In most cases, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. These wages must be included on line 7 of Form See Form for more information.
This section discusses many types of employee compensation. The subjects are arranged in alphabetical order. 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. Ben Green received three employee achievement awards during the year: Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income.
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.
See Valuation of Fringe Benefitslater in this discussion, for information on how to determine the amount to include in income. The special accounting period rule: 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.
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 coveragesee Pub. 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 Formfor 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. To determine the taxable and nontaxable amounts, you must complete Part III of Form File the form with your return. The gym must be used primarily by employees, their spouses, and their dependent children. If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the options is included in your compensation.
Also see Employee Discountslater. If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Dependent care benefits include:. Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and.
Your employer must show the total amount of dependent stock benefits provided to you during the year under a qualified plan in box 10 of your Form W To claim the exclusion, you must complete Part III of Form See the Instructions for Form for more information. For more information, see Pub.
If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage.
For a discount on property, your employer's gross profit percentage gross profit divided by gross sales on all property sold during the employer's previous tax year. Ask your employer for this percentage. Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. Qualified retirement planning services paid for you by your employer may be excluded from your income.
For more information, see Retirement Planning Serviceslater. For exceptions to this rule, see Entire cost excludedand Entire cost taxedlater. Also, it is shown separately in box 12 with code C. Provides an amount of insurance to each employee based on a formula that prevents individual selection. Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or. Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded.
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. You figure the amount to include in your income as follows.
You must add it to the wages shown on your Forms W-2 and include the total on your return. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. A charitable organization 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 aren't entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.
You reached age 55 before January 2,and were employed by the employer or its predecessor in The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. You don't include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met.
A condition of your employment. You must accept it in order to be able to properly perform your duties. You also don't include in your income the value of meals or meal money that qualifies as a minimal fringe benefit.
See Minimal Benefitsearlier. Its principal purpose or function is to provide medical or hospital care or medical education or research. One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty.
The average of rentals paid by individuals other than employees or students for comparable lodging held for rent by the educational institution.
Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. In most cases, if your employer pays for your moving expenses either directly or indirectly and the expenses would have been deductible if you paid them yourself, the value isn't included in your income. The value of services you receive from your employer for free, at cost, or for a reduced price isn't included in your income if your employer:.
Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and. Does not have a substantial additional cost including any sales income given up to provide you with the service regardless of what you paid for the service. In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. You are employed as a flight attendant for a company that owns both an airline and a hotel chain.
Your employer allows you to take personal flights if there is an unoccupied seat and stay in any one of their hotels if there is an unoccupied room at no cost to you. The value of the personal flight isn't included in stock income. However, the value of the hotel room is included in your income because you don't work in the hotel business.
If your employer has a qualified retirement plan, qualified retirement planning services provided to you and your spouse by your employer aren't 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 can't exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer.
Also, see Financial Counseling Feesearlier. 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 is also 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 isn't readily available for direct distribution to you. On trips during which employees occupy at least half of the vehicle's adult seating capacity not including the driver. You can exclude a qualified tuition reduction from your income. This is the amount of a reduction in tuition:. For education below graduate level furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children.
For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution.
Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost isn't included in your income.
You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. The cost of the subscription isn't included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself.
If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. For an exception, see Group-Term Life Insuranceearlier. Your employer's contributions to a qualified retirement plan for you aren't 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 Insuranceearlier, 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 isn't 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 don't 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 Pub. If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you.
The amount you set aside called an elective deferral is treated as an employer contribution to a qualified plan. An elective deferral, other than a designated Roth contribution discussed laterisn't included in wages subject to income tax at the time contributed.
However, it is included in wages subject to social security and Medicare taxes. Section c 18 D plans. But see Reporting by employerlater. Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and. SEPs SARSEPssee Salary Reduction Simplified Employee Pension in chapter 2 of Pub.
Section plans, see Limit for deferrals under section planslater. The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or. The value of any employer-provided qualified transportation fringe benefit defined under Transportationearlier that isn't included in your income.
Other amounts received cash or noncash for personal services you performed, including, but not limited to, the following items. Qualified cash or deferred arrangements section k plans that aren't included in your income. The basic annual limit plus the amount of the basic limit not used in prior years only allowed if not using age 50 or over catch-up contributions. No other elective deferrals can be made for you to the plan for the year because of limits or restrictions.
If the distribution was for a excess deferral, your Form R should have the code 8 in box 7. Add the excess deferral amount to your wages on your tax return. If the distribution was for a excess deferral to a designated Roth account, your Form R should have code B in box 7. Do not add this amount to your wages on your return. If the distribution was for a excess deferral, your Form R should have the code P in box 7.
If you didn't add the excess deferral amount to your wages on your tax return, you must file an amended return on Form X. If you didn't receive the distribution by April 15,you also must add it to your wages on your tax return. If the distribution was for the income earned on an excess deferral, your Form R should have the code 8 in box 7. Add the income amount to your wages on your income tax return, regardless of when the excess deferral was made.
If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan.
You must include the excess contributions in your income as wages on Formline 7. You can't use Form A or Form EZ to report excess contribution amounts. If you receive a corrective distribution of excess contributions and allocable incomeit is included in your income in the year of the distribution. The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions.
You should receive a Form R for the year the excess contributions are distributed to you. Add the distribution to your wages for that year.
Even though a corrective distribution of excess contributions is reported on Form R, it isn't otherwise treated as a distribution from the plan. It can't be rolled over into another plan, and it isn't subject to the additional tax on early distributions.
