The eight chapters in this part discuss many kinds of income. They explain which income is and is not taxed. See Part Three for information on gains and losses you report on Form 8949 and Schedule D (Form 1040) and for information on selling your home.
Table of Contents
Foreign income. If you are a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
This chapter discusses compensation received for services as an employee, such as wages, salaries, and fringe benefits. The following topics are included.
Bonuses and awards.
Special rules for certain employees.
Sickness and injury benefits.
The chapter explains what income is included in the employee's gross income and what is not included.
Publication
463 Travel, Entertainment, Gift, and Car Expenses
525 Taxable and Nontaxable Income
This section discusses various types of employee compensation including fringe benefits, retirement plan contributions, stock options, and restricted property.
If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. These wages must be included on line 7 of Form 1040. See Form 8919 for more information.
This section discusses different types of employee compensation.
If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments in chapter 12.
However, the exclusion does not apply to the following awards.
A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.
A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.
Example.
Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 – $1,600) in his income.
Allowances and differentials that increase your basic pay as an incentive for taking a less desirable post of duty are part of your compensation and must be included in income. For example, your compensation includes Foreign Post, Foreign Service, and Overseas Tropical differentials. For more information, see Publication 516, U.S. Government Civilian Employees Stationed Abroad.
However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. This amount is included in your wages shown on Form W-2, box 1. It is also shown on Form W-2, box 12, using code Z.
If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them.
If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on the return and the wages on your Forms W-2.
However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040).
A welfare fund.
A state sickness or disability fund.
An association of employers or employees.
An insurance company, if your employer paid for the plan.
Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules.
The general rule: benefits are reported for a full calendar year (January 1–December 31).
The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year.
You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example).
In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. Benefits you receive from the plan may be taxable, as explained later under Sickness and Injury Benefits .
For information on the items covered in this section, other than Long-term care coverage, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Contributions you make to the plan are discussed in Publication 502, Medical and Dental Expenses.
Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.
Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.
You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. See the Instructions for Form 8839 for more information.
Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. They also are included as social security and Medicare wages in boxes 3 and 5. However, they are not included as wages in box 1. To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839, Qualified Adoption Expenses. File the form with your return.
If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income.
You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. For more information, see Publication 970, Tax Benefits for Education.
In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance.
For exceptions, see Entire cost excluded , and Entire cost taxed , later.
If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Also, it is shown separately in box 12 with code C.
Provides a general death benefit,
Is provided to a group of employees,
Is provided under a policy carried by the employer, and
Provides an amount of insurance to each employee based on a formula that prevents individual selection.
| 1. | Enter the total amount of your insurance coverage from your employer(s) | 1. | |||
| 2. | Limit on exclusion for employer-provided group-term life insurance coverage | 2. | 50,000 | ||
| 3. | Subtract line 2 from line 1 | 3. | |||
| 4. | Divide line 3 by $1,000. Figure to the nearest tenth | 4. | |||
| 5. | Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group | 5. | |||
| 6. | Multiply line 4 by line 5 | 6. | |||
| 7. | Enter the number of full months of coverage at this cost. | 7. | |||
| 8. | Multiply line 6 by line 7 | 8. | |||
| 9. | Enter the premiums you paid per month | 9. | |||
| 10. | Enter the number of months you paid the premiums | 10. | |||
| 11. | Multiply line 9 by line 10. | 11. | |||
| 12. | Subtract line 11 from line 8. Include this amount in your income as wages | 12. | |||
Table 5-1. Cost of $1,000 of Group-Term Life Insurance for One Month
| Age | Cost |
| Under 25 | $.05 |
| 25 through 29 | .06 |
| 30 through 34 | .08 |
| 35 through 39 | .09 |
| 40 through 44 | .10 |
| 45 through 49 | .15 |
| 50 through 54 | .23 |
| 55 through 59 | .43 |
| 60 through 64 | .66 |
| 65 through 69 | 1.27 |
| 70 and older | 2.06 |
Example.
You are 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the amount to include in your income as shown in Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated , later.
| 1. | Enter the total amount of your insurance coverage from your employer(s) | 1. | 80,000 | ||
| 2. | Limit on exclusion for employer-provided group-term life insurance coverage | 2. | 50,000 | ||
| 3. | Subtract line 2 from line 1 | 3. | 30,000 | ||
| 4. | Divide line 3 by $1,000. Figure to the nearest tenth | 4. | 30.0 | ||
| 5. | Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group | 5. | .23 | ||
| 6. | Multiply line 4 by line 5 | 6. | 6.90 | ||
| 7. | Enter the number of full months of coverage at this cost. | 7. | 12 | ||
| 8. | Multiply line 6 by line 7 | 8. | 82.80 | ||
| 9. | Enter the premiums you paid per month | 9. | 4.15 | ||
| 10. | Enter the number of months you paid the premiums | 10. | 12 | ||
| 11. | Multiply line 9 by line 10. | 11. | 49.80 | ||
| 12. | Subtract line 11 from line 8. Include this amount in your income as wages | 12. | 33.00 | ||
You are permanently and totally disabled and have ended your employment.
Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.
A charitable organization (defined in chapter 24) to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.)
The plan existed on January 1, 1984, and
You retired before January 2, 1984, and were covered by the plan when you retired, or
You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.
The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan.
You are a key employee and your employer's plan discriminates in favor of key employees.
If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer.
If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. A qualified transportation fringe benefit is:
Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement also is excludable. However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you.
The exclusion for the qualified parking fringe benefit cannot be more than $230 a month.
The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year.
If the benefits have a value that is more than these limits, the excess must be included in your income. You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement.
For transporting employees between their homes and work place, and
On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver).
Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See Group-Term Life Insurance , earlier, under Fringe Benefits .
If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture.
For information on distributions from retirement plans, see Publication 575, Pension and Annuity Income (or Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits, if you are a federal employee or retiree).
Elective deferrals include elective contributions to the following retirement plans.
Cash or deferred arrangements (section 401(k) plans).
The Thrift Savings Plan for federal employees.
Salary reduction simplified employee pension plans (SARSEP).
Savings incentive match plans for employees (SIMPLE plans).
Tax-sheltered annuity plans (403(b) plans).
Section 501(c)(18)(D) plans.
Section 457 plans.
Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and
How contributions made will be invested in the absence of any investment decision by you.
You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions.
If you set aside more than the limit, the excess generally must be included in your income for that year, unless you have an excess deferral of a designated Roth contribution. See Publication 525 for a discussion of the tax treatment of excess deferrals.
If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option. However, if your option is a statutory stock option, you will not have any income until you sell or exchange your stock. Your employer can tell you which kind of option you hold. For more information, see Publication 525.
In most cases, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. However, if you receive stock or other property that has certain restrictions that affect its value, you do not include the value of the property in your income until it has substantially vested. (You can choose to include the value of the property in your income in the year it is transferred to you.) For more information, see Restricted Property in Publication 525.
For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Publication 525.
This section deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers.
If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it is not taxable to you.
If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. See chapter 24.
If you are a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order.
If your order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to be performing the services as an agent of the order. Any wages you earn as an agent of an order that you turn over to the order are not included in your income.
Example.
You are a member of a church order and have taken a vow of poverty. You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. You are a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. However, you remain under the general direction and control of the order. You are considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order are not included in your income.
They are the kind of services that are ordinarily the duties of members of the order.
They are part of the duties that you must exercise for, or on behalf of, the religious order as its agent.
Example.
Mark Brown is a member of a religious order and has taken a vow of poverty. He renounces all claims to his earnings and turns over his earnings to the order.
Mark is a schoolteacher. He was instructed by the superiors of the order to get a job with a private tax-exempt school. Mark became an employee of the school, and, at his request, the school made the salary payments directly to the order.
Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. The wages Mark earns working for the school are included in his income.
Special rules apply if you work for a foreign employer.
Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true.
You are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States).
Your work is like the work done by employees of the United States in foreign countries.
The foreign government gives an equal exemption to employees of the United States in its country.
Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. Allowances generally are not taxed. For more information on the tax treatment of military allowances and benefits, see Publication 3, Armed Forces' Tax Guide.
For more detailed discussion of survivor annuities, see chapter 10.
Education, training, and subsistence allowances.
Disability compensation and pension payments for disabilities paid either to veterans or their families.
Grants for homes designed for wheelchair living.
Grants for motor vehicles for veterans who lost their sight or the use of their limbs.
Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death.
Interest on insurance dividends you leave on deposit with the VA.
Benefits under a dependent-care assistance program.
The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001.
Payments made under the compensated work therapy program.
Any bonus payment by a state or political subdivision because of service in a combat zone.
The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or similar agency is covered in the following discussions.
Allowances paid to your spouse and minor children while you are a volunteer leader training in the United States.
Living allowances designated by the Director of the Peace Corps as basic compensation. These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses.
Leave allowances.
Readjustment allowances or termination payments. These are considered received by you when credited to your account.
Example.
Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account.
You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA) program. See chapter 24.
This section discusses sickness and injury benefits including disability pensions, long-term care insurance contracts, workers' compensation, and other benefits.
In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. However, certain payments may not be taxable to you. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury.
Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established.
If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled.
You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit and the definition of permanent and total disability, see chapter 32.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. The rules for reporting pensions are explained in How To Report in chapter 10.
For information on disability payments from a governmental program provided as a substitute for unemployment compensation, see chapter 12.
Certain military and government disability pensions are not taxable.
The armed forces of any country.
The National Oceanic and Atmospheric Administration.
The Public Health Service.
The Foreign Service.
You were entitled to receive a disability payment before September 25, 1975.
You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.
You receive the disability payments for a combat-related injury. This is a personal injury or sickness that
Results directly from armed conflict,
Takes place while you are engaged in extra-hazardous service,
Takes place under conditions simulating war, including training exercises such as maneuvers, or
Is caused by an instrumentality of war.
You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.
If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you are later given a retroactive disability rating by the VA.
Example.
You retired in 2005 and receive a pension based on your years of service. On August 3, 2011, you receive a determination of service-connected disability retroactive to 2005. Generally, you could claim a refund for the taxes paid on your pension for 2008, 2009, and 2010. However, under the special limitation period, you can also file a claim for 2007 as long as you file the claim by August 3, 2012. You cannot file a claim for 2005 and 2006 because those tax years began more than 5 years before the determination.
Long-term care insurance contracts in most cases are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) in most cases are excludable from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return.
A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. The contract must:
Be guaranteed renewable,
Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits, and
In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.
Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and
Required by a chronically ill individual and provided pursuant to a plan of care as prescribed by a licensed health care practitioner.
An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.
If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
In addition to disability pensions and annuities, you may receive other payments for sickness or injury.
If you received income because of a disability, see Disability Pensions , earlier.
If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the taxability of these benefits, see Social security and equivalent railroad retirement benefits under Other Income, in Publication 525.
