Publication 525 Cat

Home , Itemized deduction, Lucky number, Nonrecourse debt, Ordinary income, Recourse debt

Userid: CPM Schema: tipx Leadpct: 100% Pt. size: 8 Draft Ok to Print AH XSL/XML Fileid: … tions/P525/2020/A/XML/Cycle08/source (Init. & Date) ______Page 1 of 42 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Publication 525 Cat. No. 15047D Contents

Future Developments ...... 1 Department of the Taxable and What's New ...... 1 Treasury Internal Reminders ...... 2 Revenue Nontaxable Service Introduction ...... 2 Income Employee Compensation ...... 3

Special Rules for Certain Employees ...... 15

For use in preparing Business and Investment Income .... 17 2020 Returns Sickness and Injury Benefits ...... 18 Miscellaneous Income ...... 20

Repayments ...... 36

How To Get Tax Help ...... 37

Index ...... 39

Future Developments For the latest information about developments related to Pub. 525, such as legislation enacted after it was published, go to IRS.gov/Pub525.

What's New Exclusion from income tax on a portion of unemployment compensation for 2020. For individuals with adjusted gross income of less than $150,000, up to $10,200 of unemployment compensation is excluded from gross income. In the case of a joint return, up to $10,200 received by each spouse is excluded. (See P.L. 117-2 and section 85(c).) Paycheck Protection Program loan forgiveness. Gross income doesn’t include any amount arising from the forgiveness of a Pay- check Protection Program (PPP) loan, effective for taxable years ending after 3/27/2020. (See P.L. 116–136.) Likewise, gross income does not include any amount arising from the forgiveness of Second Draw PPP loans, effective 12/27/2020. (See P.L. 116–260.) Families First Coronavirus Response Act (FFCRA). The FFCRA, as amended by the COVID-related Tax Relief Act of 2020, provides tax credits for self-employed individuals carry- ing on any trade or business within the meaning of section 1402 of the Internal Revenue Code if the self-employed individual would be entitled to receive paid leave under the FFCRA if the individual were an employee of an employer (other than him or herself). These credits are available for periods of leave taken between April 1, 2020, and March 31, 2021. The Get forms and other information faster and easier at: amounts of these are not included in the gross • IRS.gov (English) • IRS.gov/Korean (한국어) income of the eligible self-employed individual. • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) Emergency financial aid grants. Certain • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (Tiếng Việt) emergency financial aid grants under the CARES Act are excluded from the income of

Apr 06, 2021 Page 2 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

college and university students, effective for for up to 5 years for the qualified stocks re- from income death or disability benefits re- grants made after 3/26/2020. (See P.L. 116– ceived. See Qualified Equity Grants under Em- ceived from the federal Bureau of Justice Assis- 136 and P.L. 116–260.) ployee Compensation, later. tance or death benefits paid by a state program. See section 104(a)(6). Economic impact payments. Any economic Suspension of qualified bicycle commuting impact payments you received are not taxable reimbursement exclusion. For tax years be- Qualified Medicaid waiver payments. Cer- for federal income tax purposes, but they re- ginning after 2017, reimbursement you receive tain payments you receive for providing care to duce your recovery rebate credit. from your employer for the purchase, repair, or an eligible individual in your home under a Other loan forgiveness under the CARES storage of a bicycle you regularly use for travel state's Medicaid waiver program may be exclu- Act. Gross income does not include any between your residence and place of employ- ded from your income under Notice 2014-7. amount arising from the forgiveness of certain ment must be included in your gross income. See also Instructions for Schedule 1 (Form 1040), line 8. loans, emergency Economic Injury Disaster Unemployment compensation. If you re- Loan (EIDL) grants, and certain loan repayment ceived unemployment compensation but did Qualified settlement income. If you're a assistance, each as provided by the CARES not receive Form 1099-G, Certain Government qualified taxpayer, you can contribute all or part Act, effective for tax years ending after Payments, through the mail, you may need to of your qualified settlement income, up to 3/27/2020. (See P.L. 116–136 and P.L. 116– access your information through your state’s $100,000, to an eligible retirement plan, includ- 260.) website to get your electronic Form 1099-G. ing an IRA. Contributions to eligible retirement Deferred compensation contribution limit plans, other than a Roth IRA or a designated Access your online account. You must au- increased. If you participate in a 401(k), Roth contribution, reduce the qualified settle- thenticate your identity. To securely log in to 403(b), or the federal government's Thrift Sav- ment income that you must include in income. your federal tax account, go to IRS.gov/ ings Plan (TSP), the total annual amount you See Exxon Valdez settlement income under Account. You can view the amount you owe, re- can contribute is increased to $19,500 ($26,000 Other Income, later. Also, see Pub. 590-A for view 18 months of payment history, access on- if age 50 or older). This also applies to most 457 more information. line payment options, and create or modify an plans. online payment agreement. You can also ac- Taxpayer identification number (TIN). A TIN Exclusion of income for volunteer firefight- cess your tax records online. is your social security number (SSN), individual ers and emergency medical responders. If taxpayer identification number (ITIN), adoption you are a volunteer firefighter or emergency Achieving a Better Life Experience (ABLE) taxpayer identification number (ATIN), or em- medical responder, you may be able to exclude account. This is a type of savings account for ployer identification number (EIN). from gross income certain rebates or reductions individuals with disabilities and their families. Distributions are tax free if used to pay the ben- Terrorist attacks. You can exclude from in- of state or local property or income taxes and come certain disaster assistance, disability, and up to $50 per month provided by a state or local eficiary's qualified disability expenses. See Pub. 907 for more information. death payments received as a result of a terro- government. For more information, see Volun- rist or military action. For more information, see teer firefighters and emergency medical res- Certain amounts received by wrongfully in- Sickness and Injury Benefits, later; Pub. 3920, ponders.. carcerated individuals. Certain amounts you Tax Relief for Victims of Terrorist Attacks; and Health flexible spending arrangements receive due to a wrongful incarceration may be Pub. 907, Tax Highlights for Persons With Disa- (health FSAs) under cafeteria plans. For tax excluded from gross income. See IRS.gov/ bilities. years beginning in 2020, the dollar limitation un- Individuals/Wrongful-Incarceration-FAQs for more information. Photographs of missing children. The Inter- der section 125(i) on voluntary employee salary nal Revenue Service is a proud partner with the reductions for contributions to health FSAs is Foreign income. If you're a U.S. citizen or res- National Center for Missing & Exploited $2,750. ident alien, you must report income from sour- Children® (NCMEC). Photographs of missing ces outside the United States (foreign income) children selected by the Center may appear in on your tax return unless it’s exempt by U.S. this publication on pages that would otherwise law. This is true whether you reside inside or be blank. You can help bring these children Reminders outside the United States and whether or not home by looking at the photographs and calling Repeal of deduction for alimony payments you receive a Form W-2, Wage and Tax State- 1-800-THE-LOST (1-800-843-5678) if you rec- and corresponding inclusion in gross in- ment, or Form 1099 from the foreign payer. This ognize a child. come. Alimony received will no longer be in- applies to earned income (such as wages and cluded in your income if you entered into a di- tips) as well as unearned income (such as inter- Introduction vorce or separation agreement on or before est, dividends, capital gains, pensions, rents, December 31, 2018, and the agreement is and royalties). You can receive income in the form of money, changed after December 31, 2018, to expressly If you reside outside the United States, you property, or services. This publication dis- provide that alimony received isn't included in may be able to exclude part or all of your for- cusses many kinds of income and explains your income. Alimony received will also not be eign source earned income. For details, see whether they are taxable or nontaxable. It in- included in income if a divorce or separation Pub. 54, Tax Guide for U.S. Citizens and Resi- cludes discussions on employee wages and agreement is entered into after December 31, dent Aliens Abroad. fringe benefits, and income from bartering, part- 2018. For more information, see Pub. 504. Olympic and Paralympic medals and United nerships, S corporations, and royalties. It also Retroactive extension from 2018 through States Olympic Committee (USOC) prize includes information on disability pensions, life 2020 of exclusion of debt discharged from money. If you receive Olympic and Paralympic insurance proceeds, and welfare and other principal residence indebtedness. The Fur- medals and USOC prize money, the value of public assistance benefits. Check the index for ther Consolidated Appropriations Act, 2020, the medals and the amount of the prize money the location of a specific subject. Public Law 116-94 (enacted December 20, may be nontaxable. See the Instructions for In most cases, an amount included in your 2019) retroactively extended the exclusion from Schedule 1 (Form 1040), line 8, at IRS.gov/ income is taxable unless it is specifically ex- income of debt discharged from principal resi- Form1040 for more information. empted by law. Income that is taxable must be dence indebtedness from 2018 through 2020. reported on your return and is subject to tax. In- Public safety officers. A spouse, former come that is nontaxable may have to be shown Forms 1040A and 1040EZ no longer availa- spouse, and child of a public safety officer killed on your tax return but isn’t taxable. ble. Forms 1040A and 1040EZ aren't available in the line of duty can exclude from gross in- to file your 2020 taxes. If you used one of these come survivor benefits received from a govern- Constructively received income. You are forms in the past, you’ll now file Form 1040 or mental section 401(a) plan attributable to the of- generally taxed on income that is available to 1040-SR. ficer's service. See section 101(h). you, regardless of whether it is actually in your Qualified equity grants. For tax years begin- A public safety officer that's permanently possession. ning after 2017, certain qualified employees can and totally disabled or killed in the line of duty A valid check that you received or that was make a new election to defer income taxation and a surviving spouse or child can exclude made available to you before the end of the tax

