRS to figure your tax. Free state tax file Figuring Your Tax Your income tax is based on your taxable income. Free state tax file After you figure your income tax and AMT, if any, subtract your tax credits and add any other taxes you may owe. Free state tax file The result is your total tax. Free state tax file Compare your total tax with your total payments to determine whether you are entitled to a refund or if you must make a payment. Free state tax file This section provides a general outline of how to figure your tax. Free state tax file You can find step-by-step directions in the Instructions for Forms 1040EZ, 1040A, and 1040. Free state tax file If you are unsure of which tax form you should file, see Which Form Should I Use? in chapter 1. Free state tax file Tax. Free state tax file   Most taxpayers use either the Tax Table or the Tax Computation Worksheet to figure their income tax. Free state tax file However, there are special methods if your income includes any of the following items. Free state tax file A net capital gain. Free state tax file (See chapter 16. Free state tax file ) Qualified dividends taxed at the same rates as a net capital gain. Free state tax file (See chapters 8 and 16. Free state tax file ) Lump-sum distributions. Free state tax file (See chapter 10. Free state tax file ) Farming or fishing income. Free state tax file (See Schedule J (Form 1040), Income Averaging for Farmers and Fishermen. Free state tax file ) Unearned income over $2,000 for certain children. Free state tax file (See chapter 31. Free state tax file ) Parents' election to report child's interest and dividends. Free state tax file (See chapter 31. Free state tax file ) Foreign earned income exclusion or the housing exclusion. Free state tax file (See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, and the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. Free state tax file ) Credits. Free state tax file   After you figure your income tax and any AMT (discussed later), determine if you are eligible for any tax credits. Free state tax file Eligibility information for these tax credits is discussed in chapters 32 through 37 and your form instructions. Free state tax file The following table lists the credits you may be able to subtract from your tax and shows where you can find more information on each credit. Free state tax file CREDITS For information on: See  chapter: Adoption 37 Alternative motor vehicle 37 Alternative fuel vehicle refueling  property 37 Child and dependent care 32 Child tax 34 Credit to holders of tax credit  bonds 37 Education 35 Elderly or disabled 33 Electric vehicle 37 Foreign tax 37 Mortgage interest 37 Prior year minimum tax 37 Residential energy 37 Retirement savings contributions 37   Some credits (such as the earned income credit) are not listed because they are treated as payments. Free state tax file See Payments , later. Free state tax file   There are other credits that are not discussed in this publication. Free state tax file These include the following credits. Free state tax file General business credit, which is made up of several separate business-related credits. Free state tax file These generally are reported on Form 3800, General Business Credit, and are discussed in chapter 4 of Publication 334, Tax Guide for Small Business. Free state tax file Renewable electricity, refined coal, and Indian coal production credit for electricity and refined coal produced at facilities placed in service after October 22, 2004 (after October 2, 2008, for electricity produced from marine and hydrokinetic renewables), and Indian coal produced at facilities placed in service after August 8, 2005. Free state tax file See Form 8835, Part II. Free state tax file Work opportunity credit. Free state tax file See Form 5884. Free state tax file Credit for employer social security and Medicare taxes paid on certain employee tips. Free state tax file See Form 8846. Free state tax file Other taxes. Free state tax file   After you subtract your tax credits, determine whether there are any other taxes you must pay. Free state tax file This chapter does not explain these other taxes. Free state tax file You can find that information in other chapters of this publication and your form instructions. Free state tax file See the following table for other taxes you may need to add to your income tax. Free state tax file OTHER TAXES For information on: See  chapter: Additional taxes on qualified retirement plans and IRAs 10, 17 Household employment taxes 32 Recapture of an education credit 35 Social security and Medicare tax on wages 5 Social security and Medicare tax on tips 6 Uncollected social security and Medicare tax on tips 6   You also may have to pay AMT (discussed later in this chapter). Free state tax file   There are other taxes that are not discussed in this publication. Free state tax file These include the following items. Free state tax file Self-employment tax. Free state tax file You must figure this tax if either of the following applies to you (or your spouse if you file a joint return). Free state tax file Your net earnings from self-employment from other than church employee income were $400 or more. Free state tax file The term “net earnings from self-employment” may include certain nonemployee compensation and other amounts reported to you on Form 1099-MISC, Miscellaneous Income. Free state tax file If you received a Form 1099-MISC, see the Instructions for Recipient on the back. Free state tax file Also see the Instructions for Schedule SE (Form 1040), Self-Employment Tax; and Publication 334, Tax Guide for Small Business. Free state tax file You had church employee income of $108. Free state tax file 28 or more. Free state tax file Additional Medicare Tax. Free state tax file Beginning in 2013, you may be