Under certain circumstances, contributions that exceed these limits excess annual additions may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions.
A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. A corrective payment consisting of your after-tax contributions isn't taxable. If you received a corrective payment of excess annual additions, you should receive a separate Form R for the year of the payment with the code E in box 7.
Report the total payment shown in box 1 of Form R on line 16a of Form or line 12a of Form A. Report the taxable amount shown in box 2a of Form R on line 16b of Form or line 12b of Form A. Even though a corrective distribution of excess annual additions is reported on Form R, it isn't otherwise treated as a distribution from the plan. If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option the grantwhen you exercise the option use it to buy or sell the stock or other propertyor when you sell or otherwise dispose of the option or property acquired through exercise of the option.
The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Your employer can tell you which kind of option you hold.
The option or the property subject to the option isn't subject to any condition or restriction other than a condition to secure payment of the purchase price that has a significant effect on the fair market value of the option. For more information on the excise tax, see section For either kind of option, you must be an employee of the company granting the option, or a related company, at all times during the period beginning on the date the option is granted and ending 3 months before the date you exercise the option for an incentive stock option, 1 year before if you are disabled.
Also, the option must be nontransferable except at death. If you don't meet the employment requirements, or you receive a transferable option, your option is a nonstatutory stock option. If you exercise an ISO duringyou should receive Formor a statement, from the corporation for each transfer made during The corporation must send or provide you with the form by February 1, Keep this information for your records. You satisfy the conditions described under Option granted at a discountunder Employee stock purchase planlater.
Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the option. The rest of your gain is capital gain, figured as follows:. XYZ Company has an employee stock purchase plan. The option price is the lower of the stock price at the time the option is granted or at the time the option is exercised. A's holding period for all 12 shares begins the day after the option is exercised, even though the money used to purchase the shares was deducted from A's pay on 48 separate days.
The excess of the fair market value of the share at the time the option was granted over the option price, or. The excess of the fair market value of the share at the time of the disposition or death over the amount paid for the share under the option. The facts are the same as in the previous example, except that you sold the stock only 6 months after you exercised the option. If you sold stock in that you acquired by exercising an option granted at a discount under an employee stock purchase plan, you should receive Formfrom the corporation.
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 don't include the value of the property in your income until it has been substantially vested.
You can choose to include the value of the property in your income in the year it is transferred to you, as discussed later, rather than the year it is substantially vested.
Until the property becomes substantially vested, it is owned by the person who makes the transfer to you, usually your employer. However, any income from the property, or the right to use the property, is included in your income as additional compensation in the year you receive the income or have the right to use the property. When the property becomes substantially vested, you must include its fair market value, minus any amount you paid for it, in your income for that year.
Your holding period for this property begins when the property becomes substantially vested. Under the terms of the sale, the stock is under a substantial risk of forfeiture you have a good chance of losing it for a 5-year period.
Your stock isn't substantially vested when it is transferred, so you don't include any amount in your income in the year you buy it. Dividends paid by the RST Corporation on your shares of stock are taxable to you as additional compensation during the period the stock can be forfeited.
It isn't subject to a substantial risk of forfeiture. You don't have a good chance of losing it. You can't make this choice for a nonstatutory stock option. The date or dates on which the property was transferred and the tax year for which you are making the choice. The fair market value at the time of transfer ignoring restrictions except those that will never lapse of each property for which you are making the choice. This part of the publication deals with special rules for people in certain types of employment: 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.
If the offering is made to the religious institution, it isn't 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.
Also, see Members of Religious Orderslater. Special rules for housing apply to members of the clergy. Under these rules, you don't include in your income the rental value of a home including utilities or a designated housing allowance provided to you as part of your pay. However, the exclusion can't be more than the reasonable pay for your service. If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost.
The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE Formif you are subject to the self-employment tax. 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.
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 aren't included in your income. They are part of the duties that you must exercise for, or on behalf of, the religious order as its agent.
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. Gene Dennis is a member of a religious order who, as a condition of membership, has taken vows of poverty and obedience. All claims to his earnings are renounced. Gene received permission from the order to establish a private practice as a psychologist and counsels members of religious orders as well as nonmembers.
Although the order reviews Gene's budget annually, Gene controls not only the details of his practice but also the means by which his work as a psychologist is accomplished. Gene's private practice as a psychologist doesn't make him an agent of the religious order.
The psychological services provided by Gene aren't the type of services that are provided by the order. The income Gene earns as a psychologist is earned in his individual capacity. Gene must include in his income the earnings from his private practice. You aren't 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.
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 aren't taxed.
For more information on the tax treatment of military allowances and benefits, see Pub. Disability compensation and pension payments for disabilities paid either to veterans or their families. Veterans' insurance proceeds and dividends paid options to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death.
The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, If, in a previous year, you received a bonus payment by a state or political subdivision because of service in a combat zone that you included in your income, you can file a claim for refund of the taxes on that income.
Use Form X to file the claim. File a separate form for each tax year involved. In most cases, you must file your claim within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. See the Instructions for Form X for information on filing that form. 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. Readjustment allowances or termination payments.
These are considered received by you when credited to your account. Although the allowance isn't 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.
This section provides information on the treatment of income from certain rents and royalties, and from interests in partnerships and S corporations. You may be subject to the Net Investment Income Tax NIIT. The NIIT is a 3. For details, see Formand its instructions. Income from sales at auctions, including online auctions, may be business income.