Page 2 Publication 525 (2020) Page 3 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

year is considered income constructively re- Useful Items ceived in that year, even if you don’t cash the You may want to see: Fair market value (FMV). The FMV of an check or deposit it to your account until the next item of property is the price at which the item would change hands between a willing buyer year. For example, if the postal service tries to Publication deliver a check to you on the last day of the tax and a willing seller, neither being required to buy or sell and both having reasonable knowl- year but you aren’t at home to receive it, you 334 334 Tax Guide for Small Business must include the amount in your income for that edge of the relevant facts.

523 523 Selling Your Home tax year. If the check was mailed so that it Childcare providers. If you provide childcare, couldn’t possibly reach you until after the end of 527 527 Residential Rental Property either in the child's home or in your home or the tax year, and you otherwise couldn’t get the

541 other place of business, the pay you receive funds before the end of the year, you include 541 Partnerships must be included in your income. If you're not the amount in your income for the next tax year. 544 544 Sales and Other Dispositions of an employee, you're probably self-employed Assets Assignment of income. Income received and must include payments for your services on

by an agent for you is income you constructively 550 550 Investment Income and Expenses Schedule C (Form 1040), Profit or Loss From received in the year the agent received it. If you Business. You generally aren’t an employee un- agree by contract that a third party is to receive 554 554 Tax Guide for Seniors less you're subject to the will and control of the person who employs you as to what you're to income for you, you must include the amount in 559 559 Survivors, Executors, and your income when the third party receives it. Administrators do, and how you're to do it.

Example 1. You and your employer agree 575 575 Pension and Annuity Income Babysitting. If you babysit for relatives or that part of your salary is to be paid directly to neighborhood children, whether on a regular 907 907 Tax Highlights for Persons With basis or only periodically, the rules for childcare one of your creditors. You must include that Disabilities amount in your income when your creditor re- providers apply to you. ceives it. 915 915 Social Security and Equivalent Self-employment tax. Whether you're an Railroad Retirement Benefits employee or self-employed person, your in- Prepaid income. In most cases, prepaid income could be subject to self-employment tax. 970 970 Tax Benefits for Education come, such as compensation for future serv- See the Instructions for Schedule C (Form ices, is included in your income in the year you 4681 4681 Canceled Debts, Foreclosures, 1040) and the Instructions for Schedule SE receive it. However, if you use an accrual Repossessions, and Abandonments (Form 1040) if you're self-employed. Also see method of accounting, you can defer prepaid in- Pub. 926 for more information. come you receive for services to be performed Form (and Instructions) before the end of the next tax year. In this case, Bankruptcy. If you filed for bankruptcy under 1040 1040 U.S. Individual Income Tax Return you include the payment in your income as you chapter 11 of the Bankruptcy Code, you must earn it by performing the services. 1040-NR 1040-NR U.S. Nonresident Alien Income allocate your wages and withheld income tax. Tax Return Your Form W-2 will show your total wages and Comments and suggestions. We welcome withheld income tax for the year. On your tax re-