subject to a 0. Free state tax file 9% Additional Medicare Tax that applies to Medicare wages, Railroad Retirement Act compensation, and self-employment income over a threshold based on your filing status. Free state tax file For more information, see the Instructions for Form 1040, line 60 and Form 8959. Free state tax file Net Investment Income Tax (NIIT). Free state tax file Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Free state tax file NIIT is a 3. Free state tax file 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income over a threshold amount. Free state tax file For more information, see the Instructions for Form 1040, line 60 and Form 8960. Free state tax file Recapture taxes. Free state tax file You may have to pay these taxes if you previously claimed an investment credit, a low-income housing credit, a new markets credit, a qualified plug-in electric drive motor vehicle credit, an alternative motor vehicle credit, a credit for employer-provided child care facilities, an Indian employment credit, or other credits listed in the instructions for Form 1040, line 60. Free state tax file For more information, see the instructions for Form 1040, line 60. Free state tax file Section 72(m)(5) excess benefits tax. Free state tax file If you are (or were) a 5% owner of a business and you received a distribution that exceeds the benefits provided for you under the qualified pension or annuity plan formula, you may have to pay this additional tax. Free state tax file See Tax on Excess Benefits in chapter 4 of Publication 560, Retirement Plans for Small Business. Free state tax file Uncollected social security and Medicare tax on group-term life insurance. Free state tax file If your former employer provides you with more than $50,000 of group-term life insurance coverage, you must pay the employee part of social security and Medicare taxes on those premiums. Free state tax file The amount should be shown in box 12 of your Form W-2 with codes M and N. Free state tax file Tax on golden parachute payments. Free state tax file This tax applies if you received an “excess parachute payment” (EPP) due to a change in a corporation's ownership or control. Free state tax file The amount should be shown in box 12 of your Form W-2 with code K. Free state tax file See the instructions for Form 1040, line 60. Free state tax file Tax on accumulation distribution of trusts. Free state tax file This applies if you are the beneficiary of a trust that accumulated its income instead of distributing it currently. Free state tax file See Form 4970 and its instructions. Free state tax file Additional tax on HSAs or MSAs. Free state tax file If amounts contributed to, or distributed from, your health savings account or medical savings account do not meet the rules for these accounts, you may have to pay additional taxes. Free state tax file See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans; Form 8853, Archer MSAs and Long-Term Care Insurance Contracts; Form 8889, Health Savings Accounts (HSAs); and Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Free state tax file Additional tax on Coverdell ESAs. Free state tax file This applies if amounts contributed to, or distributed from, your Coverdell ESA do not meet the rules for these accounts. Free state tax file See Publication 970, Tax Benefits for Education, and Form 5329. Free state tax file Additional tax on qualified tuition programs. Free state tax file This applies to amounts distributed from qualified tuition programs that do not meet the rules for these accounts. Free state tax file See Publication 970 and Form 5329. Free state tax file Excise tax on insider stock compensation from an expatriated corporation. Free state tax file You may owe a 15% excise tax on the value of nonstatutory stock options and certain other stock-based compensation held by you or a member of your family from an expatriated corporation or its expanded affiliated group in which you were an officer, director, or more-than-10% owner. Free state tax file For more information, see the instructions for Form 1040, line 60. Free state tax file Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements. Free state tax file This income should be shown in Form W-2, box 12, with code Z, or in Form 1099-MISC, box 15b. Free state tax file For more information, see the instructions for Form 1040, line 60. Free state tax file Interest on the tax due on installment income from the sale of certain residential lots and timeshares. Free state tax file For more information, see the instructions for Form 1040, line 60. Free state tax file Interest on the deferred tax on gain from certain installment sales with a sales price over $150,000. Free state tax file For more information, see the instructions for Form 1040, line 60. Free state tax file Repayment of first-time homebuyer credit. Free state tax file For more information, see Form 5405, Repayment of the First-Time Homebuyer Credit, and its instructions. Free state tax file Also see the instructions for Form 1040, line 59b. Free state tax file Payments. Free state tax file   After you determine your total tax, figure the total payments you have already made for the year. Free state tax file Include credits that are treated as payments. Free state tax file This chapter does not explain these payments and credits. Free state tax file You can find that information in other chapters of this publication and your form instructions. Free state tax file See the following table for amounts you can include in your total payments. Free state tax file PAYMENTS For information on: See  chapter: Child tax credit (additional) 34 Earned income credit 36 Estimated tax paid 4 Excess social security   and RRTA tax withheld 37 Federal income tax withheld 4 Health coverage tax credit 37 Credit for tax