If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is in most cases determined by:. 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. Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income. In most cases you report royalties on Schedule E FormSupplemental Income and Loss.
However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc. A partnership generally isn't 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. In many cases, Schedule K-1 Form will tell you where to report an item of income on your individual return.
In most cases, an S corporation doesn't 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.
You must report your share of these items on your return. In most cases, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate. 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. For information on nontaxable payments, see Military and Government Disability Pensions and Other Sickness and Injury Benefitslater in this discussion. 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 or Form A 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 aren't disabled. You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit, see Pub. 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 or on lines 12a and 12b of Form A. For more information on pensions and annuities, see Pub. 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, You receive the disability payments for a combat-related injury.
This is a personal injury or sickness that:. 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. You retired in and receive a pension based on your years of service.
On August 3,you receive a determination of service-connected disability retroactive to Generally, you could claim a refund for the taxes paid on your pension for, and However, under the special limitation period, you can also file a claim for as long as you file the claim by August 3, You can't file a claim for and because those tax years began more than 5 years before the determination.
In most cases, long-term care insurance contracts are treated as accident and health insurance contracts. Amounts you receive from them other than policyholder dividends or premium refunds are excludable in most cases 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 with your return.
A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. 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, rehabilitative services, and maintenance and personal care services; and.
Required by a chronically ill individual and provided pursuant to a plan of care 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 a 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, doesn't 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.
In addition to disability pensions and annuities, you may receive other payments for sickness or injury. Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments.
See Court awards and damages under Other Incomelater. 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 aren't taxable even if your employer pays for the accident and health plan that provides these benefits. This section discusses various types of income. You may have taxable income from certain transactions even if no money changes hands. For example, you may have taxable income if you lend money at a below-market interest rate or have a debt you owe canceled. 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 or Schedule C-EZ Form However, if the barter involves an exchange of something other than services, such as in Example 4later, you may have to use another form or schedule instead. 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 or Schedule C-EZ Form in the year you receive them. You are a self-employed accountant. You and a house painter are members of a barter club.
Members contact each other directly and bargain for the value of the services to be performed. In return for accounting services you provided, the house painter painted your home. You must report as your income on Schedule C Form or Schedule C-EZ Form the fair market value of the house painting services you received.
The house painter must include in income the fair market value of the accounting services you provided. 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. 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 the fair market value of the artwork, and the artist must report as income on Schedule C Form or Schedule C-EZ Form the fair rental value of the apartment. You don't give the barter exchange your taxpayer identification number generally a social security number or an employer identification numberor. 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 Formline If it is a business debt, report the amount on Schedule C Form or Schedule C-EZ Form or on Schedule F Formif the debt is farm debt and you are a farmer. Starting in you must include the income you elected to defer in or from a cancellation, reacquisition, or modification of a business debt.
For information on this election, see Revenue Procedure available at www. There are several exceptions to the inclusion of canceled debt in income. These are explained next. 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.
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 c 3 organization defined later.
Fostering national or international amateur sports competition but only if none of the organization's activities involve providing athletic facilities or equipment. The debt is canceled when you are insolvent.
However, you can't exclude any amount of canceled debt that is more than the amount by which you are insolvent. The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Pub.
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. Life insurance proceeds paid to you because of the death of the insured person aren't 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. Before the policy is issued, you provide written notice about the insurance to the employee and the employee provides written consent to be insured. The employee was your employee within the month period before death, or, at the time the contract was issued, was a director or highly compensated employee, or.
For information on when the proceeds are excluded from income, see Accelerated Death Benefitslater. Under the economic benefit rule, the owner of the life insurance contract is treated as providing current life insurance protection and other taxable economic benefits to the non-owner of the contract.
Under the loan rule, the non-owner of the life insurance contract is treated as loaning premium payments to the owner of the contract. 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 investment in the contract 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. Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity.
This is explained in Pub. For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. This election must be made within 60 days after the lump-sum payment first becomes payable to you. 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.
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 itemized deductions.
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. You made your fourth payment in January You had no state income tax withheld during You claimed itemized deductions each year on Schedule A Form You claimed the standard deduction on your federal income tax return.
In you received a refund of your state income tax. Do not report any of the refund as income because you didn't itemize deductions for The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. However, you generally don't need to use this discussion if you file Form and the recovery is for state or local income taxes paid in Instead, use the worksheet in the Form instructions for line 10 to figure the amount if any to include in your income.
You can't use the Form worksheet and must use this discussion if you are a nonresident alien discussed later or any of the following statements are true. You received a refund other than an income tax refund, such as a general sales tax or real property tax refund, in of an amount deducted or credit claimed in an earlier year.
The amount on your Formline 42 was more than the amount on your Formline See Capital gainslater. Your state and local income tax refund is more than your state and local income tax deduction minus the amount you could have deducted as your state and local general sales taxes. You couldn't use the full amount of credits you were entitled to in because the options credits were more than the amount shown on your Formline You received a refund because of a jointly-filed state or local income tax return, but you aren't filing a joint Form with the same person.
If you also recovered an amount deducted as a non-itemized deduction, figure the amount of that recovery to include in your income and add it to your adjusted gross income before applying the rules explained here.