1040-SR 1040-SR U.S. Tax Return for Seniors your comments about this publication and sug- turn, you report the wages and withheld income gestions for future editions. 1099-R 1099-R Distributions From Pensions, tax for the period before you filed for bank- You can send us comments through Annuities, Retirement or ruptcy. Your bankruptcy estate reports the wa- IRS.gov/FormComments. Or, you can write to Profit-Sharing Plans, IRAs, Insurance ges and withheld income tax for the period after the Internal Revenue Service, Tax Forms and Contracts, etc. you filed for bankruptcy. If you receive other in- Publications, 1111 Constitution Ave. NW, formation returns (such as Form 1099-DIV or IR-6526, Washington, DC 20224. W-2 W-2 Wage and Tax Statement Form 1099-INT) that report gross income to Although we can’t respond individually to See How To Get Tax Help at the end of this you, rather than to the bankruptcy estate, you each comment received, we do appreciate your publication for information about getting these must allocate that income. feedback and will consider your comments and publications. The only exception is for purposes of figur- suggestions as we revise our tax forms, instruc- ing your self-employment tax if you're self-em- tions, and publications. Don’t send tax ques- ployed. For that purpose, you must take into ac- tions, tax returns, or payments to the above ad- Employee count all your self-employment income for the dress. year from services performed both before and Getting answers to your tax questions. Compensation after the beginning of the case. If you have a tax question not answered by this You must file a statement with your income publication or the How To Get Tax Help section In most cases, you must include in gross in- tax return stating you filed a chapter 11 bank- at the end of this publication, go to the IRS In- come everything you receive in payment for ruptcy case. The statement must show the allo- teractive Tax Assistant page at IRS.gov/ personal services. In addition to wages, salar- cation and describe the method used to make Help/ITA where you can find topics by using the ies, commissions, fees, and tips, this includes the allocation. For a sample of this statement search feature or viewing the categories listed. other forms of compensation such as fringe and other information, see Notice 2006-83, benefits and stock options. 2006-40 I.R.B. 596, available at IRS.gov/irb/ Getting tax forms, instructions, and pub- 2006-40_IRB#NOT-2006-83. lications. Visit IRS.gov/Forms to download You should receive a Form W-2 from your current and prior-year forms, instructions, and employer or former employer showing the pay publications. you received for your services. Include all your Miscellaneous pay on Form 1040 or 1040-SR, line 1, even if Compensation Ordering tax forms, instructions, and you don’t receive Form W-2, or you receive a publications. Go to IRS.gov/OrderForms to Form W-2 that doesn’t include all pay that This section discusses many types of employee order current forms, instructions, and publica- should be included on the Form W-2. compensation. The subjects are arranged in al- tions; call 800-829-3676 to order prior-year phabetical order. forms and instructions. The IRS will process If you performed services, other than as an your order for forms and publications as soon independent contractor, and your employer Advance commissions and other earnings. as possible. Don’t resubmit requests you’ve al- didn’t withhold social security and Medicare If you receive advance commissions or other ready sent us. You can get forms and publica- taxes from your pay, you must file Form 8919 amounts for services to be performed in the fu- tions faster online. with your Form 1040 or 1040-SR. These wages ture and you're a cash-method taxpayer, you must be included on Form 1040 or 1040-SR, line 1. See Form 8919 for more information.

Publication 525 (2020) Page 3 Page 4 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