You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. It is a miscellaneous deduction subject to the 2%-of-AGI limit on Schedule A (Form 1040). If you buy back sick leave in the same year you used it, the amount reduces your taxable sick leave pay. Do not deduct it separately.
Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments.
Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income.
Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.
Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits.
This chapter is for employees who receive tips.
All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.
The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax.
Reporting your tip income correctly is not difficult. You must do three things.
Keep a daily tip record.
Report tips to your employer.
Report all your tips on your income tax return.
This chapter will explain these three things and show you what to do on your tax return if you have not done the first two.
This chapter will also show you how to treat allocated tips.
For information on special tip programs and agreements, see Publication 531.
Publication
531 Reporting Tip Income
1244 Employee's Daily Record of Tips and Report to Employer
Form (and Instructions)
4137 Social Security and Medicare Tax on Unreported Tip Income
4070 Employee's Report of Tips to Employer
Report your tips accurately to your employer,
Report your tips accurately on your tax return, and
Prove your tip income if your return is ever questioned.
Write information about your tips in a tip diary, or
Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips.
If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. To get Form 4070A, ask the Internal Revenue Service (IRS) or your employer for Publication 1244. Also, Publication 1244 is available online at www.irs.gov/pub/irs-pdf/p1244.pdf. Publication 1244 includes a 1-year supply of Form 4070A. Each day, write in the information asked for on the form.
In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.
If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it is different from your employer's name). Then, each workday, write the date and the following information.
Cash tips you get directly from customers or from other employees.
Tips from credit and debit card charge customers that your employer pays you.
The value of any noncash tips you get, such as tickets, passes, or other items of value.
The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.
Example 1.
Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. Because Jane did not have an unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. Do not include the 18% charge in your tip diary. Service charges that are paid to you are considered wages, not tips.
Example 2.
Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. Be sure to include this amount in your tip diary.
Your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax,
Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and
You can avoid the penalty for not reporting tips to your employer (explained later).
If your total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that employer.
If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report to your employer any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees.
Do not report the value of any noncash tips, such as tickets or passes, to your employer. You do not pay social security and Medicare taxes or railroad retirement tax on these tips.
If you do not use Form 4070, give your employer a statement with the following information.
Your name, address, and social security number.
Your employer's name, address, and business name (if it is different from your employer's name).
The month (or the dates of any shorter period) in which you received tips.
The total tips required to be reported for that period.
Your employer may require you to report your tips more than once a month. However, the statement cannot cover a period of more than 1 calendar month.
You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so, attach a statement to your return explaining why you did not report them.
If you do not give your employer enough money, your employer will apply your regular pay and any money you give in the following order.
All taxes on your regular pay.
Social security and Medicare taxes or railroad retirement tax on your reported tips.
Federal, state, and local income taxes on your reported tips.
Any taxes that remain unpaid can be collected by your employer from your next paycheck. If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See Publication 505, Tax Withholding and Estimated Tax, for more information.
Uncollected taxes. You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 2011. These uncollected taxes will be shown on your 2011 Form W-2. See Reporting uncollected social security and Medicare taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later.
If you received $20 or more in cash and charge tips in a month and did not report all of those tips to your employer, see Reporting social security and Medicare taxes on tips not reported to your employer, later.
If you did not keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips, later.
If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount in box 1 of your Form W-2.
Example.
Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2011) on June 30 and received $10,000 in wages during the year. Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. He was not required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required.
Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return.
Use Form 4137 to figure these taxes. Enter the tax on your return as instructed, and attach the completed Form 4137 to your return.
If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported tips. To get railroad retirement credit, you must report tips to your employer.
If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2011, the uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). You must report these amounts as additional tax on your return.
To report these uncollected taxes, you must file a return even if you would not otherwise have to file. Include the taxes in your total tax amount on Form 1040, line 60, and write “UT” and the total of the uncollected taxes in the space next to line 60. (You cannot file Form 1040EZ or Form 1040A.)
If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. They are not included in box 1 with your wages and reported tips. If box 8 is blank, this discussion does not apply to you.
You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees,
The tips you reported to your employer were less than your share of 8% of food and drink sales, and
You did not participate in your employer's Attributed Tip Income Program (ATIP).
See What tips to report under Reporting Tips on Your Tax Return, and Keeping a Daily Tip Record , earlier.
Because social security and Medicare taxes were not withheld from the allocated tips, you must report those taxes as additional tax on your return. Complete Form 4137, and include the allocated tips on line 1 of the form. See Reporting social security and Medicare taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier.
Table of Contents
This chapter is for employees who receive tips.
All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.
The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax.
Reporting your tip income correctly is not difficult. You must do three things.
Keep a daily tip record.
Report tips to your employer.
Report all your tips on your income tax return.
This chapter will explain these three things and show you what to do on your tax return if you have not done the first two.
This chapter will also show you how to treat allocated tips.
For information on special tip programs and agreements, see Publication 531.
Publication
531 Reporting Tip Income
1244 Employee's Daily Record of Tips and Report to Employer
Form (and Instructions)
4137 Social Security and Medicare Tax on Unreported Tip Income
4070 Employee's Report of Tips to Employer
Report your tips accurately to your employer,
Report your tips accurately on your tax return, and
Prove your tip income if your return is ever questioned.
Write information about your tips in a tip diary, or
Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips.
If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. To get Form 4070A, ask the Internal Revenue Service (IRS) or your employer for Publication 1244. Also, Publication 1244 is available online at www.irs.gov/pub/irs-pdf/p1244.pdf. Publication 1244 includes a 1-year supply of Form 4070A. Each day, write in the information asked for on the form.
In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.
If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it is different from your employer's name). Then, each workday, write the date and the following information.
Cash tips you get directly from customers or from other employees.
Tips from credit and debit card charge customers that your employer pays you.
The value of any noncash tips you get, such as tickets, passes, or other items of value.
The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.
Example 1.
Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. Because Jane did not have an unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. Do not include the 18% charge in your tip diary. Service charges that are paid to you are considered wages, not tips.
Example 2.
Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. Be sure to include this amount in your tip diary.
Your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax,
Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and
You can avoid the penalty for not reporting tips to your employer (explained later).
If your total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that employer.
If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report to your employer any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees.
Do not report the value of any noncash tips, such as tickets or passes, to your employer. You do not pay social security and Medicare taxes or railroad retirement tax on these tips.
If you do not use Form 4070, give your employer a statement with the following information.
Your name, address, and social security number.
Your employer's name, address, and business name (if it is different from your employer's name).
The month (or the dates of any shorter period) in which you received tips.
The total tips required to be reported for that period.
Your employer may require you to report your tips more than once a month. However, the statement cannot cover a period of more than 1 calendar month.
You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so, attach a statement to your return explaining why you did not report them.
If you do not give your employer enough money, your employer will apply your regular pay and any money you give in the following order.
All taxes on your regular pay.
Social security and Medicare taxes or railroad retirement tax on your reported tips.
Federal, state, and local income taxes on your reported tips.
Any taxes that remain unpaid can be collected by your employer from your next paycheck. If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See Publication 505, Tax Withholding and Estimated Tax, for more information.
Uncollected taxes. You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 2011. These uncollected taxes will be shown on your 2011 Form W-2. See Reporting uncollected social security and Medicare taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later.
If you received $20 or more in cash and charge tips in a month and did not report all of those tips to your employer, see Reporting social security and Medicare taxes on tips not reported to your employer, later.
If you did not keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips, later.
If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount in box 1 of your Form W-2.
Example.
Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2011) on June 30 and received $10,000 in wages during the year. Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. He was not required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required.
Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return.
Use Form 4137 to figure these taxes. Enter the tax on your return as instructed, and attach the completed Form 4137 to your return.
If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported tips. To get railroad retirement credit, you must report tips to your employer.
If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2011, the uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). You must report these amounts as additional tax on your return.
To report these uncollected taxes, you must file a return even if you would not otherwise have to file. Include the taxes in your total tax amount on Form 1040, line 60, and write “UT” and the total of the uncollected taxes in the space next to line 60. (You cannot file Form 1040EZ or Form 1040A.)
If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. They are not included in box 1 with your wages and reported tips. If box 8 is blank, this discussion does not apply to you.
You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees,
The tips you reported to your employer were less than your share of 8% of food and drink sales, and
You did not participate in your employer's Attributed Tip Income Program (ATIP).
See What tips to report under Reporting Tips on Your Tax Return, and Keeping a Daily Tip Record , earlier.
Because social security and Medicare taxes were not withheld from the allocated tips, you must report those taxes as additional tax on your return. Complete Form 4137, and include the allocated tips on line 1 of the form. See Reporting social security and Medicare taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier.
Foreign-source income. If you are a U.S. citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.
This chapter discusses the following topics.
Different types of interest income.
What interest is taxable and what interest is nontaxable.
When to report interest income.
How to report interest income on your tax return.
In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. Exceptions to this rule are discussed later in this chapter.
You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. See chapter 28.
Publication
537 Installment Sales
550 Investment Income and Expenses
1212 Guide to Original Issue Discount (OID) Instruments
Form (and Instructions)
Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends
8815 Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
8818 Optional Form To Record Redemption of Series EE and I U.S. Savings Bonds Issued After 1989
A few items of general interest are covered here.
Recordkeeping. You should keep a list showing sources and interest amounts received during the year. Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records.
Some parents can choose to include the child's interest and dividends on the parent's return. If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose.
For more information about the tax on investment income of children and the parents' election, see chapter 30.
These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN.
Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. For more information, see Backup Withholding in chapter 4.
Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation.
The savings account legally belongs to the child.
The parents are not legally permitted to use any of the funds to support the child.
Report on your tax return the total interest income you receive for the tax year.
If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Publication 550, or Schedule B (Form 1040A or 1040) instructions.
Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. See Alternative Minimum Tax in chapter 29 for more information. Chapter 1 of Publication 550 contains a discussion on private activity bonds under State or Local Government Obligations.
Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.
Cooperative banks,
Credit unions,
Domestic building and loan associations,
Domestic savings and loan associations,
Federal savings and loan associations, and
Mutual savings banks.
Example.
You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. The certificate earned $575 at maturity in 2011, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. The bank gives you a Form 1099-INT for 2011 showing the $575 interest you earned. The bank also gives you a statement showing that you paid $310 interest for 2011. You must include the $575 in your income. If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit.
For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.
Example.
You open a savings account at your local bank and deposit $800. The account earns $20 interest. You also receive a $15 calculator. If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. You must report $35 interest income on your tax return.
The financial institution is bankrupt or insolvent, or
The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.
The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of:
The net amount you withdrew from these deposits during the year, and
The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit).
The interest you exclude is treated as credited to your account in the following year. You must include it in income in the year you can withdraw it.
Example.