See Non-Itemized Deduction Recoverieslater. Your itemized deductions exceeded the standard deduction by at least the amount of the recovery. If your itemized deductions didn't exceed the standard deduction by at least the amount of the recovery, see Standard deduction limitlater. You had taxable income. If you had no taxable income, see Negative taxable incomelater. Your deduction for the item recovered equals or exceeds the amount recovered.
If your deduction was less than the amount recovered, see Recovery limited to deductionlater. Your itemized deductions were not subject to the limit on itemized deductions. If your deductions were limited, see Itemized deductions limitedlater. You had no unused tax credits. If you had unused tax credits, see Unused tax creditslater. You were not subject to alternative minimum tax. If you were subject to alternative minimum tax, see Subject to alternative minimum taxlater. Foryou filed a joint return on Form Inyou received the following recoveries for amounts deducted on your return:.
None of the recoveries were more than the deductions taken for Multiply the amount of taxable recoveries by the percentage in 1. This is the amount you report as a state income tax refund. Subtract the result in 2 above from the amount of taxable recoveries. This is the amount you report as other income. None of the recoveries were more than the actual deductions for The amount of itemized deductions you would have been allowed for the earlier year after taking into account the limit on itemized deductions if you had figured them using only the net amount of the recovery item.
The net amount is the amount you actually paid reduced by the recovery amount. If you were required to itemize your deductions in the earlier year, use step 1 b and not step 1 a. Subtract the amount in step 1 from the amount of itemized deductions actually allowed in the earlier year after applying the limit on itemized deductions. InJean Black filed as head of household and itemized her deductions on Schedule A Form Jean's tax liability for isn't changed by reducing her deductions by the recovery.
She didn't have a tax benefit from the recovered deduction and doesn't include any of the recovery in her income for If you received a recovery in for an item for which you claimed a tax credit in an earlier year, you must increase your tax by the amount of the recovery, up to the amount by which the credit reduced your tax in the earlier year. You had a recovery if there was a downward price adjustment or similar adjustment on the item for which you claimed a credit. This rule doesn't apply to the investment credit or the foreign tax credit.
Recoveries of these credits are covered by other provisions of the law. In most cases, payments made by or for an employer because of an employee's death must be included in income.
The following discussions explain the tax treatment of certain payments made to survivors. For additional information, see Pub. The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.
Disability payments from a government program paid as a substitute for unemployment compensation. Amounts received as workers' compensation for injuries or illness aren't unemployment compensation.
See Workers' Compensation under Sickness and Injury Benefitsearlier. 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 shouldn't 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 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.
A State Housing Finance agency State HFA Hardest Hit Fund program in which program payments can be used to pay mortgage interest, or. An Emergency Homeowners' Loan Program EHLP administered by the Department of Housing and Urban Development HUD or a state. The program is administered under specified guidelines and doesn't discriminate in favor of members of the governing body of the tribe, and.
The benefits provided under the program a are available to any tribal member who meets guidelines, b are for the promotion of general welfare, c aren't lavish or extravagant, and d aren't compensation for services. You take the foreign earned income exclusion, the foreign housing exclusion or deduction, the exclusion of income from American Samoa, or the exclusion of income from Puerto Rico by bona fide residents of Puerto Rico.
The following brief discussions are arranged in alphabetical order. Other income items briefly discussed below are referenced to publications which provide more information. A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and. This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business. Punitive damages, in most cases. It doesn't matter if they relate to a physical injury or physical sickness.
Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of Attorney fees and costs including contingent fees where the underlying recovery is included in gross income. The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the United States government, or the claim under section b 3 A of the Social Security Act.
The deduction you are claiming can't be more than the amount of the judgment or settlement you are including in income for the tax year. The judgment or settlement to which your attorney fees and court costs apply must occur after October 22, Received in connection with the civil action In re Exxon ValdezNo. 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 that could have been withdrawn at the end of that tax year not reduced by any penalty for premature withdrawals of a time deposit.
You sell cars and help arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you for referring customers to them. You must include the kickbacks in your income. You sell cars for an automobile dealership and receive incentive payments from the automobile manufacturer every time you sell a particular model of car. You report the incentive payments on Formline You aren't required to perform substantial future services as a condition for 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 following conditions apply to the transfer. You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should contain:. The purpose of the designation by making a reference to section 74 b 3 of the Internal Revenue Code.
In the case of an unexpected presentation, you must return the prize or award before using it or spending, depositing, investing it, etc. After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred. Course related expenses, such as fees, books, and equipment that are required for courses at the eligible educational institution.
These items must be required of all students in your course of instruction. 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. In most cases, 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. Refigure your tax from the earlier year without including in income the amount you repaid in the year of repayment.
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 the year of repayment figured without the deduction step 1. For you filed a return and reported your income on the cash method. Your filing status in and is single. Your income and tax for both years are as follows:. Deductions for theft losses due to criminal fraud or embezzlement in a transaction entered into for profit.
If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS. See if you qualify to use brand-name software to prepare and e-file your federal tax return for free. Getting answers to your tax law questions. You can print the entire interview and the final response for your records. View it online in HTML or as a PDF or, better yet, download it to your mobile device to enjoy eBook features.
The Earned Income Tax Credit Assistant IRS. The Online EIN Application IRS. The IRS Withholding Calculator IRS. The First Time Homebuyer Credit Account Look-up IRS.
The Sales Tax Deduction Calculator IRS. This includes any type of electronic communication, such as text messages and social media channels. If your SSN has been lost or stolen or you suspect you are a victim of tax-related identity theft, visit IRS. This applies to the entire refund, not just the portion associated with these credits. Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.