must include these amounts in your income in each award by itself would be excluded from in- you previously included in your income. Don’t the year you receive them. come. However, because the $1,750 total value include that part again in your income. Include If you repay unearned commissions or other of the awards is more than $1,600, Ben must in- the rest of the payment in your income in the amounts in the same year you receive them, re- clude $150 ($1,750 − $1,600) in his income. year of payment. duce the amount of unearned commissions in- If your employer gives you a nonnegotiable cluded in your income by the repayment. If you Differential wage payments. This is any pay- unsecured note as payment for your services, repay them in a later tax year, you can deduct ment made by an employer to an individual for payments on the note that are credited toward the repayment as an itemized deduction on any period during which the individual is, for a the principal amount of the note are compensa- your Schedule A (Form 1040), Other Itemized period of more than 30 days, an active duty tion income when you receive them. Deductions, line 16, or you may be able to take member of the uniformed services and repre- a credit for that year. See Repayments, later. sents all or a portion of the wages the individual Severance pay. You must include in income would have received from the employer for that amounts you receive as severance pay and any Allowances and reimbursements. If you re- period. These payments are treated as wages payment for the cancellation of your employ- ceive travel, transportation, or other business and are subject to income tax withholding, but ment contract. expense allowances or reimbursements from not FICA or FUTA taxes. The payments are re- your employer, see Pub. 463. If you're reim- ported as wages on Form W-2. Severance payments are subject to social bursed for moving expenses, see Pub. 521. security and Medicare taxes, income tax Government cost-of-living allowances. withholding, and FUTA tax. Severance pay- Back pay awards. Include in income amounts Most payments received by U.S. Government ments are wages subject to social security and you're awarded in a settlement or judgment for civilian employees for working abroad are taxa- Medicare taxes. As noted in section 15 of Pub. back pay. These include payments made to you ble. However, certain cost-of-living allowances 15, Special Rules for Various Types of Service for damages, unpaid life insurance premiums, are tax free. Pub. 516 explains the tax treatment and Payments, severance payments are also and unpaid health insurance premiums. They of allowances, differentials, and other special subject to income tax withholding and FUTA should be reported to you by your employer on pay you receive for employment abroad. tax. Form W-2. Nonqualified deferred compensation plans. Accrued leave payment. If you're a fed- Bonuses and awards. Bonuses or awards Your employer will report to you the total eral employee and receive a lump-sum pay- you receive for outstanding work are included in amount of deferrals for the year under a non- ment for accrued annual leave when you retire your income and should be shown on your qualified deferred compensation plan. This or resign, this amount will be included as wages Form W-2. These include prizes such as vaca- amount is shown in Form W-2, box 12, using on your Form W-2. tion trips for meeting sales goals. If the prize or code Y. This amount isn’t included in your in- If you resign from one agency and are reem- award you receive is goods or services, you come. ployed by another agency, you may have to re- must include the FMV of the goods or services However, if at any time during the tax year, pay part of your lump-sum annual leave pay- in your income. However, if your employer the plan fails to meet certain requirements, or ment to the second agency. You can reduce merely promises to pay you a bonus or award at isn’t operated under those requirements, all gross wages by the amount you repaid in the some future time, it isn’t taxable until you re- amounts deferred under the plan for the tax same tax year in which you received it. Attach ceive it or it’s made available to you. year and all preceding tax years are included in to your tax return a copy of the receipt or state- your income for the current year. This amount is ment given to you by the agency you repaid to Employee achievement award. If you re- included in your wages shown in Form W-2, explain the difference between the wages on ceive tangible personal property (other than box 1. It’s also shown in Form W-2, box 12, us- your return and the wages on your Forms W-2. cash, a gift certificate, or an equivalent item) as ing code Z. an award for length of service or safety achieve- Outplacement services. If you choose to accept a reduced amount of severance pay so ment, you must generally exclude its value from Nonqualified deferred compensation plans your income. However, the amount you can ex- that you can receive outplacement services of nonqualified entities. In most cases, any (such as training in résumé writing and inter- clude is limited to your employer's cost and compensation deferred under a nonqualified can’t be more than $1,600 ($400 for awards view techniques), you must include the unre- deferred compensation plan of a nonqualified duced amount of the severance pay in income. that aren’t qualified plan awards) for all such entity is included in gross income when there is awards you receive during the year. Your em- no substantial risk of forfeiture of the rights to ployer can tell you whether your award is a Sick pay. Pay you receive from your employer such compensation. For this purpose, a non- while you're sick or injured is part of your salary qualified plan award. Your employer must make qualified entity is one of the following. the award as part of a meaningful presentation, or wages. In addition, you must include in your under conditions and circumstances that don’t 1. A foreign corporation, unless substantially income sick pay benefits received from any of create a significant likelihood of it being dis- all of its income is: the following payers. • A welfare fund. guised pay. a. Effectively connected with the con- However, the exclusion doesn’t apply to the • A state sickness or disability fund. duct of a trade or business in the Uni- • An association of employers or employees. following awards. ted States, or • A length-of-service award if you received it • An insurance company, if your employer for less than 5 years of service or if you re- b. Subject to a comprehensive foreign paid for the plan. ceived another length-of-service award income tax. However, if you paid the premiums on an acci- during the year or the previous 4 years. 2. A partnership, unless substantially all of its dent or health insurance policy, the benefits you • A safety achievement award if you're a income is allocated to persons other than: receive under the policy aren’t taxable. For manager, administrator, clerical employee, more information, see Other Sickness and In- or other professional employee or if more a. Foreign persons for whom the income jury Benefits under Sickness and Injury Bene- than 10% of eligible employees previously isn’t subject to a comprehensive for- fits, later. received safety achievement awards dur- eign income tax, and ing the year. b. Tax-exempt organizations. Social security and Medicare taxes paid by employer. If you and your employer have an Example 2. Ben Green received three em- Note received for services. If your employer agreement that your employer pays your social ployee achievement awards during the year: a gives you a secured note as payment for your security and Medicare taxes without deducting nonqualified plan award of a watch valued at services, you must include the FMV (usually the them from your gross wages, you must report $250, and two qualified plan awards of a stereo discount value) of the note in your income for the amount of tax paid for you as taxable wages valued at $1,000 and a set of golf clubs valued the year you receive it. When you later receive on your tax return. The payment is also treated at $500. Assuming that the requirements for payments on the note, a proportionate part of as wages for figuring your social security and qualified plan awards are otherwise satisfied, each payment is the recovery of the FMV that Medicare taxes and your social security and

Page 4 Publication 525 (2020) Page 5 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Medicare benefits. However, these payments fringe benefits by using either of the following For 2020, health FSAs are subject to a aren’t treated as social security and Medicare rules. $2,750 limit on a salary reduction contribution. wages if you're a household worker or a farm • The general rule: benefits are reported for worker. a full calendar year (January 1–December Health reimbursement arrangement (HRA). 31). If your employer provides an HRA that qualifies Stock appreciation rights. Don’t include a • The special accounting period rule: bene- as an accident or health plan, coverage and re- stock appreciation right granted by your em- fits provided during the last 2 months of the imbursements of your medical care expenses ployer in income until you exercise (use) the calendar year (or any shorter period) are generally aren’t included in your income. right. When you use the right, you're entitled to treated as paid during the following calen- a cash payment equal to the FMV of the corpo- dar year. For example, each year, your Health savings account (HSA). If you’re an ration's stock on the date of use minus the FMV employer reports the value of benefits pro- eligible individual, you and any other person, in- on the date the right was granted. You include vided during the last 2 months of the prior cluding your employer or a family member, can the cash payment in income in the year you use year and the first 10 months of the current make contributions to your HSA. Contributions, the right. year. other than employer contributions, are deductible on your return whether or not you itemize Your employer doesn’t have to use the same Virtual currency. If your employer gives you deductions. Contributions made by your em- accounting period for each fringe benefit, but virtual currency (such as Bitcoin) as payment ployer aren’t included in your income. Distribu- must use the same period for all employees for your services, you must include the FMV of tions from your HSA that are used to pay quali- who receive a particular benefit. the currency in your income. The FMV of virtual fied medical expenses aren’t included in your currency paid as wages is subject to federal in- You must use the same accounting period income. Distributions not used for qualified come tax withholding, Federal Insurance Contri- that you use to report the benefit to claim an medical expenses are included in your income. bution Act (FICA) tax, and Federal Unemploy- employee business deduction (for example, See Pub. 969 for the requirements of an HSA. use of a car). ment Tax Act (FUTA) tax and must be reported Contributions by a partnership to a bona fide on Form W-2. Notice 2014-21, 2014-16 I.R.B. partner's HSA aren’t contributions by an em- Form W-2. Your employer must include all tax- 938, describes how virtual currency is treated ployer. The contributions are treated as a distri- able fringe benefits in box 1 of Form W-2 as wa- for federal tax purposes and is available at bution of money and aren’t included in the part- ges, tips, and other compensation, and, if appli- IRS.gov/irb/2014-16_IRB#NOT-2014-21. For ner's gross income. Contributions by a cable, in boxes 3 and 5 as social security and further information, see IRS.gov/ partnership to a partner's HSA for services ren- Medicare wages. Although not required, your virtualcurrency.. dered are treated as guaranteed payments that employer may include the total value of fringe are includible in the partner's gross income. In benefits in box 14 (or on a separate statement). both situations, the partner can deduct the con- Fringe Benefits However, if your employer provided you with a tribution made to the partner's HSA. vehicle and included 100% of its annual lease Fringe benefits received in connection with the value in your income, the employer must sepa- Contributions by an S corporation to a performance of your services are included in rately report this value to you in box 14 (or on a 2%-shareholder-employee's HSA for services your income as compensation unless you pay separate statement). rendered are treated as guaranteed payments FMV for them or they’re specifically excluded by and are includible in the shareholder-employee's gross income. The shareholder-employee law. Refraining from the performance of serv- Accident or Health Plan ices (for example, under a covenant not to com- can deduct the contribution made to the shareholder-employee's HSA. pete) is treated as the performance of services In most cases, the value of accident or health for purposes of these rules. plan coverage provided to you by your em- Qualified HSA funding distribution. You See Valuation of Fringe Benefits, later in this ployer isn’t included in your income. Benefits can make a one-time distribution from your indi- discussion, for information on how to determine you receive from the plan may be taxable, as vidual retirement arrangement (IRA) to an HSA the amount to include in income. explained under Sickness and Injury Benefits, and you generally won’t include any of the dis- later. tribution in your income. See Pub. 590-B for the Recipient of fringe benefit. You're the recipi- requirements for these qualified HSA funding ent of a fringe benefit if you perform the serv- For information on the items covered in this distributions. ices for which the fringe benefit is provided. section, other than Long-term care coverage, You're considered to be the recipient even if it’s see Pub. 969. Adoption Assistance given to another person, such as a member of your family. An example is a car your employer Long-term care coverage. Contributions by You may be able to exclude from your income gives to your spouse for services you perform. your employer to provide coverage for amounts paid or expenses incurred by your em- The car is considered to have been provided to long-term care services generally aren’t inclu- ployer for qualified adoption expenses in con- you and not to your spouse. ded in your income. However, contributions nection with your adoption of an eligible child. made through a flexible spending or similar ar- You don’t have to be an employee of the See the Instructions for Form 8839 for more in- rangement (such as a cafeteria plan) must be provider to be a recipient of a fringe benefit. If formation. included in your income. This amount will be re- you're a partner, a director, or an independent ported as wages in box 1 of Form W-2. contractor, you can also be the recipient of a Adoption benefits are reported by your em- fringe benefit. Archer MSA contributions. Contributions by ployer in box 12 of Form W-2 with code T. They your employer to your Archer MSA generally are also included as social security and Medi- Provider of benefit. Your employer or another care wages in boxes 3 and 5. However, they person for whom you perform services is the aren’t included in your income. Their total will be reported in box 12 of Form W-2 with code R. aren’t included as wages in box 1. To determine provider of a fringe benefit regardless of the taxable and nontaxable amounts, you must whether that person actually provides the fringe You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance complete Part III of Form 8839. File the form benefit to you. The provider can be a client or with your return. customer of an independent contractor. Contracts. File the form with your return.