$100 of interest was credited on your frozen deposit during the year. You withdrew $80 but could not withdraw any more as of the end of the year. You must include $80 in your income and exclude $20 from your income for the year. You must include the $20 in your income for the year you can withdraw it.
This section provides tax information on U.S. savings bonds. It explains how to report the interest income on these bonds and how to treat transfers of these bonds.
For other information on U.S. savings bonds, write to:
For series EE and I:
Bureau of the Public Debt
Division of Customer Assistance
P.O. Box 7012
Parkersburg, WV 26106-7012
For series HH/H:
Bureau of the Public Debt
Division of Customer Assistance
P.O. Box 2186
Parkersburg, WV 26106-2186
Or, on the Internet, visit:
Series HH bonds were first offered in 1980 and last offered in August 2004. Before 1980, series H bonds were issued. Series H bonds are treated the same as series HH bonds. If you are a cash method taxpayer, you must report the interest when you receive it.
Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years. The last series H bonds matured in 2009.
Owners of paper series E and EE bonds can convert them to electronic bonds. These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest).
Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. (However,
see
Savings bonds traded
, later.)
Note. Series EE bonds issued in 1981 matured in 2011. If you have used method 1, you generally must report the interest on these
bonds on your 2011 return. The last series E bonds were issued in 1980 and matured in 2010. If you used method 1, you generally
should have reported the interest on these bonds on your 2010 return.
Method 2. Choose to report the increase in redemption value as interest each year.
If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. To learn how, see Education Savings Bond Program, later.
Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next.
You have typed or printed the following number at the top: “131”.
It includes your name and social security number under “131”.
It includes the year of change (both the beginning and ending dates).
It identifies the savings bonds for which you are requesting this change.
It includes your agreement to:
Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and
Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.
You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions).
You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. On the statement, type or print “Filed pursuant to section 301.9100-2(b).” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions).
By the date you file the original statement with your return, you must also send a signed copy to the address below.
Internal Revenue Service
Attention: CC:IT&A (Automatic Rulings Branch)
P.O. Box 7604
Benjamin Franklin Station
Washington, DC 20044
If you use a private delivery service, send the signed copy to the address below.
Internal Revenue Service
Attention: CC:IT&A (Automatic Rulings Branch)
Room 5336
1111 Constitution Avenue, NW
Washington, DC 20224
Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. In that case, follow the form instructions for an automatic change. No user fee is required.
This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce.
This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. But the new co-owner will report only his or her share of the interest earned after the transfer.
If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued.
| IF ... | THEN the interest must be reported by ... |
| you buy a bond in your name and the name of another person as co-owners, using only your own funds | you. |
| you buy a bond in the name of another person, who is the sole owner of the bond | the person for whom you bought the bond. |
| you and another person buy a bond as co-owners, each contributing part of the purchase price | both you and the other co-owner, in proportion to the amount each paid for the bond. |
| you and your spouse, who live in a community property state, buy a bond that is community property | you and your spouse. If you file separate returns, both you and your spouse generally report one-half of the interest. |
Example 1.
You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. At that time neither you nor your spouse has to report the interest earned to the date of reissue.
Example 2.
You bought a $1,000 series EE savings bond entirely with your own funds. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. You must report half the interest earned to the date of reissue.
The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. See Savings bonds traded , later.
Example.
In May 2004, you traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. You reported the $223 as taxable income in 2004, the year of the trade. At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. You hold the series HH bonds until maturity, when you receive $2,500. You must report $300 as interest income in the year of maturity. This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade.)
You chose to report the increase in the redemption value of the bond each year. The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income.
You received the bond from a decedent. The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return.
Ownership of the bond was transferred. The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer.
You were named as a co-owner, and the other co-owner contributed funds to buy the bond. The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. (See Co-owners , earlier in this chapter, for more information about the reporting requirements.)
You received the bond in a taxable distribution from a retirement or profit-sharing plan. The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year of distribution.)
For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. Publication 550 includes examples showing how to report these amounts.
Interest on U.S. savings bonds is exempt from state and local taxes. The Form 1099-INT you receive will indicate the amount that is for U.S. savings bond interest in box 3.
You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U.S. savings bonds during the year if you pay qualified higher educational expenses during the same year. This exclusion is known as the Education Savings Bond Program.
You do not qualify for this exclusion if your filing status is married filing separately.
The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased.
Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account.
Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.
Tax-free part of scholarships and fellowships (see Scholarships and fellowships in chapter 12).
Expenses used to figure the tax-free portion of distributions from a Coverdell ESA.
Expenses used to figure the tax-free portion of distributions from a qualified tuition program.
Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as
Veterans' educational assistance benefits,
Qualified tuition reductions, or
Employer-provided educational assistance.
Any expense used in figuring the American Opportunity and lifetime learning credits.
To determine the excludable amount, multiply the interest part of the proceeds by a fraction. The numerator of the fraction is the qualified higher educational expenses you paid during the year. The denominator of the fraction is the total proceeds you received during the year.
Example.
In February 2011, Mark and Joan, a married couple, cashed a qualified series EE U.S. savings bond they bought in April 1997. They received proceeds of $8,124 representing principal of $5,000 and interest of $3,124. In 2011, they paid $4,000 of their daughter's college tuition. They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. They can exclude $1,538 ($3,124 × ($4,000 ÷ $8,124)) of interest in 2011. They must pay tax on the remaining $1,586 ($3,124 - $1,538) interest.
$71,100 to $86,100 for taxpayers filing single or head of household, and
$106,650 to $136,650 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child.
Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040A, line 21 or Form 1040, line 37) figured before the interest exclusion, and modified by adding back any:
Foreign earned income exclusion,
Foreign housing exclusion and deduction,
Exclusion of income for bona fide residents of American Samoa,
Exclusion for income from Puerto Rico,
Exclusion for adoption benefits received under an employer's adoption assistance program,
Deduction for tuition and fees,
Deduction for student loan interest, and
Deduction for domestic production activities.
Use the worksheet in the instructions for line 9, Form 8815, to figure your modified AGI. If you claim any of the exclusion or deduction items listed above (except items 6 and 7), add the amount of the exclusion or deduction (except any deduction for student loan interest or domestic production activities) to the amount on line 5 of the worksheet, and enter the total on Form 8815, line 9, as your modified AGI.
If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Publication 550.
Recordkeeping. If you claim the interest exclusion, you must keep a written record of the qualified U.S. savings bonds you redeem. Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. You can use Form 8818 to record this information. You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year.
Treasury bills, notes, and bonds are direct debts (obligations) of the U.S. Government.
Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system.
For other information on Treasury notes or bonds, write to:
Bureau of The Public Debt
P.O. Box 7015
Parkersburg, WV 26106-7015
Or, on the Internet, visit: www.treasurydirect.gov/write.htm.
For information on series EE, series I, and series HH savings bonds, see U.S. Savings Bonds , earlier.
If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale.
If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Publication 550 for information on reporting the payment.
Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income.
For more information about insurance proceeds received in installments, see Publication 525, Taxable and Nontaxable Income.
Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions.
Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function.
For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Publication 550.
Original issue discount (OID) is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.
A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price.
All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments.
The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). See Discount on Short-Term Obligations in chapter 1 of Publication 550.
Example 1.
You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Because the $20 discount is less than $25, the OID is treated as zero. (If you hold the bond at maturity, you will recognize $20 ($1,000 - $980) of capital gain.)
Tax-exempt obligations. (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Publication 550).
U.S. savings bonds.
Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue).
Obligations issued by an individual before March 2, 1984.
Loans between individuals if all the following are true.
The lender is not in the business of lending money.
The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less.
Avoiding any federal tax is not one of the principal purposes of the loan.
In most cases, you must report the entire amount in boxes 1 and 2 of Form 1099-OID as interest income. But see Refiguring OID shown on Form 1099-OID, later in this discussion, for more information.
You bought the debt instrument after its original issue and paid a premium or an acquisition premium.
The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments).
This also applies to similar deposit arrangements with banks, building and loan associations, etc., including:
Time deposits,
Bonus plans,
Savings certificates,
Deferred income certificates,
Bonus savings certificates, and
Growth savings certificates.
When to report your interest income depends on whether you use the cash method or an accrual method to report income.
Example.
On September 1, 2009, you loaned another individual $2,000 at 12%, compounded annually. You are not in the business of lending money. The note stated that principal and interest would be due on August 31, 2011. In 2011, you received $2,508.80 ($2,000 principal and $508.80 interest). If you use the cash method, you must include in income on your 2011 return the $508.80 interest you received in that year.
You constructively receive income on the deposit or account even if you must:
Make withdrawals in multiples of even amounts,
Give a notice to withdraw before making the withdrawal,
Withdraw all or part of the account to withdraw the earnings, or
Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity.
Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2.
You cannot use Form 1040EZ if your interest income is more than $1,500. Instead, you must use Form 1040A or Form 1040.
Your taxable interest income is more than $1,500.
You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).
You received interest from a seller-financed mortgage, and the buyer used the property as a home.
You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported before 2011.
You received, as a nominee, interest that actually belongs to someone else.
You received a Form 1099-INT for interest on frozen deposits.
You are reporting OID in an amount less than the amount shown on Form 1099-OID.
You received a Form 1099-INT for interest on a bond you bought between interest payment dates.
You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortization in chapter 3 of Publication 550).
You cannot use Form 1040A if you must use Form 1040, as described next.
You forfeited interest income because of the early withdrawal of a time deposit;
You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortization in chapter 3 of Publication 550); or
You received tax-exempt interest from private activity bonds issued after August 7, 1986.
Your taxable interest income is more than $1,500.
You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).
You received interest from a seller-financed mortgage, and the buyer used the property as a home.
You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported before 2011.
You received, as a nominee, interest that actually belongs to someone else.
You received a Form 1099-INT for interest on frozen deposits.
You received a Form 1099-INT for interest on a bond you bought between interest payment dates.
You are reporting OID in an amount less than the amount shown on Form 1099-OID.
Statement (2) in the preceding list under Form 1040 is true.
Box 9 shows the tax-exempt interest subject to the alternative minimum tax on Form 6251, Alternative Minimum Tax—Individuals. It is already included in the amount in box 8. Do not add the amount in box 9 to, or subtract from, the amount in box 8.
Do not report interest from an individual retirement account (IRA) as tax-exempt interest.
If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. See Penalty on early withdrawal of savings in chapter 1 of Publication 550.
Box 3 of Form 1099-INT shows the interest income you received from U.S. savings bonds, Treasury bills, Treasury notes, and Treasury bonds. Add the amount shown in box 3 to any other taxable interest income you received, unless part of the amount in box 3 was previously included in your interest income. If part of the amount shown in box 3 was previously included in your interest income, see U.S. savings bond interest previously reported , later.
Box 4 of Form 1099-INT (federal income tax withheld) will contain an amount if you were subject to backup withholding. Report the amount from box 4 on Form 1040EZ, line 7; on Form 1040A, line 36; or on Form 1040, line 62 (federal income tax withheld).
Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. See chapter 28 for more information about investment expenses.
If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. You may be able to take a credit for the amount shown in box 6 (foreign tax paid) unless you deduct this amount on Schedule A of Form 1040 as “Other taxes.” To take the credit, you may have to file Form 1116, Foreign Tax Credit. For more information, see Publication 514, Foreign Tax Credit for Individuals.
On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Then follow these steps.
Several lines above line 2, enter a subtotal of all interest listed on line 1.
Below the subtotal enter “U.S. Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond.
Subtract these amounts from the subtotal and enter the result on line 2.
Foreign-source income. If you are a U.S. citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.
This chapter discusses the tax treatment of:
Ordinary dividends,
Capital gain distributions,
Nondividend distributions, and
Other distributions you may receive from a corporation or a mutual fund.
This chapter also explains how to report dividend income on your tax return.
Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. However, some amounts you receive that are called dividends are actually interest income. (See Dividends that are actually interest under Taxable Interest in chapter 7.)
Most distributions are paid in cash (or check). However, distributions can consist of more stock, stock rights, other property, or services.
Publication
514 Foreign Tax Credit for Individuals
550 Investment Income and Expenses
Form (and Instructions)
Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends
This section discusses general rules for dividend income.
Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose.
For more information about the tax on investment income of children and the parents' election, see chapter 30.
For more information on SSNs and ITINs, see Social Security Number in chapter 1.
Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. For more information, see Backup Withholding in chapter 4.
Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. They are paid out of earnings and profits and are ordinary income to you. This means they are not capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive.
Qualified dividends are the ordinary dividends subject to the same 0% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive.
Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 0% rate.
To qualify for the 0% or 15% maximum rate, all of the following requirements must be met.
The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. (See Qualified foreign corporation , later.)
The dividends are not of the type listed later under Dividends that are not qualified dividends.
You meet the holding period (discussed next).
When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples later.
Example 1.
You bought 5,000 shares of XYZ Corp. common stock on July 8, 2011. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 15, 2011. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on August 11, 2011. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 9, 2011, through August 11, 2011). The 121-day period began on May 16, 2011 (60 days before the ex-dividend date), and ended on September 13, 2011. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.
Example 2.
Assume the same facts as in Example 1 except that you bought the stock on July 14, 2011 (the day before the ex-dividend date), and you sold the stock on September 15, 2011. You held the stock for 63 days (from July 15, 2011, through September 15, 2011). The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 15, 2011, through September 13, 2011).
Example 3.
You bought 10,000 shares of ABC Mutual Fund common stock on July 8, 2011. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 15, 2011. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 11, 2011. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.
You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities.
You were grantor (writer) of an option to buy substantially identical stock or securities.
Your risk of loss is diminished by holding one or more other positions in substantially similar or related property.
For information about how to apply condition (3), see Regulations section 1.246-5.
The corporation is incorporated in a U.S. possession.
The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, seeTable 8-1.
The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. See Readily tradable stock, later.
Capital gain distributions.
Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions. (Report these amounts as interest income.)
Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year.
Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.
Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends.
Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.
Table 8-1. Income Tax Treaties
| Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. | ||
| Australia | Indonesia | Romania |
| Austria | Ireland | Russian |
| Bangladesh | Israel | Federation |
| Barbados | Italy | Slovak |
| Belgium | Jamaica | Republic |
| Bulgaria | Japan | Slovenia |
| Canada | Kazakhstan | South Africa |
| China | Korea | Spain |
| Cyprus | Latvia | Sri Lanka |
| Czech | Lithuania | Sweden |
| Republic | Luxembourg | Switzerland |
| Denmark | Malta | Thailand |
| Egypt | Mexico | Trinidad and |
| Estonia | Morocco | Tobago |
| Finland | Netherlands | Tunisia |
| France | New Zealand | Turkey |
| Germany | Norway | Ukraine |
| Greece | Pakistan | United |
| Hungary | Philippines | Kingdom |
| Iceland | Poland | Venezuela |
| India | Portugal | |
The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.
If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.
You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See chapter 28 for more information about deducting expenses of producing income.
In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date.
Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT.
Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT.
Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11.
The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. Attach Copy B of Form 2439 to your return, and keep Copy C for your records.
A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. You should receive a Form 1099-DIV or other statement showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend.
When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 14.
Example.
You bought stock in 1998 for $100. In 2001, you received a nondividend distribution of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2011. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2011. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.
Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.
For more information on liquidating distributions, see chapter 1 of Publication 550.
Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return.
You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights.
The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders.
The distribution is in convertible preferred stock and has the same result as in (2).
The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders.
The distribution is on preferred stock. (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right.)
The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities.
If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income.
Report these transactions on Form 8949 with the correct box (A, B, or C) checked.
For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. Also, see the Instructions for Schedule D.
Example.
You own one share of common stock that you bought on January 3, 2002, for $100. The corporation declared a common stock dividend of 5% on June 30, 2011. The fair market value of the stock at the time the stock dividend was declared was $200. You were paid $10 for the fractional-share stock dividend under a plan described in the above paragraph. You figure your gain or loss as follows:
| Fair market value of old stock | $200.00 |
| Fair market value of stock dividend (cash received) | +10.00 |
| Fair market value of old stock and stock dividend | $210.00 |
| Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) | $95.24 |
| Basis (cost) of stock dividend (($10 ÷ $210) × $100) | + 4.76 |
| Total | $100.00 |
| Cash received | $10.00 |
| Basis (cost) of stock dividend | - 4.76 |
| Gain | $5.24 |
Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain.
However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. You must include its fair market value in income on the date you receive it.
You may receive any of the following distributions during the year.
If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. Report any taxable distributions on insurance policies on Form 1040, line 21.
Do not include in your income patronage dividends you receive on:
Property bought for your personal use, or
Capital assets or depreciable property bought for use in your business. But you must reduce the basis (cost) of the items bought. If the dividend is more than the adjusted basis of the assets, you must report the excess as income.
These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative.
Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Report qualified dividends on line 9b of Form 1040 or Form 1040A.
If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. You cannot use Form 1040EZ if you receive any dividend income.
See Form 1099-DIV for more information on how to report dividend income.
Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or
You received, as a nominee, dividends that actually belong to someone else.
List on Schedule B, Part II, line 5, each payer's name and the ordinary dividends you received. If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited.
Enter on line 6 the total of the amounts listed on line 5. Also enter this total on Form 1040A, or Form 1040, line 9a.
Do not include any of the following on line 9b.
Qualified dividends you received as a nominee. See Nominees under How to Report Dividend Income in chapter 1 of Publication 550.
Dividends on stock for which you did not meet the holding period. See Holding period earlier under Qualified Dividends.
Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends.
Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.
If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D instructions, whichever applies. Enter qualified dividends on line 2 of the worksheet.
This chapter discusses rental income and expenses. It also covers the following topics.
Personal use of dwelling unit (including vacation home).
Depreciation.
Limits on rental losses.
How to report your rental income and expenses.
If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets.
If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts.
If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. See Publication 527, Residential Rental Property, for more information.
Publication
527 Residential Rental Property
534 Depreciating Property Placed in Service Before 1987
535 Business Expenses
925 Passive Activity and At-Risk Rules
946 How To Depreciate Property
Form (and Instructions)
4562 Depreciation and Amortization
6251 Alternative Minimum Tax—Individuals
8582 Passive Activity Loss Limitations
Schedule E (Form 1040) Supplemental Income and Loss
In most cases, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income.
For more information about when you constructively receive income, see Accounting Methods in chapter 1.
If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.
This part discusses expenses of renting property that you ordinarily can deduct from your rental income. It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Depreciation , which you can also deduct from your rental income, is discussed later.
If you use an accrual method, you report income when you earn it. If you are unable to collect the rent, you may be able to deduct it as a business bad debt. See chapter 10 of Publication 535 for more information about business bad debts.
You can deduct the cost of repairs to your rental property, but you cannot deduct the cost of improvements. Instead, recover the cost of improvements by taking depreciation (explained later).
If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement.
Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements when you sell or depreciate your property.
Putting a recreation room in an unfinished basement.
Paneling a den.
Adding a bathroom or bedroom.
Putting decorative grillwork on a balcony.
Putting up a fence.
Putting in new plumbing or wiring.
Putting in new cabinets.
Putting on a new roof.
Paving a driveway.
If you make an improvement to property, the cost of the improvement must be capitalized. The capitalized cost can generally be depreciated as if the improvement were separate property.
Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next.
Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. For 2011, the standard mileage rate for each mile of business use is 51 cents per mile for miles driven before July 1 and 55.5 cents per mile for miles driven after June 30, 2011. For more information, see chapter 26.
To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. In addition, you must complete Form 4562, Part V, and attach it to your tax return.
To deduct travel expenses, you must keep records that follow the rules in chapter 26.
If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use.
You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes.
You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040).
Example.
Your tax year is the calendar year. You moved from your home in May and started renting it out on June 1. You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance.
Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities.
If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property.
You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house.
There is no change in the types of expenses deductible for the personal-use part of your property. Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040).
You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it.
You do not have to divide the expenses that belong only to the rental part of your property. For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. You can deduct depreciation , discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes.
If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535.
If you itemize, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income.
If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. See What Is a Day of Personal Use and How To Divide Expenses , later.
If you used a dwelling unit for personal purposes, it may be considered a “dwelling unit used as a home.” If it is, you cannot deduct rental expenses that are more than your rental income for that dwelling unit. See Dwelling Unit Used as Home and How To Figure Rental Income and Deductions , later. If your dwelling unit is not considered a dwelling unit used as a home, you can deduct rental expenses that are more than rental income for the unit subject to certain limits. See Limits on Rental Losses , later.
A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year.
A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). However, see Use as Main Home Before or After Renting under Dwelling Unit Used as Home , later.
A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
Anyone under an arrangement that lets you use some other dwelling unit.
Anyone at less than a fair rental price.
The following examples show how to determine days of personal use.
Example 1.
You and your neighbor are co-owners of a condominium at the beach. Last year, you rented the unit to vacationers whenever possible. The unit was not used as a main home by anyone. Your neighbor used the unit for 2 weeks last year; you did not use it at all.
Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks.
Example 2.
You and your neighbors are co-owners of a house under a shared equity financing agreement. Your neighbors live in the house and pay you a fair rental price.
Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. This is because your neighbors rent the house as their main home under a shared equity financing agreement.
Example 3.
You own a rental property that you rent to your son. Your son does not own any interest in this property. He uses it as his main home and pays you a fair rental price.
Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price.
Example 4.
You rent your beach house to Joshua. Joshua rents his cabin in the mountains to you. You each pay a fair rental price.
You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house.