Debit or credit card: Choose an approved payment processor to pay online, by phone, and by mobile device. Offered only when filing your federal taxes using tax preparation software or through a tax professional. Electronic Federal Tax Payment System: Best option for businesses.
Check or money order: Mail your payment to the address listed on the notice or instructions. If cash is your only option, you may be able to pay your taxes at a participating retail store. Apply for an online payment agreement IRS.
Once you complete the online process, you will receive immediate notification of whether your agreement has been approved. Use the Offer in Compromise Pre-Qualifier IRS. The Taxpayer Advocate Service TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.
And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:. We have offices in every state, the District of Columbia, and Puerto Rico.
You can also call us at The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at taxpayeradvocate. These are your rights. TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS. Low Income Taxpayer Clinics LITCs serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes.
Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. To find a clinic near you, visit IRS. Subscriptions IRS Guidewire IRS Newswire QuickAlerts e-News for Tax Professionals IRS Tax Tips More.
Publication - Main Content. Table of Contents Employee Compensation Babysitting. Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Options for Certain Employees Clergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment Income Rents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury Benefits Disability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous Income Bartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income Repayments Method 1.
How To Get Tax Help The Taxpayer Advocate Service Is Here To Help You Low Income Taxpayer Clinics. If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Whether you are an employee or self-employed person, your income could be subject to self-employment tax.
See the instructions for Schedule C Form and SE Form if you are self-employed. If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax.
Your W-2 will show your total wages and withheld income tax for the year. On your tax return, you options the wages and withheld income tax for the period before you filed for bankruptcy. Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. If you receive other information returns such as Form DIV, or INT that report gross income to you, rather than to the bankruptcy estate, you must allocate that income.
The only exception is for purposes of figuring your self-employment tax, if you are self-employed. For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. The statement must show the allocation and describe the method used to make the allocation.
For a sample of this statement and other information, see NoticeI. Advance commissions and other earnings. If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them.
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 Formor you may be able to take a credit for that year.
See Repaymentslater. If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Pub. If you are reimbursed for moving expenses, see Pub. Include in income amounts you are awarded in a settlement or judgment for back pay.
These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income.
If you receive tangible personal property other than cash, a gift certificate, or an equivalent item as an award for length of service or safety achievement, you generally can exclude its value from your income.
Your employer can tell you whether your award is a qualified plan award. This is any payment made by an employer to an individual for any period during which the individual is, for a stock of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period.
These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. The payments are reported as wages on Form W Most payments received by U. Government civilian employees for working abroad are taxable. However, certain cost-of-living allowances are tax free. Nonqualified deferred compensation plans. Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. This amount is shown on Form W-2, box 12, using code Y.
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. Nonqualified deferred compensation plans of nonqualified entities. In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation.
For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax.
Note received for services. If your employer gives you a secured note as payment for your services, you must include the fair market value usually the discount value of the note in your income for the year you receive it. When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income.
Do not include that part again in your income. Include the rest of the payment in your income in the year of payment. 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.
You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Severance payments are subject to social security and Medicare taxes, income tax withholding, and FUTA tax.
Severance payments are wages subject to social security and Medicare taxes. As noted in section 15 of Pub. If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W 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 your return and the wages on your Forms W Pay you receive from your employer while you are sick or injured is part of your salary or wages.
In addition, you must include in your income sick pay benefits received from any of the following payers. A state sickness or disability fund. An association of employers or employees. An insurance company, if your employer paid for the plan. Social security and Medicare taxes paid by employer. If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return.
The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Do not include a stock appreciation right granted by your employer in income until you exercise use the right. When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. You include the cash payment in income in the year you use the right.
If your employer gives you virtual currency such as Bitcoin as payment for your services, you must include the fair market value of the currency in your income. The fair market value of virtual currency such as Bitcoin paid as wages is subject to federal income tax withholding, Federal Insurance Contribution Act FICA tax, stock Federal Unemployment Tax Act FUTA tax and must be reported on Form W NoticeI.
Recipient of fringe benefit. You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You are considered to be the recipient even if it is given to another person, such as a member of your family. An example is a car your employer gives to your spouse for services you perform. The car is considered to have been provided to you and not to your spouse. If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit.
Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. The provider can be a client or customer of an independent contractor.
You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Although not required, your employer may include the total value of fringe benefits in box 14 or on a separate statement.
Accident or Health Plan. However, contributions made through a flexible spending or similar arrangement such as a cafeteria plan must be included in your income.
This amount will be reported as wages in box 1 of your Form W Their total will be reported in box 12 of Form W-2, with code R. You must report this amount on Form Health flexible spending arrangement health FSA. Health reimbursement arrangement HRA. Health savings account HSA. If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA.
Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Distributions not used for qualified medical expenses are included in your 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. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.
Qualified HSA funding distribution. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer.
This insurance is term life insurance protection insurance for a fixed period of time that: 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. If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them.
Your employer should be able to tell you the amount to include in your income. Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them on line 62, Formand follow the instructions for line For more information, see the Instructions for Form Two or more employers.
You must figure how much to include in your income. Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. Figuring the taxable cost. Use the following worksheet to figure the amount to include in your income.
If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded.
Figuring the Cost of Group-Term Life Insurance To Include in Income. Enter the total amount of your insurance coverage from your employer s 1.