on   undistributed capital gain 37 Tax paid with extension 1   Another credit that is treated as a payment is the credit for federal excise tax paid on fuels. Free state tax file This credit is for persons who have a nontaxable use of certain fuels, such as diesel fuel and kerosene. Free state tax file It is claimed on Form 1040, line 70. Free state tax file See Form 4136, Credit for Federal Tax Paid on Fuels. Free state tax file Refund or balance due. Free state tax file   To determine whether you are entitled to a refund or whether you must make a payment, compare your total payments with your total tax. Free state tax file If you are entitled to a refund, see your form instructions for information on having it directly deposited into one or more of your accounts, or to purchase U. Free state tax file S. Free state tax file savings bonds instead of receiving a paper check. Free state tax file Alternative Minimum Tax (AMT) This section briefly discusses an additional tax you may have to pay. Free state tax file The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Free state tax file Taxpayers who benefit from this special treatment may have to pay at least a minimum amount of tax through an additional tax called AMT. Free state tax file You may have to pay the AMT if your taxable income for regular tax purposes, combined with certain adjustments and tax preference items, is more than a certain amount. Free state tax file See Form 6251, Alternative Minimum Tax — Individuals. Free state tax file Adjustments and tax preference items. Free state tax file   The more common adjustments and tax preference items include: Addition of personal exemptions, Addition of the standard deduction (if claimed), Addition of itemized deductions claimed for state and local taxes, certain interest, most miscellaneous deductions, and part of medical expenses, Subtraction of any refund of state and local taxes included in gross income, Changes to accelerated depreciation of certain property, Difference between gain or loss on the sale of property reported for regular tax purposes and AMT purposes, Addition of certain income from incentive stock options, Change in certain passive activity loss deductions, Addition of certain depletion that is more than the adjusted basis of the property, Addition of part of the deduction for certain intangible drilling costs, and Addition of tax-exempt interest on certain private activity bonds. Free state tax file More information. Free state tax file   For more information about the AMT, see the instructions for Form 6251. Free state tax file Tax Figured by IRS If you file by April 15, 2014, you can have the IRS figure your tax for you on Form 1040EZ, Form 1040A, or Form 1040. Free state tax file If the IRS figures your tax and you paid too much, you will receive a refund. Free state tax file If you did not pay enough, you will receive a bill for the balance. Free state tax file To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later. Free state tax file The IRS can also figure the credit for the elderly or the disabled and the earned income credit for you. Free state tax file When the IRS cannot figure your tax. Free state tax file   The IRS cannot figure your tax for you if any of the following apply. Free state tax file You want your refund directly deposited into your accounts. Free state tax file You want any part of your refund applied to your 2014 estimated tax. Free state tax file You had income for the year from sources other than wages, salaries, tips, interest, dividends, taxable social security benefits, unemployment compensation, IRA distributions, pensions, and annuities. Free state tax file Your taxable income is $100,000 or more. Free state tax file You itemize deductions. Free state tax file You file any of the following forms. Free state tax file Form 2555, Foreign Earned Income. Free state tax file Form 2555-EZ, Foreign Earned Income Exclusion. Free state tax file Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Free state tax file Form 4970, Tax on Accumulation Distribution of Trusts. Free state tax file Form 4972, Tax on Lump-Sum Distributions. Free state tax file Form 6198, At-Risk Limitations. Free state tax file Form 6251, Alternative Minimum Tax—Individuals. Free state tax file Form 8606, Nondeductible IRAs. Free state tax file Form 8615, Tax for Certain Children Who Have Unearned Income. Free state tax file Form 8814, Parents' Election To Report Child's Interest and Dividends. Free state tax file Form 8839, Qualified Adoption Expenses. Free state tax file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Free state tax file Form 8889, Health Savings Accounts (HSAs). Free state tax file Form 8919, Uncollected Social Security and Medicare Tax on Wages. Free state tax file Filing the Return After you complete the line entries for the tax form you are filing, fill in your name and address. Free state tax file Enter your social security number in the space provided. Free state tax file If you are married, enter the social security numbers of you and your spouse even if you file separately. Free state tax file Sign and date your return and enter your occupation(s). Free state tax file If you are filing a joint return, both you and your spouse must sign it. Free state tax file Enter your daytime phone number in the space provided. Free state tax file This may help speed the processing of your return if we have a question that can be answered over the phone. Free state tax file If you are filing a joint return, you may enter either your or your spouse's daytime phone number. Free state tax file If you want to allow a friend, family member, or any other person you choose to discuss your 2013 tax return with the IRS, check the “Yes” box in the “Third party designee” area on your return. Free state tax