Accounting period. You must use the same Health flexible spending arrangement Athletic Facilities accounting period your employer uses to report (health FSA). If your employer provides a If your employer provides you with the free or your taxable noncash fringe benefits. Your em- health FSA that qualifies as an accident or low-cost use of an employer-operated gym or ployer has the option to report taxable noncash health plan, the amount of your salary reduction, and reimbursements of your medical care other athletic club on your employer's premises, expenses, in most cases aren’t included in your the value isn’t included in your compensation. income. The gym must be used primarily by employees, their spouses, and their dependent children.

Publication 525 (2020) Page 5 Page 6 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

If your employer pays for a fitness program Employee Discounts Accidental death benefits. Insurance that provided to you at an off-site resort hotel or ath- provides accidental or other death benefits but letic club, the value of the program is included If your employer sells you property or services doesn't provide general death benefits (for ex- in your compensation. at a discount, you may be able to exclude the ample, travel insurance) isn’t group-term life in- amount of the discount from your income. The surance. De Minimis (Minimal) Benefits exclusion applies to discounts on property or services offered to customers in the ordinary Former employer. If your former employer If your employer provides you with a product or course of the line of business in which you provided more than $50,000 of group-term life service and the cost of it is so small that it would work. However, it doesn’t apply to discounts on insurance coverage during the year, the amount be unreasonable for the employer to account real property or property commonly held for in- included in your income is reported as wages in for it, the value isn’t included in your income. In vestment (such as stocks or bonds). box 1 of Form W-2. Also, it's shown separately most cases, the value of benefits such as dis- in box 12 with code C. Box 12 will also show the counts at company cafeterias, cab fares home The exclusion is limited to the price charged amount of uncollected social security and Medi- when working overtime, occasional personal nonemployee customers multiplied by the fol- care taxes on the excess coverage, with codes use of an employer’s copying machine (where lowing percentage. M and N. You must pay these taxes with your at least 85% of the use of the machine is for • For a discount on property, your employ- income tax return. Include them on Schedule 2 business), and company picnics aren’t included er's gross profit percentage (gross profit (Form 1040), line 8. For more information, see in your income. Also, see Employee Discounts, divided by gross sales) on all property sold the Instructions for Forms 1040 and 1040-SR. later. during the employer's previous tax year. (Ask your employer for this percentage.) Two or more employers. Your exclusion for Holiday gifts. If your employer gives you a tur- • For a discount on services, 20% (0.20). employer-provided group-term life insurance key, ham, or other item of nominal value at coverage can’t exceed the cost of $50,000 of Christmas or other holidays, don’t include the Financial Counseling Fees coverage, whether the insurance is provided by value of the gift in your income. However, if your a single employer or multiple employers. If two or more employers provide insurance coverage employer gives you cash, a gift certificate, or a Financial counseling fees paid for you by your that totals more than $50,000, the amounts re- similar item that you can easily exchange for employer are included in your income and must ported as wages on your Forms W-2 won’t be cash, you include the value of that gift as extra be reported as part of wages. Fees for tax or incorrect. You must figure how much to include in salary or wages regardless of the amount investment counseling are miscellaneous item- your income. Reduce the amount you figure by volved. ized deductions and are no longer deductible. any amount reported with code C in box 12 of your Forms W-2, add the result to the wages re- Qualified retirement planning services paid Dependent Care Benefits ported in box 1, and report the total on your re- for you by your employer may be excluded from turn. If your employer provides dependent care ben- your income. For more information, see Retire- ment Planning Services, later. efits under a qualified plan, you may be able to Figuring the taxable cost. Use the following exclude these benefits from your income. De- worksheet to figure the amount to include in pendent care benefits include: Employer-Provided Group-Term your income. Amounts your employer pays directly to ei- • Life Insurance If you pay any part of the cost of the insur- ther you or your care provider for the care ance, your entire payment reduces, dollar for of your qualifying person while you work, In most cases, the cost of up to $50,000 of dollar, the amount you would otherwise include The FMV of care in a daycare facility provi- • group-term life insurance coverage provided to in your income. However, you can’t reduce the ded or sponsored by your employer, and you by your employer (or former employer) isn’t amount to include in your income by: • Pre-tax contributions you made under a included in your income. However, you must in- • Payments for coverage in a different tax dependent care FSA. clude in income the cost of employer-provided year; insurance that is more than the cost of $50,000 Payments for coverage through a cafeteria The amount you can exclude is limited to the • of coverage reduced by any amount you pay to- plan, unless the payments are after-tax lesser of: ward the purchase of the insurance. contributions; or • The total amount of dependent care bene- Payments for coverage not taxed to you fits you received during the year, • For exceptions to this rule, see Entire cost because of the exceptions discussed later • The total amount of qualified expenses you excluded and Entire cost taxed, later. under Entire cost excluded. incurred during the year, • Your earned income, If your employer provided more than • Your spouse's earned income, or $50,000 of coverage, the amount included in • $5,000 ($2,500 if married filing separately). your income is reported as part of your wages in box 1 of Form W-2. Also, it's shown separately Your employer must show the total amount in box 12 with code C. of dependent care benefits provided to you during the year under a qualified plan in box 10 of Group-term life insurance. This insurance is Form W-2. Your employer will also include any term life insurance protection (insurance for a dependent care benefits over $5,000 in your fixed period of time) that: wages shown in box 1 of Form W-2. • Provides a general death benefit, • Is provided to a group of employees, To claim the exclusion, you must complete • Is provided under a policy carried by the Part III of Form 2441. See the Instructions for employer, and Form 2441 for more information. • Provides an amount of insurance to each employee based on a formula that pre- Educational Assistance vents individual selection.