Limit on exclusion for employer-provided group-term life insurance coverage 2. Subtract line 2 from line 1 3. Figure to the nearest tenth 4. Go to Table 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.
Multiply line 4 by line 5 6. Enter the number of full months of coverage at this cost 7. Multiply line 6 by line 7 8. Enter the premiums you paid per month 9. Enter the number of months you paid the premiums Multiply line 9 by line 10 Subtract line 11 from line 8. Include this amount in your income as wages Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated.
Enter the number of full months of coverage at this cost. You aren't taxed on the cost of group-term life insurance if any of the following circumstances apply. You are permanently and totally disabled and have ended your employment.
The plan existed on January 1,and: You retired before January 2,and were covered by the plan when you retired, or You reached age 55 before January 2,and were employed by the employer or its predecessor in You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply.
You are a key employee and your employer's plan discriminates in favor of key employees. Furnished on the business premises of your employer, and Furnished for the convenience of your employer.
Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. If you are an employee of an educational institution or an academic health center and you are provided with lodging that doesn't meet the three conditions given earlier, you still may not have to include the value of the lodging in income.
However, the lodging must be qualified campus lodging, and you must pay an adequate rent. This is an organization that meets the following conditions. It receives payments for graduate medical education under the Social Security Act. Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home.
The lodging must be located on or near a campus of the educational institution or academic health center. The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost including any sales income given up to provide you with the service regardless of what you paid for the service.
Transportation in a commuter highway vehicle such as a van between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement.
You can't exclude from your income any qualified bicycle commuting reimbursement if you can choose between reimbursement and compensation that is otherwise includible in your income. If the benefits have a value that is more than these limits, the excess must be included in your income. This is a highway vehicle that seats at least six adults not including the driver.
For transporting employees between their homes and workplace, and On trips during which employees occupy at least half of the vehicle's adult seating capacity not including the driver. This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit whether public or private free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation.
This is parking provided to an employee at or near the employer's place of business. It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. It doesn't include parking at or near the employee's home. This is reimbursement based on the number of qualified bicycle commuting months for the year. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you don't receive any of the other qualified transportation fringe benefits.
The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Valuation of Fringe Benefits. You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law.
The fair market value of a fringe benefit is determined by all the facts and circumstances. It is the amount you would have to pay a third party to buy or lease the benefit.
This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. If your employer provides a car or other highway motor vehicle to you, your personal use of the car is usually a taxable noncash fringe benefit.
Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. The value can't be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis.
Flights on employer-provided aircraft. Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party.
If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. The division must be based on all the facts, including which employee or employees control the use of the aircraft. You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. If your employer uses a special valuation rule, you can't use a different special rule to value that benefit.
You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule.
If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. The automobile lease rule. The vehicle cents-per-mile rule. The unsafe conditions commuting rule. The employer-operated eating-facility rule. Cash or deferred arrangements section 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 b plans. Qualified automatic contribution arrangements. Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section k plan.
You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. The notice must explain: 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. Overall limit on deferrals. The specific plan limits for the plans listed in 4 through 7earlier, are discussed later.
Amounts deferred under specific plan limits are part of the overall limit on deferrals. Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you are responsible for monitoring the total you defer to ensure that the deferrals aren't more than the overall limit. You may be allowed catch-up contributions additional elective deferrals if you are age 50 or older by the end of your tax year. For more information about catch-up contributions to b plans, see chapter 6 of Pub.
For more information about additional elective deferrals to: SIMPLE plans, see SIMPLE Plans in chapter 3 of Pub. Limit for deferrals under SIMPLE plans. Limit for tax-sheltered annuities. However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches or associated organizationthe limit on elective deferrals is increased by the least of the following amounts.
The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or. Limit for deferral under section c 18 plans. Limit for deferrals under section plans. However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it.
See Increased limitlater. This is the pay you received for the year from the employer who maintained the section plan. In most cases, it includes all the following payments. Fees for professional services. The section plan. A salary reduction simplified employee pension SARSEP. A tax-sheltered annuity section b plan. A savings incentive match plan for employees SIMPLE plan. A section cafeteria plan.
Your wages as defined for income tax withholding purposes. Your wages as reported in box 1 of Form W Your wages that are subject to social security withholding including elective deferrals. During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: You generally can have additional elective deferrals made to your governmental section plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions.
Employers with section k and section b plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions.
Designated Roth contributions are treated as elective deferrals, except that they are included in income. Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. Qualified distributions from a Roth plan aren't included in income. In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan isn't a qualified distribution.
Your employer generally shouldn't include elective deferrals in your wages in box 1 of Form W Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box Section c 18 D contributions. Wages shown in box 1 of your Form W-2 shouldn't have been reduced for contributions you made to a section c 18 D retirement plan. The amount you contributed should be identified with code H in box You may deduct the amount deferred subject to the limits that apply.
Include your deduction in the total on Formline These contributions are elective deferrals but are included in your wages in box 1 of Form W Designated Roth contributions to a section k plan are reported using code AA in box 12, or, for section b plans, code BB in box If your deferrals exceed the limit, you must notify your plan by the date required by the plan.
If the plan permits, the excess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year.
You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. File Form to add the excess deferral amount to your wages on line 7. Do not use Form A or Form EZ to report excess deferral amounts.
If you don't take out the excess amount, you can't include it in the cost of the contract even though you included it in your income. Therefore, you stock taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution.