file Also enter the designee's name, phone number, and any five digits the designee chooses as his or her personal identification number (PIN). Free state tax file If you check the “Yes” box, you, and your spouse if filing a joint return, are authorizing the IRS to call the designee to answer any questions that may arise during the processing of your return. Free state tax file Fill in and attach any schedules and forms asked for on the lines you completed to your paper return. Free state tax file Attach a copy of each of your Forms W-2 to your paper return. Free state tax file Also attach to your paper return any Form 1099-R you received that has withholding tax in box 4. Free state tax file Mail your return to the Internal Revenue Service Center for the area where you live. Free state tax file A list of Service Center addresses is in the instructions for your tax return. Free state tax file Form 1040EZ Line Entries Read lines 1 through 8b and fill in the lines that apply to you. Free state tax file Do not complete lines 9 through 12. Free state tax file If you are filing a joint return, use the space to the left of line 6 to separately show your taxable income and your spouse's taxable income. Free state tax file Payments. Free state tax file   Enter any federal income tax withheld on line 7. Free state tax file Federal income tax withheld is shown on Form W-2, box 2, or Form 1099, box 4. Free state tax file Earned income credit. Free state tax file   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. Free state tax file Enter “EIC” in the space to the left of line 8a. Free state tax file Enter the nontaxable combat pay you elect to include in earned income on line 8b. Free state tax file   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. Free state tax file For details, see the Form 1040EZ Instructions. Free state tax file Form 1040A Line Entries Read lines 1 through 27 and fill in the lines that apply to you. Free state tax file If you are filing a joint return, use the space to the left of the entry space for line 27 to separately show your taxable income and your spouse's taxable income. Free state tax file Do not complete line 28. Free state tax file Complete lines 29 through 33 and 36 through 40 if they apply to you. Free state tax file However, do not fill in lines 30 and 38a if you want the IRS to figure the credits shown on those lines. Free state tax file Also, enter any write-in information that applies to you in the space to the left of line 41. Free state tax file Do not complete lines 34, 35, and 42 through 46. Free state tax file Payments. Free state tax file   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 36. Free state tax file Enter any estimated tax payments you made on line 37. Free state tax file Credit for child and dependent care expenses. Free state tax file   If you can take this credit, as discussed in chapter 32, complete Form 2441, Child and Dependent Care Expenses, and attach it to your return. Free state tax file Enter the amount of the credit on line 29. Free state tax file The IRS will not figure this credit. Free state tax file Credit for the elderly or the disabled. Free state tax file   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. Free state tax file Enter “CFE” in the space to the left of line 30 and attach Schedule R (Form 1040A or 1040), Credit for the Elderly or the Disabled, to your paper return. Free state tax file On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. Free state tax file Complete Part II and Part III, lines 11 and 13, if they apply. Free state tax file Earned income credit. Free state tax file   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. Free state tax file Enter “EIC” to the left of the entry space for line 38a. Free state tax file Enter the nontaxable combat pay you elect to include in earned income on line 38b. Free state tax file    If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. Free state tax file If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. Free state tax file   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. Free state tax file For details, see the Form 1040A Instructions. Free state tax file Form 1040 Line Entries Read lines 1 through 43 and fill in the lines that apply to you. Free state tax file Do not complete line 44. Free state tax file If you are filing a joint return, use the space under the words “Adjusted Gross Income” on the front of your return to separately show your taxable income and your spouse's taxable income. Free state tax file Read lines 45 through 71. Free state tax file Fill in the lines that apply to you, but do not fill in lines 54, 61, and 72. Free state tax file Also, do not complete line 55 and lines 73 through 77. Free state tax file Do not fill in line 53, box “c,” if you are completing Schedule R (Form 1040A or 1040), or line 64a if you want the IRS to figure the credits shown on those lines. Free state tax file Payments. Free state tax file   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 62. Free state tax file Enter any estimated tax payments you made on line 63. Free state tax file Credit for child and dependent care expenses. Free state tax file   If you can take this credit, as discussed in chapter 32, complete Form 2441 and attach it to your paper return. Free state tax file Enter the amount of the credit on line 48. Free state tax file The IRS will not figure this credit. Free state tax file Credit for the elderly or the disabled. Free state tax file   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. Free state tax file Enter “CFE” on the line next to line 53, check box “c,” and attach Schedule R (Form 1040A or 1040) to your paper return. Free state tax file On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. Free state tax file Complete Part II and Part III, lines 11 and 13, if they apply. Free state tax file Earned income credit. Free state tax file   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. Free state tax file Enter “EIC” on the dotted line next to Form 1040, line 64a. Free state tax file Enter the nontaxable combat pay you elect to include in earned income on line 64b. Free state tax file   If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. Free state tax file If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. Free state tax file   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. Free state tax file For details, see the Form 1040 Instructions. Free state tax file Prev  Up  Next   Home   More Online Publications