You can exclude from your income up to $5,250 Permanent benefits. If your group-term life of qualified employer-provided educational as- insurance policy includes permanent benefits, sistance. For more information, see Pub. 970. 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.

Page 6 Publication 525 (2020) Page 7 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Table 1. Cost of $1,000 of Worksheet 1. Figuring the Group-Term Life Insurance for 1 Worksheet 1. Figuring the Cost of Group-Term Life Month Cost of Group-Term Life Insurance To Include in Age Cost Insurance To Include in Income Under 25 ...... $ .05 Income—Illustrated Keep for Your Records 25 through 29 ...... 06 Keep for Your Records

1. Enter the total amount of 30 through 34 ...... 08 1. Enter the total amount of your insurance coverage 35 through 39 ...... 09 your insurance coverage from your from your employer(s) ...... 1. 40 through 44 ...... 10 employer(s) ...... 1. 80,000 45 through 49 ...... 15 2. Limit on exclusion for 2. Limit on exclusion for 50 through 54 ...... 23 employer-provided employer-provided 55 through 59 ...... 43 group-term life insurance group-term life insurance coverage ...... 2. 50,000 50,000 coverage ...... 2. 60 through 64 ...... 66 3. Subtract line 2 from 65 through 69 ...... 1.27 line 1 ...... 3. 30,000 3. Subtract line 2 from 4. Divide line 3 by $1,000. 70 and above ...... 2.06 line 1 ...... 3. Figure to the nearest tenth ...... 4. 30.0 4. Divide line 3 by $1,000. Example 3. You're 51 years old and work 5. Go to Table 1. Using your Figure to the nearest for employers A and B. Both employers provide age on the last day of the tax tenth ...... 4. group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with year, find your age group in the left column, and enter the 5. Go to Table 1. Using your employer A and $45,000 with employer B. You cost from the column on the age on the last day of the pay premiums of $4.15 a month under the employer B group plan. You figure the amount to right for your age tax year, find your age include in your income as follows. group ...... 5. .23 group in the left column, and enter the cost from the 6. Multiply line 4 by 6.90 column on the right for your line 5 ...... 6. age group ...... 5. 7. Enter the number of full months of coverage at this 12 6. Multiply line 4 by cost ...... 7. line 5 ...... 6. 8. Multiply line 6 by line 7 ...... 8. 82.80 7. Enter the number of full 9. Enter the months of coverage at this premiums you paid cost ...... 7. per month ..... 9. 4.15 10. Enter the number 8. Multiply line 6 by of months you paid line 7 ...... 8. the premiums ..... 10. 12 9. Enter the 11. Multiply line 9 by premiums you line 10 ...... 11. 49.80 paid per 12. Subtract line 11 from line 8. month ...... 9. Include this amount in your income as 10. Enter the number wages ...... 12. 33.00 of months you paid the The total amount to include in income for the premiums ..... 10. cost of excess group-term life insurance is $33. Neither employer provided over $50,000 insur- 11. Multiply line 9 by ance coverage, so the wages shown on your

line 10 ...... 11. Forms W-2 don't include any part of that $33. You must add it to the wages shown on your 12. Subtract line 11 from line 8. Forms W-2 and include the total on your return. Include this amount in your income as Entire cost excluded. You aren't taxed on the wages ...... 12. cost of group-term life insurance if any of the following circumstances apply. 1. You’re permanently and totally disabled and have ended your employment. 2. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. 3. 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