Excess distributed to you. If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, don't include it in income again in the year you receive it. If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Any income on the excess deferral taken out is taxable in the tax year in which you take it out. If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income.
You should receive a Form R for the year in which the excess deferral is distributed to you. Use the following rules to report a corrective distribution shown on Form R for If you are granted a nonstatutory stock option, you may have income when you receive the option. The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. The fair market value of an option can be readily determined if it is actively traded on an established market.
The fair market value of an option that isn't traded on an established market can be readily determined only if all of the following conditions exist. You can transfer the option. You can exercise the option immediately in full.
The fair market value of the option privilege can be readily determined. Option with readily determinable value.
If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. See Restricted Propertylater, for rules on how much income to include and when to include it. However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer doesn't apply to a nonstatutory option.
Option without readily determinable value. If the fair market value of the option isn't readily determinable at the time it is granted to you even if it is determined lateryou don't have income until you exercise or transfer the option. Exercise or transfer of option. When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you don't have to include any amount in income.
When you exercise a nonstatutory stock option that didn't have a readily determinable value at the time the option was granted, the restricted property rules apply to the property received. The amount to include in your income is the difference between the amount you pay for the property and its fair market value when it becomes substantially vested. If it isn't substantially vested at the time you exercise this nonstatutory stock option so that you may have to give the stock backyou don't have to include any amount in income.
You include the difference in income when the option becomes substantially vested. For more information on restricted property, see Restricted Propertylater. Transfer in arm's-length transaction. If you transfer a nonstatutory stock option without a readily determinable value in an arm's-length transaction to an unrelated person, you must include in your income the money or other property you received for the transfer, as if you had exercised the option.
Transfer in non-arm's-length transaction. If you transfer a nonstatutory stock option without a readily determinable value in a non-arm's-length transaction for example, a giftthe option isn't treated as exercised or closed at that time. You must include in your income, as compensation, any money or property received. When the transferee exercises the option, you must include in your income, as compensation, the excess of the fair market value of the stock acquired by the transferee over the sum of the exercise price paid and any amount you included in income at the time you transferred the option.
At the time of the exercise, the transferee recognizes no income and has a basis in the stock acquired equal to the fair market value of the stock. Any transfer of this kind of option to a related person is treated as a non-arm's-length transaction. See Regulations section 1.
Recourse note in satisfaction of the exercise price of an option. If you are an employee, and you issue a recourse note to your employer in satisfaction of the exercise price of an option to acquire your employer's stock, and your employer and you subsequently agree to reduce the stated principal amount of the note, you generally recognize compensation income at the time and in the amount of the reduction.
If you have income from the exercise of nonstatutory stock options, your employer should report the amount to you on Form W-2, box 12, code V.
The employer should show the spread that is, the fair market value of stock over the exercise price of options granted to you for that stock from your exercise of the nonstatutory stock options. Your employer should include this amount in boxes 1, 3 up to the social security wage baseand 5. Your employer should include this amount in box 14 if it is a railroad employer.
If you are a nonemployee spouse and you exercise nonstatutory stock options you received incident to a divorce, the income is reported to you on Form MISC, in box 3. Sale of the stock. There are no special income rules for the sale of stock acquired through the exercise of a nonstatutory stock option. Report the sale as explained in the Instructions for Schedule D Formfor the year of the sale.
You may receive a Form B, reporting the sales proceeds. Your basis in the property you acquire under the option is the amount you pay for it plus any amount you included in income upon grant or exercise of the option. Your holding period begins as of the date you acquired the option, if it had a readily determinable value, or as of the date you exercised or transferred the option, if it had no readily determinable value.
For options granted on or after January 1,the basis information reported to you on Form B won't reflect any amount you included in income upon grant or exercise of the option. For options granted before January 1,any basis information reported to you on Form B may or may not reflect any amount you included in income upon grant or exercise; therefore, the basis may need to be adjusted. Incentive stock options ISOsand Options granted under employee stock purchase plans.
If you receive a statutory stock option, don't include any amount in your income when the option is granted. If you exercise a statutory stock option, don't include any amount in income when you exercise the option. Alternative minimum tax AMT. For the AMT, you must treat stock acquired through the exercise of an ISO as if no special treatment applied. This means that, when your rights in the stock are transferable or no longer subject to a substantial risk of forfeiture, you must include as an adjustment in figuring alternative minimum taxable income the amount by which the fair market value of the stock exceeds the option price.
Enter this adjustment on line 14 of Form Increase your AMT basis in any stock you acquire by exercising the ISO by the amount of the adjustment. However, no adjustment is required if you dispose of the stock in the same year you exercise the option. See Restricted Propertylater, for more information. You have taxable income or a deductible loss when you sell the stock that you bought by exercising the option. Your income or loss is the difference between the amount you paid for the stock the option price and the amount you receive when you sell it.
You generally treat this amount as capital gain or loss and report it as explained in the Instructions for Schedule D Form for the year of the sale. However, you may have ordinary income for the year that you sell or otherwise dispose of the stock in either of the following situations.
You don't satisfy the holding period requirement. You satisfy the holding period requirement if you don't sell the stock until the end of the later of the 1-year period after the stock was transferred to you or the 2-year period after the option was granted. However, you are considered to satisfy the holding period requirement if you sold the stock to comply with conflict-of-interest requirements.