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The Free State Tax File

Free state tax file Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Free state tax file Property not disposed of or abandoned. Free state tax file Special rule for normal retirements from item accounts. Free state tax file Abandoned property. Free state tax file Single item accounts. Free state tax file Multiple property account. Free state tax file Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Free state tax file If your property qualified for MACRS, you must depreciate it under MACRS. Free state tax file See Publication 946. Free state tax file However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Free state tax file Also, you can elect to exclude certain property from being depreciated under MACRS. Free state tax file Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Free state tax file Intangible property. Free state tax file   You cannot depreciate intangible property under ACRS or MACRS. Free state tax file You depreciate intangible property using any other reasonable method, usually, the straight line method. Free state tax file Note. Free state tax file The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Free state tax file For more information, see chapter 12 of Publication 535. Free state tax file Public utility property. Free state tax file   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Free state tax file This type of property is subject to depreciation under a special rule. Free state tax file Videocassettes. Free state tax file   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Free state tax file You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Free state tax file The straight line method, salvage value, and useful life are discussed later under Methods To Use. Free state tax file You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Free state tax file How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Free state tax file These methods are straight line and declining balance. Free state tax file To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Free state tax file They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Free state tax file The amount of the deduction in any year also depends on which method of depreciation you choose. Free state tax file Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Free state tax file The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Free state tax file Your original basis is usually the purchase price. Free state tax file However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Free state tax file Adjusted basis. Free state tax file   Events will often change the basis of property. Free state tax file When this occurs, the changed basis is called the adjusted basis. Free state tax file Some events, such as improvements you make, increase basis. Free state tax file Events such as deducting casualty losses and depreciation decrease basis. Free state tax file If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Free state tax file   Publication 551 explains how to figure basis for property acquired in different ways. Free state tax file It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Free state tax file Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Free state tax file It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Free state tax file It is how long it will continue to be useful to you, not how long the property will last. Free state tax file Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Free state tax file The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Free state tax file Consider all these factors before you arrive at a useful life for your property. Free state tax file The useful life of the same type of property varies from user to user. Free state tax file When you determine the useful life of your property, keep in mind your own experience with similar property. Free state tax file You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Free state tax file Change in useful life. Free state tax file   You base your estimate of useful life on certain facts. Free state tax file If these facts change significantly, you can adjust your estimate of the remaining useful life. Free state tax file However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Free state tax file Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Free state tax file You generally cannot depreciate property below a reasonable salvage value. Free state tax file Determining salvage value. Free state tax file   Salvage value is the estimated value of property at the end of its useful life. Free state tax file It is what you expect to get for the property if you sell it after you can no longer use it productively. Free state tax file You must estimate the salvage value of a piece of property when you first acquire it. Free state tax file   Salvage value is affected both by how you use the property and how long you use it. Free state tax file If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Free state tax file However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Free