How To Postpone Gain

You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain.

Required statement.   You should attach a statement to your return for the year you have the gain. This statement should include all the following information.

• The date and details of the casualty, theft, or other involuntary conversion.
• The insurance or other reimbursement you received.
• How you figured the gain.

Replacement property acquired before return filed.   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items.

• The replacement property.
• The postponed gain.
• The basis adjustment that reflects the postponed gain. (Reduce the basis of the replacement property by the postponed gain.)
• Any gain you are reporting as income.

Replacement property acquired after return filed.   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period.

You should then attach another statement to your return for the year in which you buy the replacement property. This statement should contain detailed information on the replacement property. If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. Include in the statement detailed information on the replacement property bought in that year.

Amended return.   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations.

• You do not acquire replacement property within the replacement period, plus extensions. On this amended return, you must report the gain and pay any additional tax due.
• You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due.

Disaster Area Losses

Special rules apply to Presidentially declared disaster area losses. A Presidentially declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Disaster Relief and Emergency Assistance Act.

In March 2003, the IRS will issue a revenue ruling listing all of the areas declared by the President to be eligible for federal assistance during 2002 under the Act. A list of the areas warranting assistance under the Act is also available at the Federal Emergency Management Agency (FEMA) web site at www.fema.gov.

This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. For other special rules, see Publication 547.

When to deduct the loss.   If you have a deductible loss from a disaster that occurred in a Presidentially declared disaster area, you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. If you make this choice, the loss is treated as having occurred in the preceding year.

Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund.

You must make this choice to take your casualty loss for the disaster in the preceding year by the later of the following dates.

• The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred.
• The due date (with extensions) for the return for the preceding tax year.

Qualified disaster relief payments.   Qualified disaster relief payments received in tax years ending after September 10, 2001, are not included in the income of individuals. These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). No withholding applies to these payments.

Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses.

• Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a Presidentially declared disaster.
• Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a Presidentially declared disaster. (A personal residence can be a rented residence or one you own.)
• Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a Presidentially declared disaster.

Qualified disaster relief payments also include amounts paid by a federal, state, or local government in connection with a Presidentially declared disaster to those affected by the disaster.

Qualified disaster relief payments do not include:

• Insurance or other reimbursements for expenses, or
• Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation.

Postponed tax deadlines.   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. The tax deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes, and making contributions to a traditional IRA or Roth IRA.

If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB).

Who is eligible.   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement.

• Any individual whose main home is located in a covered disaster area (defined next).
• Any business entity or sole proprietor whose principal place of business is located in a covered disaster area.
• Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area.
• Any individual, business entity, or sole proprietor whose records are needed to meet a postponed deadline, provided those records are maintained in a covered disaster area. The main home or principal place of business does not have to be located in the covered disaster area.
• Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area.
• The spouse on a joint return with a taxpayer who is eligible for postponements.
• Any other person determined by the IRS to be affected by a Presidentially declared disaster.

Covered disaster area.   This is an area of a Presidentially declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year.

Abatement of interest and penalties.   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines.

Reporting Gains and Losses

You will have to file one or more of the following forms to report your gains or losses from involuntary conversions.

Form 4684.   Use this form to report your gains and losses from casualties and thefts.

Form 4797.   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit.

Schedule A (Form 1040).   Use this form to deduct your losses from casualties and thefts of personal-use property that you reported on Form 4684.

Schedule D (Form 1040).   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. Also, carry over the following gains to Schedule D.

• Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year.
• Net gain shown on Form 4684 from the casualty or theft of personal-use property.

Schedule F (Form 1040).   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 34, if you use the cash method of accounting and have not otherwise deducted these losses.

Alternative Minimum Tax

Introduction

The tax laws give special treatment to some types of income, allow special deductions for some types of expenses, and allow credits for certain taxpayers. These laws enable some taxpayers with substantial economic income to significantly reduce their regular tax. The alternative minimum tax (AMT) ensures that these taxpayers pay at least a minimum amount of tax on their economic income.

This chapter discusses the AMT for individuals. For information about the AMT for corporations, see Publication 542, Corporations.

Topics

This chapter discusses:

• Form 6251
• Records you must keep
• Credit for prior year minimum tax

Useful Items You may want to see:

Form (and Instructions)

• 1040   U.S. Individual Income Tax Return
• Sch A (Form 1040)   Itemized Deductions
• 6251   Alternative Minimum Tax - Individuals
• 8801   Credit For Prior Year Minimum Tax - Individuals, Estates, and Trusts

See chapter 21 for information about getting publications and forms.