The tax treatment of rental income and expenses for a dwelling unit that you also use for personal purposes depends on whether you use it as a home. (See How To Figure Rental Income and Deductions, later.)
You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of:
14 days, or
10% of the total days it is rented to others at a fair rental price.
See What Is a Day of Personal Use , earlier.
If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Instead, count it as a day of personal use in applying both (1) and (2) above. However, this rule does not apply when dividing expenses between rental and personal use.
The following examples show how to determine whether you used your rental property as a home.
Example 1.
You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. You rented the basement apartment at a fair rental price to college students during the regular school year. You rented to them on a 9-month lease (273 days). You figured 10% of the total days rented to others at a fair rental price is 27 days.
During June (30 days), your brothers stayed with you and lived in the basement apartment rent free.
Your basement apartment was used as a home because you used it for personal purposes for 30 days. Rent-free use by your brothers is considered personal use. Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days).
Example 2.
You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. You figured 10% of the total days rented to others at a fair rental price is 3 days.
The room was used as a home because you used it for personal purposes for 21 days. That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days).
Example 3.
You own a condominium apartment in a resort area. You rented it at a fair rental price for a total of 170 days during the year. For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Your family actually used the apartment for 10 of those days. Therefore, the apartment is treated as having been rented for 160 (170 - 10) days. You figured 10% of the total days rented to others at a fair rental price is 16 days. Your family also used the apartment for 7 other days during the year.
You used the apartment as a home because you used it for personal purposes for 17 days. That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days).
For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Do not count them as days of personal use if:
You rented or tried to rent the property for 12 or more consecutive months.
You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property.
However, this special rule does not apply when dividing expenses between rental and personal use.
If you use a dwelling unit as a home during the year, how you figure your rental income and deductions depends on how many days the property was rented at a fair rental price.
If you do not use a dwelling unit as a home, report all the rental income and deduct all the rental expenses. See How To Report Rental Income and Expenses , later.
Your deductible rental expenses can be more than your gross rental income. However, see Limits on Rental Losses , later.
If you use a dwelling unit as a home during the year (see Dwelling Unit Used as Home , earlier), how you figure your rental income and deductions depends on how many days the unit was rented at a fair rental price.
To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1 at the end of this chapter.
If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose.
When dividing your expenses, follow these rules.
Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. This rule does not apply when determining whether you used the unit as a home.
Any day that the unit is available for rent but not actually rented is not a day of rental use.
Example.
Your beach cottage was available for rent from June 1 through August 31 (92 days). Your family uses the cottage during the last 2 weeks in May (14 days). You were unable to find a renter for the first week in August (7 days). The person who rented the cottage for July allowed you to use it over a weekend (2 days) without any reduction in or refund of rent. The cottage was not used at all before May 17 or after August 31.
You figure the part of the cottage expenses to treat as rental expenses as follows.
The cottage was used for rental a total of 85 days (92 - 7). The days it was available for rent but not rented (7 days) are not days of rental use. The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend.
You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
Your rental expenses are 85/99 (86%) of the cottage expenses.
When determining whether you used the cottage as a home, the July weekend (2 days) you used it is personal use even though you received a fair rental price for the weekend. Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. If you have a net loss, you may not be able to deduct all of the rental expenses. See Property Used as a Home , earlier.
You recover the cost of income-producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.
Three basic factors determine how much depreciation you can deduct. They are: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense.
You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.
You may have to use Form 4562 to figure and report your depreciation. See How To Report Rental Income and Expenses , later.
If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U.S Individual Income Tax Return. If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information.
If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. You must consider these rules in the order shown below.
At-risk rules. These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. This applies only if the real property was placed in service after 1986.
Passive activity limits. Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. However, there are exceptions.
You may be subject to the at-risk rules if you have:
A loss from an activity carried on as a trade or business or for the production of income, and
Amounts invested in the activity for which you are not fully at risk.
Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules.
In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. See Publication 925 for more information.
In most cases, all rental real estate activities (except those meeting the exception for real estate professionals, below) are passive activities. For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services.
For a detailed discussion of these rules, see Publication 925.
You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return.
If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.
$25,000 for single individuals and married individuals filing a joint return for the tax year,
$12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and
$25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.
If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI.
Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance.
The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). However, do not use that schedule to report a not-for-profit activity. See Not Rented for Profit, earlier.
If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc., you normally report your rental income and expenses on Schedule E, Part I.
List your total income, expenses, and depreciation for each rental property. Be sure to enter the number of fair rental and personal use days on line 2.
If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Complete lines 1 and 2 for each property. However, fill in lines 23 through 26 on only one Schedule E.
On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. To find out if you need to attach Form 4562, see Form 4562, later.
If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms.
Form 6198, At-Risk Limitations. See At-Risk Rules , earlier. Also see Publication 925.
Form 8582, Passive Activity Loss Limitations. See Passive Activity Limits , earlier.
Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. If you need to use page 2 of Schedule E, use page 2 of the same Schedule E you used to enter your rental activity on page 1. Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V).
Use this worksheet only if you answer “yes” to all of the following questions.
|
|||||
| PART I.Rental Use Percentage | |||||
| A. | Total days available for rent at fair rental price | A. | |||
| B. | Total days available for rent (line A) but not rented | B. | |||
| C. | Total days of rental use. Subtract line B from line A | C. | |||
| D. | Total days of personal use (including days rented at less than fair rental price) | D. | |||
| E. | Total days of rental and personal use. Add lines C and D | E. | |||
| F. | Percentage of expenses allowed for rental. Divide line C by line E | F. | |||
| PART II.Allowable Rental Expenses | |||||
| 1. | Enter rents received | 1. | |||
| 2a. | Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) |
2a. | |||
| b. | Enter the rental portion of real estate taxes | b. | |||
| c. | Enter the rental portion of deductible casualty and theft losses (see instructions) | c. | |||
| d. | Enter direct rental expenses (see instructions) | d. | |||
| e. | Fully deductible rental expenses. Add lines 2a–2d. Enter here and on the appropriate lines on Schedule E (see instructions) |
2e. | |||
| 3. | Subtract line 2e from line 1. If zero or less, enter -0- | 3. | |||
| 4a. | Enter the rental portion of expenses directly related to operating or maintaining the dwelling unit (such as repairs, insurance, and utilities) |
4a. | |||
| b. | Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) |
b. | |||
| c. | Carryover of operating expenses from 2010 worksheet | c. | |||
| d. | Add lines 4a–4c | d. | |||
| e. | Allowable expenses. Enter the smaller of line 3 or line 4d (see instructions) | 4e. | |||
| 5. | Subtract line 4e from line 3. If zero or less, enter -0- | 5. | |||
| 6a. | Enter the rental portion of excess casualty and theft losses (see instructions) | 6a. | |||
| b. | Enter the rental portion of depreciation of the dwelling unit | b. | |||
| c. | Carryover of excess casualty losses and depreciation from 2010 worksheet | c. | |||
| d. | Add lines 6a–6c | d. | |||
| e. | Allowable excess casualty and theft losses and depreciation. Enter the smaller of line 5 or line 6d (see instructions) |
6e. | |||
| PART III. Carryover of Unallowed Expenses to Next Year | |||||
| 7a. | Operating expenses to be carried over to next year. Subtract line 4e from line 4d | 7a. | |||
| b. | Excess casualty and theft losses and depreciation to be carried over to next year. Subtract line 6e from line 6d |
b. | |||
| Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b
of Part II. |
||||
| Line 2a. | Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A (as if you were itemizing your deductions) if you had not rented the unit. Do not include interest on a loan that did not benefit the dwelling unit. For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Include the rental portion of this interest in the total you enter on line 2a of the worksheet. | |||
| Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A, if you had not rented the unit. See the Schedule A instructions. However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. See Line 4b below to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. | ||||
| Note. Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Instead, figure the personal portion on a separate Schedule A. If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. | ||||
| Line 2c. | Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A if you had not rented the dwelling unit. To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. On Form 4684, line 19, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Enter the rental portion of the result from Form 4684, line 21, on line 2c of this worksheet. | |||
| Note. Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on a separate Form 4684. | ||||
| Line 2d. | Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. | |||
| Line 2e. | You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. | |||
| Line 4b. | On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). | |||
| Line 4e. | You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e.* | |||
| Line 6a. | To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. | |||
| A. | Enter the amount from Form 4684, line 10 | |||
| B. | Enter the rental portion of line A | |||
| C. | Enter the amount from line 2c of this worksheet | |||
| D. | Subtract line C from line B. Enter the result here and on line 6a of this worksheet | |||
| Line 6e. | You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e.* | |||
| *Allocating the limited deduction. If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. |
Table of Contents
Disaster-related tax relief. Special rules apply to retirement funds received by qualified individuals who suffered an economic loss as a result of:
The storms that began on May 4, 2007, in the Kansas disaster area, or
The severe storms in the Midwestern disaster areas in 2008.
For more information on these special rules, see Relief for Kansas Disaster Area and Relief for Midwestern Disaster Areas in Publication 575, Pension and Annuity Income.
2010 Roth IRA rollovers. If you rolled over an amount from a qualified retirement plan to your Roth IRA in 2010 that you are including in income in 2011 and 2012, see your tax return instructions and Publication 575 for details on how to report any taxable amount for 2011.
2010 in-plan Roth rollovers. If you rolled over an amount from your 401(k) or 403(b) plan in 2010 to a designated Roth account, within the same plan, that you are including in income in 2011 and 2012, see your tax return instructions and Publication 575 for details on how to report any taxable amount for 2011.
This chapter discusses the tax treatment of distributions you receive from:
An employee pension or annuity from a qualified plan,
A disability retirement, and
A purchased commercial annuity.
Publication
575 Pension and Annuity Income
721 Tax Guide to U.S. Civil Service Retirement Benefits
939 General Rule for Pensions and Annuities
Form (and Instructions)
W-4P Withholding Certificate for Pension or Annuity Payments
1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
4972 Tax on Lump-Sum Distributions
5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
Starting in 2011, your 457(b) plan may have a designated Roth account option. If so, you may be able to roll over amounts to the designated Roth account or make contributions. Elective deferrals to a designated Roth account are included in your income.
This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income.
For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575.
You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on the credit for the elderly or the disabled, see chapter 32.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b.
Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.
For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5.
If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. See Direct rollover option under Rollovers, later.
For more information, see Pensions and Annuities under Tax Withholding for 2012 in chapter 4.
Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. For more information about qualified plans, see Publication 560, Retirement Plans for Small Business.
If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a.
If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a.
Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. This includes the amounts your employer contributed that were taxable to you when paid. Cost does not include any amounts you deducted or were excluded from your income.
From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment.
Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed.
If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan.
If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately.
If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method.
Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. For any other annuity, this number is the number of monthly annuity payments under the contract.
Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and
On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments.
| 1. | Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a | 1. | 14,400 | ||
| 2. | Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. See Cost (Investment in the Contract) , earlier | 2. | 31,000 | ||
| Note: If your annuity starting date wasbefore this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Otherwise, go to line 3. | |||||
| 3. | Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below | 3. | 310 | ||
| 4. | Divide line 2 by the number on line 3 | 4. | 100 | ||
| 5. | Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6 | 5. | 1,200 | ||
| 6. | Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year | 6. | -0- | ||
| 7. | Subtract line 6 from line 2 | 7. | 31,000 | ||
| 8. | Enter the smaller of line 5 or line 7 | 8. | 1,200 | ||
| 9. | Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b | 9. | 13,200 | ||
| Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. | |||||
| 10. | Was your annuity starting date before 1987? ? Yes. STOP. Do not complete the rest of this worksheet. ? No. Add lines 6 and 8. This is the amount you have recovered tax free through 2011. You will need this number if you need to fill out this worksheet next year |
10. | 1,200 | ||
| 11. | Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable | 11. | 29,800 | ||
| TABLE 1 FOR LINE 3 ABOVE | ||
| AND your annuity starting date was— | ||
| IF the age at annuity starting date was... |
before November 19, 1996, enter on line 3... |
after November 18, 1996, enter on line 3... |
| 55 or under | 300 | 360 |
| 56–60 | 260 | 310 |
| 61–65 | 240 | 260 |
| 66–70 | 170 | 210 |
| 71 or older | 120 | 160 |
| TABLE 2 FOR LINE 3 ABOVE | ||
| IF the combined ages at annuity starting date were... |
THEN enter on line 3... |
|
| 110 or under | 410 | |
| 111–120 | 360 | |
| 121–130 | 310 | |
| 131–140 | 260 | |
| 141 or older | 210 | |
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date.
Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year.
Example.
Bill Smith, age 65, began receiving retirement benefits in 2011, under a joint and survivor annuity. Bill's annuity starting date is January 1, 2011. The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death.
Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. His completed worksheet is shown in Worksheet 10-A.
Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. The full amount of any annuity payments received after 310 payments are paid must be included in gross income.
If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. This deduction is not subject to the 2%-of-adjusted- gross-income limit.
A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or
A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years.
If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost.
Nonperiodic distributions are also known as amounts not received as an annuity. They include all payments other than periodic payments and corrective distributions. Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration.
If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan, it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer.
For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575.
This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier.
A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution.
The participant's entire balance from a plan does not include certain forfeited amounts. It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575.
If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part.
Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. The tax figured on Form 4972 is added to the regular tax figured on your other income. This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax.
Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income.
Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify).
Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify).
Roll over all or part of the distribution. See Rollovers , later. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.
Report the entire taxable part of the distribution as ordinary income on your tax return.
The first three options are explained in the following discussions.
The plan participant's nondeductible contributions to the plan,
The plan participant's taxable costs of any life insurance contract distributed,
Any employer contributions that were taxable to the plan participant, and
Repayments of any loans that were taxable to the plan participant.
Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. The amount treated as capital gain is taxed at a 20% rate. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.
Complete Part II of Form 4972 to choose the 20% capital gain election. For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575.
The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.
The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part.
Complete Part III of Form 4972 to choose the 10-year tax option. You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Publication 575 illustrates how to complete Form 4972 to figure the separate tax.
If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA.
For this purpose, the following plans are qualified retirement plans.
If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.
Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. For more information, see the Form 8606 instructions.
If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld.
The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.
The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution.
A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. However, see Rollovers by nonspouse beneficiary next.
You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. In addition, the 10% tax on early distributions does not apply.
You may be required to include an amount other than half of the 2010 rollover from a qualified employer plan to a Roth IRA in income for 2011 if you took a Roth IRA distribution in 2010 or 2011. See Publication 575 for more information.
To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. These special additional taxes are the taxes on:
These taxes are discussed in the following sections.
If you must pay either of these taxes, report them on Form 5329. However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58.
Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception.
Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59˝ are subject to an additional tax of 10%. This tax applies to the part of the distribution that you must include in gross income.
For this purpose, a qualified retirement plan is:
A qualified employee plan,
A qualified employee annuity plan,
A tax-sheltered annuity plan, or
An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA).
If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59˝ or older, include that distribution on Form 5329. Enter exception number “12” on line 2.
Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service),
Made because you are totally and permanently disabled, or
Made on or after the death of the plan participant or contract holder.
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees),
From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order,
From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year,
From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election,
From an employee stock ownership plan for dividends on employer securities held by the plan,
From a qualified retirement plan due to an IRS levy of the plan, or
From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions.
A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982,
A deferred annuity contract under a qualified personal injury settlement,
A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or
An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually).
To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). The payments each year cannot be less than the required minimum distribution.
For this purpose, a qualified retirement plan includes:
The calendar year in which you reach age 70˝, or
The calendar year in which you retire from employment with the employer maintaining the plan.
If you reached age 70˝ in 2011, you may be required to receive your first distribution by April 1, 2012. Your required distribution then must be made for 2012 by December 31, 2012.
For example, if you are retired and your 70th birthday was on June 30, 2011, you were age 70˝ on December 30, 2011. If your 70th birthday was on July 1, 2011, you reached age 70˝ on January 1, 2012.
Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or
Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period).
Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. However, some special rules apply.
If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. The resulting tax-free amount will then remain fixed. Any increases in the survivor annuity are fully taxable.
If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. This amount remains fixed even if the annuity payments are increased or decreased. See Simplified Method , earlier.
In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost.
If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction.
You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction.
This chapter explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. It explains the following topics.
How to figure whether your benefits are taxable.
How to use the social security benefits worksheet (with examples).
How to report your taxable benefits.
How to treat repayments that are more than the benefits you received during the year.
Social security benefits include monthly retirement, survivor, and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable.
Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. They are commonly called the social security equivalent benefit (SSEB) portion of tier 1 benefits.
If you received these benefits during 2011, you should have received a Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board (Form SSA-1042S, Social Security Benefit Statement, or Form RRB-1042S, Statement for Nonresident Alien Recipients of: Payments by the Railroad Retirement Board, if you are a nonresident alien). These forms show the amounts received and repaid, and taxes withheld for the year. You may receive more than one of these forms for the same year. You should add the amounts shown on all forms you receive for the year to determine the total amounts received and repaid, and taxes withheld for that year. See the Appendix at the end of Publication 915 for more information.
When the term “benefits” is used in this chapter, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits.
Non-social security equivalent benefit (NSSEB) portion of tier 1 benefits.
Tier 2 benefits.
Vested dual benefits.
Supplemental annuity benefits.
This chapter also does not cover the tax rules for foreign social security benefits. These benefits are taxable as annuities, unless they are exempt from U.S. tax or treated as a U.S. social security benefit under a tax treaty.
Publication
575 Pension and Annuity Income
590 Individual Retirement Arrangements (IRAs)
915 Social Security and Equivalent Railroad Retirement Benefits
Forms (and Instructions)
1040-ES Estimated Tax for Individuals
SSA-1099 Social Security Benefit Statement
RRB-1099 Payments by the Railroad Retirement Board
W-4V Voluntary Withholding Request
To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:
One-half of your benefits, plus
All your other income, including tax-exempt interest.
When making this comparison, do not reduce your other income by any exclusions for:
Interest from qualified U.S. savings bonds,
Employer-provided adoption benefits,
Foreign earned income or foreign housing, or
Income earned by bona fide residents of American Samoa or Puerto Rico.
If you are married and file a joint return for 2011, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable.
If the only income you received during 2011 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable.
$25,000 if you are single, head of household, or qualifying widow(er),
$25,000 if you are married filing separately and lived apart from your spouse for all of 2011,
$32,000 if you are married filing jointly, or
$-0- if you are married filing separately and lived with your spouse at any time during 2011.
| Worksheet 11-1. A Quick Way To Check if Your Benefits May Be Taxable | |||
|---|---|---|---|
| A. | Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2011, for 2011 and earlier years. (If you received more than one form, combine the amounts from box 5 and enter the total.) | A. | |
| Note. If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. | |||
| B. | Enter one-half of the amount on line A | B. | |
| C. | Enter your taxable pensions, wages, interest, dividends, and other taxable income | C. | |
| D. | Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income (listed earlier) | D. | |
| E. | Add lines B, C, and D | E. | |
| Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable. You need to complete Worksheet 1 in Publication 915 (or the Social Security Benefits Worksheet in your tax form instructions). If none of your benefits are taxable, but you otherwise must file a tax return, see Benefits not taxable , later, under How To Report Your Benefits. | |||
Example.
You and your spouse (both over 65) are filing a joint return for 2011 and you both received social security benefits during the year. In January 2012, you received a Form SSA-1099 showing net benefits of $7,500 in box 5. Your spouse received a Form SSA-1099 showing net benefits of $3,500 in box 5. You also received a taxable pension of $22,000 and interest income of $500. You did not have any tax-exempt interest income. Your benefits are not taxable for 2011 because your income, as figured in Worksheet 11-1, is not more than your base amount ($32,000) for married filing jointly.
Even though none of your benefits are taxable, you must file a return for 2011 because your taxable gross income ($22,500) exceeds the minimum filing requirement amount for your filing status.
| Filled-in Worksheet 11-1. A Quick Way To Check if Your Benefits May Be Taxable | |||
|---|---|---|---|
| A. | Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2011, for 2011 and earlier years. (If you received more than one form, combine the amounts from box 5 and enter the total.) | A. | $ 11,000 |
| Note. If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. | |||
| B. | Enter one-half of the amount on line A | B. | 5,500 |
| C. | Enter your taxable pensions, wages, interest, dividends, and other taxable income | C. | 22,500 |
| D. | Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income (listed earlier) | D. | -0- |
| E. | Add lines B, C, and D | E. | $28,000 |
| Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable. You then need to complete Worksheet 1 in Publication 915 (or the Social Security Benefits Worksheet in your tax form instructions). If none of your benefits are taxable, but you otherwise must file a tax return, see Benefits not taxable , later, under How To Report Your Benefits. | |||
Your gross benefits are shown in box 3 of Form SSA-1099 or RRB-1099. Your repayments are shown in box 4. The amount in box 5 shows your net benefits for 2011 (box 3 minus box 4). Use the amount in box 5 to figure whether any of your benefits are taxable.
If you do not choose to have income tax withheld, you may have to request additional withholding from other income or pay estimated tax during the year. For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES.
If part of your benefits are taxable, you must use Form 1040 or Form 1040A. You cannot use Form 1040EZ.
If part of your benefits are taxable, how much is taxable depends on the total amount of your benefits and other income. Generally, the higher that total amount, the greater the taxable part of your benefits.
The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
You are married filing separately and lived with your spouse at any time during 2011.
You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse is covered by a retirement plan at work. In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits.