state tax file Changing salvage value. Free state tax file   Once you determine the salvage value for property, you should not change it merely because prices have changed. Free state tax file However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Free state tax file When you redetermine the salvage value, take into account the facts that exist at the time. Free state tax file Net salvage. Free state tax file   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Free state tax file You can choose either salvage value or net salvage when you figure depreciation. Free state tax file You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Free state tax file However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Free state tax file Your salvage value can never be less than zero. Free state tax file Ten percent rule. Free state tax file   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Free state tax file You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Free state tax file If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Free state tax file Methods To Use Two methods of depreciation are the straight line and declining balance methods. Free state tax file If ACRS or MACRS does not apply, you can use one of these methods. Free state tax file The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Free state tax file Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Free state tax file One of these methods was the straight line method. Free state tax file This method was also used for intangible property. Free state tax file It lets you deduct the same amount of depreciation each year. Free state tax file To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Free state tax file Subtract the salvage value, if any, from the adjusted basis. Free state tax file The balance is the total amount of depreciation you can take over the useful life of the property. Free state tax file Divide the balance by the number of years remaining in the useful life. Free state tax file This gives you the amount of your yearly depreciation deduction. Free state tax file Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Free state tax file If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Free state tax file Example. Free state tax file In April 1994, Frank bought a franchise for $5,600. Free state tax file It expires in 10 years. Free state tax file This property is intangible property that cannot be depreciated under MACRS. Free state tax file Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Free state tax file He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Free state tax file He must prorate the $560 for his 9 months of use in 1994. Free state tax file This gives him a deduction of $420 ($560 ÷ 9/12). Free state tax file In 1995, Frank can deduct $560 for the full year. Free state tax file Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Free state tax file The rate cannot be more than twice the straight line rate. Free state tax file Rate of depreciation. Free state tax file   Under this method, you must determine your declining balance rate of depreciation. Free state tax file The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Free state tax file (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Free state tax file ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Free state tax file Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Free state tax file Depreciation deductions. Free state tax file   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Free state tax file This gives you the amount of your deduction. Free state tax file For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Free state tax file To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Free state tax file Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Free state tax file Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Free state tax file Your depreciation deduction for the second year is $1,600. Free state tax file   As you can see from this example, your adjusted basis in the property gets smaller each year. Free state tax file Also, under this method, deductions are larger in the earlier years and smaller in the later years. Free state tax file You can make a change to the straight line method without consent. Free state tax file Salvage value. Free state tax file   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Free state tax file However, you cannot depreciate the property below its reasonable salvage value. Free state tax file Determine salvage value using the rules discussed earlier, including the special 10% rule. Free state tax file Example. Free state tax file If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Free state tax file But if your estimate of salvage value was $900, you can only deduct $100. Free state tax file This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Free state tax file Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Free state tax file You can group the videocassettes by title for making this projection. Free state tax file You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Free state tax file The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Free state tax file For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Free state tax file How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Free state tax file If you change your method of depreciation, it is generally a change in your method of accounting. Free state tax file You must get IRS consent before making the change. Free state tax file However, you do not need permission for certain changes in your method of depreciation. Free state tax file The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Free state tax file For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Free