Publication 525 (2020) Page 7 Page 8 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

charitable contribution for naming a chari- spouse, or any of your dependents by, or on be- Retirement Planning Services table organization as the beneficiary of half of, the institution or center for use as a your policy.) home. The lodging must be located on or near a If your employer has a qualified retirement plan, campus of the educational institution or aca- qualified retirement planning services provided 4. The plan existed on January 1, 1984, and: demic health center. to you (and your spouse) by your employer a. You retired before January 2, 1984, aren't included in your income. Qualified serv- and were covered by the plan when Adequate rent. The amount of rent you ices include retirement planning advice, infor- you retired; or pay for the year for qualified campus lodging is mation about your employer's retirement plan, considered adequate if it's at least equal to the and information about how the plan may fit into b. You reached age 55 before January lesser of: your overall individual retirement income plan. 2, 1984, and were employed by the • 5% of the appraised value of the lodging, You can't exclude the value of any tax prepara- employer or its predecessor in 1983. or tion, accounting, legal, or brokerage services • The average of rentals paid by individuals provided by your employer. Also, see Financial Entire cost taxed. You’re taxed on the entire (other than employees or students) for Counseling Fees, earlier. cost of group-term life insurance if either of the comparable lodging held for rent by the ed- following circumstances applies. ucational institution. • The insurance is provided by your em- Transportation ployer through a qualified employees' trust, If the amount you pay is less than the lesser of such as a pension trust or a qualified annu- these amounts, you must include the difference If your employer provides you with a qualified ity plan. in your income. transportation fringe benefit, it can be excluded • You’re a key employee and your employ- The lodging must be appraised by an inde- from your income, up to certain limits. A quali- er's plan discriminates in favor of key em- pendent appraiser and the appraisal must be fied transportation fringe benefit is: ployees. reviewed on an annual basis. • Transportation in a commuter highway vehicle (such as a van) between your home Example 4. Carl Johnson, a sociology pro- Meals and Lodging and work place, fessor for State University, rents a home from • A transit pass, or the university that is qualified campus lodging. • Qualified parking. You don't include in your income the value of The house is appraised at $200,000. The aver- meals and lodging provided to you and your age rent paid for comparable university lodging Cash reimbursement by your employer for family by your employer at no charge if the fol- by persons other than employees or students is these expenses under a bona fide reimburse- lowing conditions are met. $14,000 a year. Carl pays an annual rent of ment arrangement is also excludable. However, 1. The meals are: $11,000. Carl doesn't include in his income any cash reimbursement for a transit pass is exclud- rental value because the rent he pays equals at able only if a voucher or similar item that can be a. Furnished on the business premises least 5% of the appraised value of the house exchanged only for a transit pass isn't readily of your employer, and (5% × $200,000 = $10,000). If Carl paid annual available for direct distribution to you. b. Furnished for the convenience of your rent of only $8,000, he would have to include employer. $2,000 in his income ($10,000 − $8,000). Exclusion limit. The exclusion for commuter vehicle transportation and transit pass fringe 2. The lodging is: Moving Expense Reimbursements benefits can't be more than $270 a month. a. Furnished on the business premises The exclusion for the qualified parking fringe of your employer, For tax years 2018 through 2025, reimburse- benefit can't be more than $270 a month. ments for certain moving expenses are no lon- b. Furnished for the convenience of your If the benefits have a value that is more than ger excluded from the gross income of nonmili- employer, and these limits, the excess must be included in tary taxpayers. your income. c. A condition of your employment. (You must accept it in order to be able to No-Additional-Cost Services Commuter highway vehicle. This is a high- properly perform your duties.) way vehicle that seats at least six adults (not in- The value of services you receive from your em- cluding the driver). At least 80% of the vehicle's You also don't include in your income the ployer for free, at cost, or for a reduced price mileage must reasonably be expected to be: value of meals or meal money that qualifies as a isn't included in your income if your employer: • For transporting employees between their minimal fringe benefit. See De Minimis (Mini- • Offers the same service for sale to custom- homes and workplace, and mal) Benefits, earlier. ers in the ordinary course of the line of • On trips during which employees occupy at business in which you work, and least half of the vehicle's adult seating ca- Faculty lodging. If you're an employee of an • Doesn’t have a substantial additional cost pacity (not including the driver). educational institution or an academic health (including any sales income given up) to center and you're provided with lodging that provide you with the service (regardless of Transit pass. This is any pass, token, fare- doesn't meet the three conditions given earlier, what you paid for the service). card, voucher, or similar item entitling a person you may still not have to include the value of the to ride mass transit (whether public or private) lodging in income. However, the lodging must In most cases, no-additional-cost services free or at a reduced rate or to ride in a com- be qualified campus lodging, and you must pay are excess capacity services, such as airline, muter highway vehicle operated by a person in an Adequate rent. bus, or train tickets, hotel rooms, and telephone the business of transporting persons for compensation. Academic health center. This is an organ- services. ization that meets the following conditions. Qualified parking. This is parking provided to Its principal purpose or function is to pro- Example 5. You're employed as a flight at- • an employee at or near the employer's place of vide medical or hospital care or medical tendant for a company that owns both an airline business. It also includes parking provided on education or research. and a hotel chain. Your employer allows you to or near a location from which the employee It receives payments for graduate medical take personal flights (if there is an unoccupied • commutes to work by mass transit, in a com- education under the Social Security Act. seat) and stay in any one of their hotels (if there muter highway vehicle, or by car pool. It doesn't One of its principal purposes or functions is is an unoccupied room) at no cost to you. The • include parking at or near the employee's to provide and teach basic and clinical value of the personal flight isn't included in your home. medical science and research using its income. However, the value of the hotel room is own faculty. included in your income because you don't work in the hotel business. Qualified campus lodging. Qualified campus lodging is lodging furnished to you, your