Situation (1) does not apply and you take an exclusion for interest from qualified U.S. savings bonds (Form 8815), for adoption benefits (Form 8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or for income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. In this situation, you must use Worksheet 1 in Publication 915 to figure your taxable benefits.
You received a lump-sum payment for an earlier year. In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. See Lump-sum election next.
This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. No part of the lump-sum death benefit is subject to tax.
Generally, you use your 2011 income to figure the taxable part of the total benefits received in 2011. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.
Because the earlier year's taxable benefits are included in your 2011 income, no adjustment is made to the earlier year's return. Do not file an amended return for the earlier year.
The following are a few examples you can use as a guide to figure the taxable part of your benefits.
Example 1.
George White is single and files Form 1040 for 2011. He received the following income in 2011:
| Fully taxable pension | $18,600 |
| Wages from part-time job | 9,400 |
| Taxable interest income | 990 |
| Total | $28,990 |
George also received social security benefits during 2011. The Form SSA-1099 he received in January 2012 shows $5,980 in box 5. To figure his taxable benefits, George completes the worksheet shown here.
Worksheet 1. Figuring Your Taxable Benefits
| 1. | Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. Also enter this amount on Form 1040, line 20a, or Form 1040A, line 14a | $5,980 |
| 2. | Enter one-half of line 1 | 2,990 |
| 3. | Combine the amounts from: | |
| Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21. | ||
| Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13 | 28,990 | |
| 4. | Enter the amount, if any, from Form 1040 or 1040A, line 8b | -0- |
| 5. | Enter the total of any exclusions/adjustments for:
|
-0- |
| 6. | Combine lines 2, 3, 4, and 5 | 31,980 |
| 7. | Form 1040 filers: Enter the amount from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36. | |
| Form 1040A filers: Enter the amount from Form 1040A, lines 16 and 17 | -0- | |
| 8. | Is the amount on line 7 less than the amount on line 6? | |
| No. None of your social security benefits are taxable. Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. | ||
| Yes.Subtract line 7 from line 6 | 31,980 | |
| 9. | If you are:
|
25,000 |
| Note. If you are married filing separately and you lived with your spouse at any time in 2011, skip lines 9 through 16; multiply line 8 by 85% (.85) and enter the result on line 17. Then go to line 18. | ||
| 10. | Is the amount on line 9 less than the amount on line 8? | |
| No. None of your benefits are taxable. Enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. If you are married filing separately and you lived apart from your spouse for all of 2011, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a, or on Form 1040A, line 14a. | ||
| Yes.Subtract line 9 from line 8 | 6,980 | |
| 11. | Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2011 | 9,000 |
| 12. | Subtract line 11 from line 10. If zero or less, enter -0- | -0- |
| 13. | Enter the smaller of line 10 or line 11 | 6,980 |
| 14. | Enter one-half of line 13 | 3,490 |
| 15. | Enter the smaller of line 2 or line 14 | 2,990 |
| 16. | Multiply line 12 by 85% (.85). If line 12 is zero, enter -0- | -0- |
| 17. | Add lines 15 and 16 | 2,990 |
| 18. | Multiply line 1 by 85% (.85) | 5,083 |
| 19. | Taxable benefits. Enter the smaller of line 17 or line 18. Also enter this amount on Form 1040, line 20b, or Form 1040A, line 14b | $2,990 |
The amount on line 19 of George's worksheet shows that $2,990 of his social security benefits is taxable. On line 20a of his Form 1040, George enters his net benefits of $5,980. On line 20b, he enters his taxable benefits of $2,990.
Example 2.
Ray and Alice Hopkins file a joint return on Form 1040A for 2011. Ray is retired and received a fully taxable pension of $15,500. He also received social security benefits, and his Form SSA-1099 for 2011 shows net benefits of $5,600 in box 5. Alice worked during the year and had wages of $14,000. She made a deductible payment to her IRA account of $1,000. Ray and Alice have two savings accounts with a total of $250 in taxable interest income. They complete Worksheet 1, entering $29,750 ($15,500 + $14,000 + $250) on line 3. They find none of Ray's social security benefits are taxable. On Form 1040A, they enter $5,600 on line 14a and -0- on line 14b.
Worksheet 1. Figuring Your Taxable Benefits
| 1. | Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. Also enter this amount on Form 1040, line 20a, or Form 1040A, line 14a | $5,600 |
| 2. | Enter one-half of line 1 | 2,800 |
| 3. | Combine the amounts from: | |
| Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21. | ||
| Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13 | 29,750 | |
| 4. | Enter the amount, if any, from Form 1040 or 1040A, line 8b | -0- |
| 5. | Enter the total of any exclusions/adjustments for:
|
-0- |
| 6. | Combine lines 2, 3, 4, and 5 | 32,550 |
| 7. | Form 1040 filers: Enter the amount from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36. | |
| Form 1040A filers: Enter the amount from Form 1040A, lines 16 and 17 | 1,000 | |
| 8. | Is the amount on line 7 less than the amount on line 6? | |
| No. None of your benefits are taxable. Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. | ||
| Yes.Subtract line 7 from line 6 | 31,550 | |
| 9. | If you are:
|
32,000 |
| Note. If you are married filing separately and you lived with your spouse at any time in 2011, skip lines 9 through 16; multiply line 8 by 85% (.85) and enter the result on line 17. Then go to line 18. | ||
| 10. | Is the amount on line 9 less than the amount on line 8? | |
| No. None of your benefits are taxable. Enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. If you are married filing separately and you lived apart from your spouse for all of 2011, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a, or on Form 1040A, line 14a. | ||
| Yes.Subtract line 9 from line 8 | ||
| 11. | Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2011 | |
| 12. | Subtract line 11 from line 10. If zero or less, enter -0- | |
| 13. | Enter the smaller of line 10 or line 11 | |
| 14. | Enter one-half of line 13 | |
| 15. | Enter the smaller of line 2 or line 14 | |
| 16. | Multiply line 12 by 85% (.85). If line 12 is zero, enter -0- | |
| 17. | Add lines 15 and 16 | |
| 18. | Multiply line 1 by 85% (.85) | |
| 19. | Taxable benefits. Enter the smaller of line 17 or line 18. Also enter this amount on Form 1040, line 20b, or Form 1040A, line 14b | |
Example 3.
Joe and Betty Johnson file a joint return on Form 1040 for 2011. Joe is a retired railroad worker and in 2011 received the social security equivalent benefit (SSEB) portion of tier 1 railroad retirement benefits. Joe's Form RRB-1099 shows $10,000 in box 5. Betty is a retired government worker and receives a fully taxable pension of $38,000. They had $2,300 in taxable interest income plus interest of $200 on a qualified U.S. savings bond. The savings bond interest qualified for the exclusion. They figure their taxable benefits by completing Worksheet 1. Because they have qualified U.S. savings bond interest, they follow the note at the beginning of the worksheet and use the amount from line 2 of their Schedule B (Form 1040A or 1040) on line 3 of the worksheet instead of the amount from line 8a of their Form 1040. On line 3 of the worksheet, they enter $40,500 ($38,000 + $2,500).
Worksheet 1. Figuring Your Taxable Benefits
| Before you begin: | ||
| • | If you are married filing separately and you lived apart from your spouse for all of 2011, enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. | |
| • | Do not use this worksheet if you repaid benefits in 2011 and your total repayments (box 4 of Forms SSA-1099 and RRB-1099) were more than your gross benefits for 2011 (box 3 of Forms SSA-1099 and RRB-1099). None of your benefits are taxable for 2011. For more information, see Repayments More Than Gross Benefits . | |
| • | If you are filing Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, do not include the amount from line 8a of Form 1040 or Form 1040A on line 3 of this worksheet. Instead, include the amount from Schedule B (Form 1040A or 1040), line 2. | |
| |
||
| 1. | Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. Also enter this amount on Form 1040, line 20a, or Form 1040A, line 14a | $10,000 |
| 2. | Enter one-half of line 1 | 5,000 |
| 3. | Combine the amounts from: | |
| Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21. | ||
| Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13 | 40,500 | |
| 4. | Enter the amount, if any, from Form 1040 or 1040A, line 8b | -0- |
| 5. | Enter the total of any exclusions/adjustments for:
|
-0- |
| 6. | Combine lines 2, 3, 4, and 5 | 45,500 |
| 7. | Form 1040 filers: Enter the amount from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36. | |
| Form 1040A filers: Enter the amount from Form 1040A, lines 16 and 17 | -0- | |
| 8. | Is the amount on line 7 less than the amount on line 6? | |
| No. None of your benefits are taxable. Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. | ||
| Yes.Subtract line 7 from line 6 | 45,500 | |
| 9. | If you are:
|
32,000 |
| Note. If you are married filing separately and you lived with your spouse at any time in 2011, skip lines 9 through 16; multiply line 8 by 85% (.85) and enter the result on line 17. Then go to line 18. | ||
| 10. | Is the amount on line 9 less than the amount on line 8? | |
| No. None of your benefits are taxable. Enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. If you are married filing separately and you lived apart from your spouse for all of 2011, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a, or on Form 1040A, line 14a. | ||
| Yes.Subtract line 9 from line 8 | 13,500 | |
| 11. | Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2011 | 12,000 |
| 12. | Subtract line 11 from line 10. If zero or less, enter -0- | 1,500 |
| 13. | Enter the smaller of line 10 or line 11 | 12,000 |
| 14. | Enter one-half of line 13 | 6,000 |
| 15. | Enter the smaller of line 2 or line 14 | 5,000 |
| 16. | Multiply line 12 by 85% (.85). If line 12 is zero, enter -0- | 1,275 |
| 17. | Add lines 15 and 16 | 6,275 |
| 18. | Multiply line 1 by 85% (.85) | 8,500 |
| 19. | Taxable benefits. Enter the smaller of line 17 or line 18. Also enter this amount on Form 1040, line 20b, or Form 1040A, line 14b | $6,275 |
More than 50% of Joe's net benefits are taxable because the income on line 8 of the worksheet ($45,500) is more than $44,000. Joe and Betty enter $10,000 on Form 1040, line 20a, and $6,275 on Form 1040, line 20b.
You may be entitled to deduct certain amounts related to the benefits you receive.
Legal expenses for collecting the taxable part of your benefits are deductible as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23.
In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Do not use a worksheet in this case. If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year.
If you have any questions about this negative figure, contact your local SSA office or your local RRB field office.
Example.
John and Mary file a joint return for 2011. John received Form SSA-1099 showing $3,000 in box 5. Mary also received Form SSA-1099 and the amount in box 5 was ($500). John and Mary will use $2,500 ($3,000 minus $500) as the amount of their net benefits when figuring if any of their combined benefits are taxable.
Figure your tax for 2011 with the itemized deduction included on Schedule A, line 28.
Figure your tax for 2011 in the following steps.
Figure the tax without the itemized deduction included on Schedule A, line 28.
For each year after 1983 for which part of the negative figure represents a repayment of benefits, refigure your taxable benefits as if your total benefits for the year were reduced by that part of the negative figure. Then refigure the tax for that year.