Form 6251

Individuals use Form 6251 to figure their AMT. They also use the form to figure certain credit limitations.

Figuring AMT.   Use the worksheet in Table 14-1 to see if you should fill in Form 6251 to figure the amount, if any, of your AMT.

Exception.   Fill in Form 6251 instead of using the worksheet if you claimed or received any of the following items.

• Accelerated depreciation.
• Income or (loss) from tax-shelter farm activities or passive activities.
• Net operating loss deduction.
• Stock by exercising an incentive stock option and you did not dispose of the stock in the same year.
• Tax-exempt interest from private activity bonds.
• Intangible drilling, circulation, research, experimental, or mining costs.
• Amortization of pollution-control facilities or depletion.
• Percentage-of-completion income from long-term contracts.
• Interest paid on a home mortgage not used to buy, build, or substantially improve your home.
• Investment interest expense reported on Form 4952.
• AMT adjustments from an estate, trust, electing large partnership, or a cooperative.
• Section 1202 exclusion.

After you fill in Form 6251, see Who Must File in the form instructions to see if you need to attach it to your tax return.

Child under age 14.   Fill in Form 6251 for a child under age 14 if the child's adjusted gross income from Form 1040, line 35, exceeds the child's earned income by more than $5,500.

Figuring credit limitations.   Although you may not owe AMT, you generally must still figure your tentative minimum tax on Form 6251 to figure certain credits. Fill in Form 6251 if you claim any of the following credits.

• Any general business credit
  (see chapter 9).
• The qualified electric vehicle credit
  (see chapter 12 in Publication 535).
• The nonconventional source fuel credit (see section 29 of the Internal Revenue Code).
• The credit for prior year minimum tax (discussed later).

After you fill in Form 6251, attach it to your tax return.

Records You Must Keep

Due to AMT adjustments, you may have a different AMT basis in certain property or activities. Because your AMT basis may affect the computation of AMT in future tax years, you may need to figure the adjustments that affect basis, even though you do not owe AMT this year. You should keep a separate record of your AMT adjusted basis, including an AMT depreciation schedule.

Carrybacks and carryovers of certain deductions and credits may have to be refigured for AMT purposes. You should keep a separate record of these AMT carrybacks and carryovers to assist you in preparing your return in other years.

Credit for Prior Year Minimum Tax

Individuals use Form 8801 to figure their minimum tax credit, if any, for AMT incurred in prior tax years. They also use the form to figure any minimum tax credit carryforward.

Form 8801.   Fill in Form 8801 if you had any of the following items in 2001.

• An AMT liability and adjustments or preferences that do not cause a permanent difference in taxable income over time.
• A minimum tax credit carryforward.
• An unallowed nonconventional source fuel credit or qualified electric vehicle credit.

For more information, see Form 8801.

Reduction for canceled debt.   You may have to reduce the credit if you exclude from income a canceled debt from any of the following.

• A bankruptcy case.
• Insolvency.
• Qualified farm debt.

You must reduce the amount available at the beginning of the year after the debt was canceled before preparing Form 8801 for that year. For more information, see Cancellation of Debt in chapter 4.

Table 14–1

Self-Employment Tax

Important Change for 2002

Tax rates and maximum net earnings.   The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $84,900 for 2002. There is no maximum limit on earnings subject to the Medicare part (2.9%).

Important Change for 2003

Maximum net earnings.   The maximum net self-employment earnings subject to the social security part of the self-employment tax will be published in Publications 533 and 553. There is no maximum limit on earnings subject to the Medicare part.

Introduction

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

You usually have to pay SE tax if you are self-employed. You are usually self-employed if you operate your own farm on land you either own or rent. You have to figure SE tax on Schedule SE (Form 1040).

Farmers who have employees may have to pay the employer's share of social security tax, as well. See chapter 16 for information on employment taxes.

SE tax rate.   The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Topics

This chapter discusses:

• Who must pay self-employment tax
• Figuring earnings subject to self-employment tax
• Landlord participation in farming
• Methods for figuring net earnings
• Reporting self-employment tax

Useful Items You may want to see:

Publication

• 533   Self-Employment Tax
• 541   Partnerships

Form (and Instructions)

• SS-5   Application for a Social Security Card
• 1040   U.S. Individual Income Tax Return
• Sch F (Form 1040)   Profit or Loss From Farming
• Sch SE (Form 1040)   Self-Employment Tax
• 1065   U.S. Return of Partnership Income
• Sch K-1 (Form 1065)   Partner's Share of Income, Credits, Deductions, etc.

See chapter 21 for information about getting publications and forms.

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