Your holding period for the property you acquire when you exercise an option begins on the day after you exercise the option. Incentive stock options ISOs. If you sell stock acquired by exercising an ISO, you need to determine if you satisfied the holding period requirement. Holding period requirement satisfied. If you sell stock acquired by exercising an ISO and satisfy the holding period requirement, your gain or loss from the sale is capital gain or loss.
Report the sale as explained in the Instructions for Schedule D Form The basis of your stock is the amount you paid for the stock. Holding period requirement not satisfied. If you sell stock acquired by exercising an ISO, don't satisfy the holding period requirement, and have a gain from the sale, the gain is ordinary income up to the amount by which the stock's fair market value when you exercised the option exceeded the option price.
Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss and you don't have any ordinary income. Your employer or former employer should report the ordinary income to you as wages in box 1 of Form W-2, and you must report this ordinary income amount on Formline 7. If your employer or former employer doesn't provide you with a Form W-2, or if the Form W-2 doesn't include the ordinary income in box 1, you still must report the ordinary income as wages on Formline 7, for the year of the sale or other disposition of the stock.
Report the capital gain or loss as explained in the Instructions for Schedule D Form In determining capital gain or loss, your basis is the amount you paid when you exercised the option plus the amount reported as wages. The rest of your gain is capital gain, figured as follows: Employee stock purchase plan. If you sold stock acquired by exercising an option granted under an employee stock purchase plan, you need to determine if you satisfied the holding period requirement.
If you sold stock acquired by exercising an option granted under an employee stock purchase plan, and you satisfy the holding period requirement, determine your ordinary income as follows. Your basis is equal to the option price at the time you exercised your option and acquired the stock. The timing and amount of pay period deductions don't affect your basis.
Option granted at a discount. The excess of the fair market value of the share at the time the option was granted over the option price, or The excess of the fair market value of the share at the time of the disposition or death over the amount paid for the share under the option.
If you don't satisfy the holding period requirement, your ordinary income is the amount by which the stock's fair market value when you exercised the option exceeded the option price. This ordinary income isn't limited to your gain from the sale of the stock. Increase your basis in the stock by the amount of this ordinary income. The difference between your increased basis and the selling price of the stock is a capital gain or loss.
Property is substantially vested when: It is transferable, or It isn't subject to a substantial risk of forfeiture. Property is transferable if you can sell, assign, or pledge your interest in the property to any person other than the transferorand if the person receiving your interest in the property isn't required to give up the property, or its value, if the substantial risk of forfeiture occurs.
Substantial risk of forfeiture. Generally, a substantial risk of forfeiture exists only if rights in property that are transferred are conditioned, directly or indirectly, on the future performance or refraining from performance of substantial services by any person, or on the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial.
Choosing to include in income for year of transfer. You can choose to include the value of restricted property at the time of transfer minus any amount you paid for the property in your income for the year it is transferred.
If you make this choice, the substantial vesting rules don't apply and, generally, any later appreciation in value isn't included in your compensation when the property becomes substantially vested. Your basis for figuring gain or loss when you sell the property is the amount you paid for it plus the amount you included in income as compensation. How to make the choice. You make the choice by filing a written statement with the Internal Revenue Service Center where you file your return. You must file this statement no later than 30 days after the date the property was transferred.
You must give a copy of this statement to the person for whom you performed the services and, if someone other than you received the property, to that person. You must sign the statement and indicate on it that you are making the choice under section 83 b of the Internal Revenue Code. The statement must contain all of the following information. Your name, address, and taxpayer identification number. A description of each property for which you are making the choice. The nature of any restrictions on the property.
Any amount that you paid for the property. A statement that you have provided copies to the appropriate persons. Dividends received on restricted stock. Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on your Form W If they also are reported on a Form DIV, you should list them on Schedule B Form A orwith a statement that you have included them as wages.
Do not include them in the total dividends received. Stock you chose to include in your income. Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends.
You should receive a Form DIV showing these dividends. Do not include the dividends in your wages on your return. Report them as dividends. Sale of property not substantially vested.
These rules apply to the sale or other disposition of property that you didn't choose to include in your income in the year transferred and that isn't substantially vested. If you sell or otherwise dispose of the property in an arm's-length transaction, include in your income as compensation for the year of sale the amount realized minus the amount you paid for the property.
If you exchange the property in an arm's-length transaction for other property that isn't substantially vested, treat the new property as if it were substituted for the exchanged property. The sale or other disposition of a nonstatutory stock option to a related person isn't considered an arm's-length transaction. If you sell the property in a transaction that isn't at arm's length, include in your income as compensation for the year of sale the total of any money you received and the fair market value of any substantially vested property you received on the sale.
In addition, you will have to report income when the original property becomes substantially vested, as if you still held it.
Report as compensation its fair market value minus the total of the amount you paid for the property and the amount included in your income from the earlier sale. Inherited property not substantially vested.
If you inherit property not substantially vested at the time of the decedent's death, any income you receive from the property is considered income in respect of a decedent and is taxed according to the rules for restricted property received for services.
For information about income in respect of a decedent, see Pub. Special Rules for Certain Employees. A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. It must be reported on lines 16a and 16b of Form or on lines 12a and 12b of Form A. Members of Religious Orders. Services performed for the order. If you are performing the services as an agent of the order in the exercise of duties required by the order, don't include in your income the amounts turned over to 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 aren't included in your income. Services performed outside the order. If you are directed to work outside the order, your services aren't an exercise of duties required by the order unless they meet both of the following requirements.
They are the kind of services that are ordinarily the duties of members of the order.