Subtract the total of the refigured tax amounts in (b) from the total of your actual tax amounts.
Subtract the result in (c) from the result in (a).
You must include on your return all items of income you receive in the form of money, property, and services unless the tax law states that you do not include them. Some items, however, are only partly excluded from income. This chapter discusses many kinds of income and explains whether they are taxable or nontaxable.
Income that is taxable must be reported on your tax return and is subject to tax.
Income that is nontaxable may have to be shown on your tax return but is not taxable.
This chapter begins with discussions of the following income items.
Bartering.
Canceled debts.
Sales parties at which you are the host or hostess.
Life insurance proceeds.
Partnership income.
S Corporation income.
Recoveries (including state income tax refunds).
Rents from personal property.
Repayments.
Royalties.
Unemployment benefits.
Welfare and other public assistance benefits.
These discussions are followed by brief discussions of other income items.
Publication
525 Taxable and Nontaxable Income
544 Sales and Other Dispositions of Assets
4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments
Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise.
Generally, you report this income on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. However, if the barter involves an exchange of something other than services, such as in Example 3 below, you may have to use another form or schedule instead.
Example 1.
You are a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of the shares in your income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) in the year you receive them.
Example 2.
You are self-employed and a member of a barter club. The club uses “credit units” as a means of exchange. It adds credit units to your account for goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. The club subtracts credit units from your account when you receive goods or services from other members. You must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year.
Example 3.
You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. You must report as rental income on Schedule E (Form 1040), Supplemental Income and Loss, the fair market value of the artwork, and the artist must report as income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) the fair rental value of the apartment.
In most cases, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches to property you hold.
If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it is a business debt, report the amount on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you are a farmer).
You may be able to elect to recognize a canceled business debt in income over a 5-tax-year period if the income is realized in a reacquisition in 2009 or 2010. For information on this election, see Revenue Procedure 2009-37 available at www.irs.gov/irb/2009-36_IRB/ar07.html.
If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).
You may be able to exclude part of the mortgage relief on your principal residence. See Excluded debt, later.
If you are not personally liable for a mortgage (nonrecourse debt), and you are relieved of the mortgage when you dispose of the property (such as through foreclosure), that relief is included in the amount you realize. You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness property as a capital gain.
See Publication 4681 for more information.
If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.
There are several exceptions to the inclusion of canceled debt in income. These are explained next.
You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. To qualify, the loan must have been made by:
The Federal Government, a state or local government, or an instrumentality, agency, or subdivision thereof,
A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law, or
An educational institution:
Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or
As part of a program of the institution designed to encourage students to serve in occupations or areas with unmet needs and under which the services provided are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization. Section 501(c)(3) organizations are defined in chapter 24.
A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a tax-exempt 501(a) organization under its program designed as described in (3)(b) above.
The provision relating to the “other state loan repayment or loan forgiveness program” was added to this exclusion for amounts received in tax years beginning after December 31, 2008. If you included these amounts in income in 2009 or 2010, you should file an amended tax return to exclude this income. See Form 1040X and its instructions for details on filing.
The debt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide.
The debt is canceled when you are insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent. See Publication 908.
The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Publication 225, Farmer's Tax Guide.
The debt is qualified real property business debt. See chapter 5 of Publication 334.
The cancellation is intended as a gift.
The debt is qualified principal residence indebtedness. See Publication 525 for additional information.
If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. You must report this item as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party.
For more information about the 50% limit for meal and entertainment expenses, see chapter 26.
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.
You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A.
An endowment contract is a policy under which you are paid a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Include the part of the lump sum payment that is more than your cost in your income.
Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded from income if the insured is terminally or chronically ill.
Is a director, officer, or employee of the person, or
Has a financial interest in the person's business.
If you are a survivor of a public safety officer who was killed in the line of duty, you may be able to exclude from income certain amounts you receive.
For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. For more information, see Publication 559, Survivors, Executors, and Administrators.
A partnership generally is not a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items.
Keep Schedule K-1 (Form 1065) for your records. Do not attach it to your Form 1040.
For more information on partnerships, see Publication 541, Partnerships.
In most cases, an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's pro rata share.
Keep Schedule K-1 (Form 1120S) for your records. Do not attach it to your Form 1040.
For more information on S corporations and their shareholders, see Instructions for Form 1120S.
A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds, reimbursements, and rebates of deductions itemized on Schedule A (Form 1040). You also may have recoveries of non-itemized deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a tax credit.
If you could choose to deduct for a tax year either:
State and local income taxes, or
State and local general sales taxes, then
If you recover any amount that you deducted in an earlier year on Schedule A (Form 1040), you generally must include the full amount of the recovery in your income in the year you receive it.
Your recoveries, or
The amount by which your itemized deductions exceeded the standard deduction.
Example.
For 2010, you filed a joint return. Your taxable income was $60,000 and you were not entitled to any tax credits. Your standard deduction was $11,400, and you had itemized deductions of $13,000. In 2011, you received the following recoveries for amounts deducted on your 2010 return:
| Medical expenses | $200 | |
| State and local income tax refund | 400 | |
| Refund of mortgage interest | 325 | |
| Total recoveries | $925 | |
None of the recoveries were more than the deductions taken for 2010. The difference between the state and local income tax you deducted and your local general sales tax was more than $400.
Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($13,000 - 11,400 = $1,600), so you must include your total recoveries in your income for 2011. Report the state and local income tax refund of $400 on Form 1040, line 10, and the balance of your recoveries, $525, on Form 1040, line 21.
Example.
You filed a joint return on Form 1040 for 2010 with taxable income of $45,000. Your itemized deductions were $12,050. The standard deduction that you could have claimed was $11,400. In 2011, you recovered $2,100 of your 2010 itemized deductions. None of the recoveries were more than the actual deductions for 2010. Include $650 of the recoveries in your 2011 income. This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($12,050 - $11,400 = $650).
If you could claim an additional standard deduction for certain taxes or a net disaster loss, increase your standard deduction for that year.
The amount deducted on Schedule A (Form 1040), or
The amount recovered.
Example.
During 2010 you paid $1,700 for medical expenses. From this amount you subtracted $1,500, which was 7.5% of your adjusted gross income. Your actual medical expense deduction was $200. In 2011, you received a $500 reimbursement from your medical insurance for your 2010 expenses. The only amount of the $500 reimbursement that must be included in your income for 2011 is $200—the amount actually deducted.
If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is in most cases determined by:
Whether or not the rental activity is a business, and
Whether or not the rental activity is conducted for profit.
In most cases, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business. See Publication 535, Business Expenses, for details on deducting expenses for both business and not-for-profit activities.
If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset other income. See Activity not for profit , under Other Income , later.
If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.
When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Each instance of repayment is not considered separately.
Figure your tax for 2011 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2011.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for 2011 figured without the deduction (Step 1).
If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 71, by adding the amount of the credit to any other credits on this line, and entering “I.R.C. 1341” in the column to the right of line 71.
An example of this computation can be found in Publication 525.
Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income.
In most cases you report royalties in Part I of Schedule E (Form 1040). However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ (Form 1040).
If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the property, you have made a lease or a sublease, and any cash you receive for the assignment of other interests in the property is ordinary income subject to a depletion allowance.
When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct depletion from that amount to arrive at your taxable income from the property.
The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.
Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund.
State unemployment insurance benefits.
Railroad unemployment compensation benefits.
Disability payments from a government program paid as a substitute for unemployment compensation. (Amounts received as workers' compensation for injuries or illness are not unemployment compensation. See chapter 5 for more information.)
Trade readjustment allowances under the Trade Act of 1974.
Unemployment assistance under the Disaster Relief and Emergency Assistance Act.
If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. For more information on estimated tax, see chapter 4.
Deduct the repayment in the later year as an adjustment to gross income on Form 1040. (You cannot use Form 1040A or Form 1040EZ.) Include the repayment on Form 1040, line 36, and enter “Sub-Pay TRA” and the amount on the dotted line next to line 36. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. For more information on this, see Repayments , earlier.
Do not include in your income governmental benefit payments from a public welfare fund based upon need, such as payments due to blindness. Payments from a state fund for the victims of crime should not be included in the victims' incomes if they are in the nature of welfare payments. Do not deduct medical expenses that are reimbursed by such a fund. You must include in your income any welfare payments that are compensation for services or that are obtained fraudulently.
To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster;
To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it is due to a qualified disaster;
By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries incurred as a result of a qualified disaster; or
By a federal, state, or local government, or agency, or instrumentality in connection with a qualified disaster in order to promote the general welfare.
A qualified disaster is:
A disaster which results from a terrorist or military action;
A federally declared disaster; or
A disaster which results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic by the Secretary of the Treasury or his or her delegate.
For amounts paid under item (4), a disaster is qualified if it is determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.
You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments.
The following brief discussions are arranged in alphabetical order. Income items that are discussed in greater detail in another publication include a reference to that publication.
Interest on any award.
Compensation for lost wages or lost profits in most cases.
Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.
Amounts received in settlement of pension rights (if you did not contribute to the plan).
Damages for:
Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.
Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).
If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.
All income that is required to be distributed to you, whether or not it is actually distributed, plus
All other amounts actually paid or credited to you,
The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you are allowed on your individual income tax return.
Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of the transferred property.
A corporate director,
An executor, administrator, or personal representative of an estate,
A manager of a trade or business you operated before declaring Chapter 11 bankruptcy,
A notary public, or
An election precinct official.
A qualified foster individual is a person who:
Is living in a foster family home, and
Was placed there by:
An agency of a state or one of its political subdivisions, or
A qualified foster care placement agency.
You must include in your income difficulty-of-care payments received for more than:
10 qualified foster individuals under age 19, or
5 qualified foster individuals age 19 or older.
If you win a state lottery prize payable in installments, see Publication 525 for more information.
If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain. (See chapter 16.) However, if you sell items from your collection at a loss, you cannot deduct the loss.
Prizes and awards in goods or services must be included in your income at their fair market value.
You were selected without any action on your part to enter the contest or proceeding.
You are not required to perform substantial future services as a condition to receiving the prize or award.
The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you.
The part of a distribution representing the amount paid or contributed to a QTP is not included in income. This is a return of the investment in the program.
In most cases, the beneficiary does not include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified higher education expenses. See Publication 970 for more information.
However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital gain and any loss is deductible as a capital loss.
Tuition and fees to enroll at or attend an educational institution, or
Fees, books, supplies, and equipment required for courses at the educational institution.
For information about the rules that apply to a tax-free qualified tuition reduction provided to employees and their families by an educational institution, see Publication 970.
You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2%-of-AGI limit if they are related to your job and if you itemize deductions on Schedule A (Form 1040). For more information, see Union Dues and Expenses in chapter 28.