state tax file Change to the straight line method. Free state tax file   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Free state tax file However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Free state tax file When the change is made, figure depreciation based on your adjusted basis in the property at that time. Free state tax file Your adjusted basis takes into account all previous depreciation deductions. Free state tax file Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Free state tax file   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Free state tax file You cannot make the change on an amended return filed after the due date of the original return (including extensions). Free state tax file   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Free state tax file   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Free state tax file Changes that require permission. Free state tax file   For most other changes in method of depreciation, you must get permission from the IRS. Free state tax file To request a change in method of depreciation, file Form 3115. Free state tax file File the application within the first 180 days of the tax year the change is to become effective. Free state tax file In most cases, there is a user fee that must accompany Form 3115. Free state tax file See the instructions for Form 3115 to determine if a fee is required. Free state tax file Changes granted automatically. Free state tax file   The IRS automatically approves certain changes of a method of depreciation. Free state tax file But, you must file Form 3115 for these automatic changes. Free state tax file   However, IRS can deny permission if Form 3115 is not filed on time. Free state tax file For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Free state tax file B. Free state tax file 420. Free state tax file Changes for which approval is not automatic. Free state tax file   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Free state tax file   You must request and receive permission for these changes. Free state tax file To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Free state tax file Change from an improper method. Free state tax file   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Free state tax file You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Free state tax file If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Free state tax file However, you must file the amended return before the filing date for the next tax year. Free state tax file Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Free state tax file You can do this by selling, exchanging, or abandoning the item of property. Free state tax file You can also withdraw it from use without disposing of it. Free state tax file For example, you could place it in a supplies or scrap account. Free state tax file Retirements can be either normal or abnormal depending on all facts and circumstances. Free state tax file The rules discussed next do not apply to MACRS and ACRS property. Free state tax file Normal retirement. Free state tax file   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Free state tax file A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Free state tax file Abnormal retirement. Free state tax file   A retirement can be abnormal if you withdraw the property early or under other circumstances. Free state tax file For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Free state tax file Gain or loss on retirement. Free state tax file   There are special rules for figuring the gain or loss on retirement of property. Free state tax file The gain or loss will depend on several factors. Free state tax file These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Free state tax file A single property account contains only one item of property. Free state tax file A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Free state tax file Sale or exchange. Free state tax file   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Free state tax file See Publication 544. Free state tax file Property not disposed of or abandoned. Free state tax file   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Free state tax file You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Free state tax file However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Free state tax file   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Free state tax file Special rule for normal retirements from item accounts. Free state tax file   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Free state tax file However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Free state tax file   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Free state tax file Abandoned property. Free state tax file   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Free state tax file However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Free state tax file Basis of property retired. Free state tax file   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Free state tax file Single item accounts. Free state tax file   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Free state tax file This is generally the cost or other basis of the item of property less depreciation. Free state tax file See Publication 551. Free state tax file Multiple property account. Free state tax file   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Free state tax file If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Free state tax file   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Free state tax file The method of depreciation used for the multiple property account is used. Free state tax file You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Free state tax file Prev  Up  Next   Home   More Online Publications