Page 8 Publication 525 (2020) Page 9 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Tuition Reduction you would have to pay a third party to lease the contributions in your income as wages for the same or a similar vehicle on the same or com- tax year in which the contributions are made. You can exclude a qualified tuition reduction parable terms in the same geographic area However, if your interest in the plan isn't trans- from your income. This is the amount of a re- where you use the vehicle. An example of a ferable or is subject to a substantial risk of for- duction in tuition: comparable lease term is the amount of time feiture (you have a good chance of losing it) at • For education (below graduate level) fur- the vehicle is available for your use, such as a the time of the contribution, you don't have to in- nished by an educational institution to an 1-year period. The value can't be determined by clude the value of your interest in your income employee, former employee who retired or multiplying a cents-per-mile rate times the num- until it's transferable or is no longer subject to a became disabled, or his or her spouse and ber of miles driven unless you prove the vehicle substantial risk of forfeiture. dependent children; could have been leased on a cents-per-mile ba- For information on distributions from • For education furnished to a graduate stu- sis. See Notice 2021–7 for more information on TIP retirement plans, see Pub. 575 (or Pub. dent at an educational institution if the temporary relief for employers and employees 721 if you’re a federal employee or re- graduate student is engaged in teaching or using the automobile lease valuation rule to de- tiree). research activities for that institution; or termine the value of an employer-provided vehi- • Representing payment for teaching, re- cle in 2020 or 2021. search, or other services if you receive the Elective Deferrals amount under the National Health Service Flights on employer-provided aircraft. Corps Scholarship Program or the Armed Under the general valuation rules, if your flight on an employer-provided piloted aircraft is pri- If you’re covered by certain kinds of retirement Forces Health Professions Scholarship plans, you can choose to have part of your and Financial Assistance program. marily personal and you control the use of the aircraft for the flight, the value is the amount it compensation contributed by your employer to For more information, see Pub. 970. would cost to charter the flight from a third a retirement fund, rather than have it paid to party. you. The amount you set aside (called an elec- Working Condition Benefits If there is more than one employee on the tive deferral) is treated as an employer contribu- flight, the cost to charter the aircraft must be tion to a qualified plan. An elective deferral, other than a designated Roth contribution (dis- If your employer provides you with a product or divided among those employees. The division cussed later), isn't included in wages subject to service and the cost of it would have been al- must be based on all the facts, including which income tax at the time contributed. However, lowable as a business or depreciation deduc- employee or employees control the use of the it’s included in wages subject to social security tion if you paid for it yourself, the cost isn't inclu- aircraft. and Medicare taxes. ded in your income. Special valuation rules. Generally, you can Example 6. You work as an engineer and use a special valuation rule for a fringe benefit Elective deferrals include elective contribu- your employer provides you with a subscription only if your employer uses the rule. If your em- tions to the following retirement plans. to an engineering trade magazine. The cost of ployer uses a special valuation rule, you can't 1. Cash or deferred arrangements (section the subscription isn't included in your income use a different special rule to value that benefit. 401(k) plans). because the cost would have been allowable to You can always use the general valuation rule you as a business deduction if you had paid for discussed earlier, based on facts and circum- 2. The TSP for federal employees. the subscription yourself. stances, even if your employer uses a special 3. Salary reduction simplified employee pen- rule. sion plans (SARSEP plans). Valuation of Fringe Benefits If you and your employer use a special valuation rule, you must include in your income the 4. Savings incentive match plans for employ- If a fringe benefit is included in your income, the amount your employer determines under the ees (SIMPLE plans). amount included is generally its value deter- special rule minus the sum of: 5. Tax-sheltered annuity plans (section mined under the general valuation rule or under 1. Any amount you repaid your employer, 403(b) plans). the special valuation rules. For an exception, plus see Employer-Provided Group-Term Life Insur- 6. Section 501(c)(18)(D) plans. (But see Re- ance, earlier. 2. Any amount specifically excluded from in- porting by employer, later.) come by law. 7. Section 457 plans. General valuation rule. You must include in The special valuation rules are the following. your income the amount by which the FMV of • The automobile lease rule. Qualified automatic contribution arrange- the fringe benefit is more than the sum of: • The vehicle cents-per-mile rule. ments. Under a qualified automatic contribu- 1. The amount, if any, you paid for the bene- • The commuting rule. tion arrangement, your employer can treat you fit, plus • The unsafe conditions commuting rule. as having elected to have a part of your com- • The employer-operated eating-facility rule. pensation contributed to a section 401(k) plan. 2. The amount, if any, specifically excluded You’re to receive written notice of your rights from your income by law. For more information on these rules, see and obligations under the qualified automatic Pub. 15-B. contribution arrangement. The notice must ex- If you pay FMV for a fringe benefit, no amount is For information on the noncommercial flight plain: included in your income. and commercial flight valuation rules, see sec- • Your rights to elect not to have elective Fringe benefit FMV. The FMV of a fringe tions 1.61-21(g) and 1.61-21(h) of the regula- contributions made, or to have contribu- benefit is determined by all the facts and cir- tions. tions made at a different percentage; and cumstances. It’s the amount you would have to • How contributions made will be invested in pay a third party to buy or lease the benefit. Retirement Plan the absence of any investment decision by This is determined without regard to: Contributions you. • Your perceived value of the benefit, or You must be given a reasonable period of • The amount your employer paid for the Your employer's contributions to a qualified re- time after receipt of the notice and before the benefit. tirement plan for you aren’t included in income first elective contribution is made to make an Employer-provided vehicles. If your em- at the time contributed. (Your employer can tell election with respect to the contributions. ployer provides a car (or other highway motor you whether your retirement plan is qualified.) Overall limit on deferrals. For 2020, you vehicle) to you, your personal use of the car is However, the cost of life insurance coverage in- shouldn't have deferred more than a total of usually a taxable noncash fringe benefit. cluded in the plan may have to be included. $19,500 of contributions to the plans listed in Under the general valuation rules, the value (1) through (3), earlier, unless you are 50 or of an employer-provided vehicle is the amount If your employer pays into a nonqualified plan for you, you must generally include the older. The specific plan limits for the plans listed

Publication 525 (2020) Page 9 Page 10 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

in (4) through (7), earlier, are discussed later. Amounts you defer under a section 501(c)(18) Catch-up contributions. You can gener- Amounts deferred under specific plan limits are plan count toward the overall limit ($19,500 in ally have additional elective deferrals made to part of the overall limit on deferrals. 2020) and may affect the amount you can defer your governmental section 457 plan if: Your employer or plan administrator should under other elective deferral plans. • You reached age 50 by the end of the apply the proper annual limit when figuring your year, and plan contributions. However, you’re responsible Limit for deferrals under section 457 plans. • No other elective deferrals can be made for monitoring the total you defer to ensure that If you're a participant in a section 457 plan (a for you to the plan for the year because of the deferrals aren't more than the overall limit. deferred compensation plan for employees of limits or restrictions. state or local governments or tax-exempt or- If you qualify, your limit can be the lesser of your ganizations), you should have deferred no more Catch-up contributions. You may be allowed includible compensation or $19,500, plus than the lesser of your includible compensation catch-up contributions (additional elective de- $6,500. However, if you're within 3 years of re- or $19,500 in 2020. However, if you're within 3 ferrals) if you're age 50 or older by the end of tirement age and your plan provides the in- years of normal retirement age, you may be al- your tax year. For 2020, the catch-up limit for creased limit, discussed earlier, that limit may lowed an increased limit if the plan allows it. section 401(k) and 403(b) plans, the TSP, SAR- be higher. SEP plans, and governmental section 457 See Increased limit, later. plans is $6,500. For SIMPLE plans, it’s $3,000. Includible compensation. Generally, this Designated Roth contributions. Employers For more information about catch-up contri- is your Form W-2 wages plus elective deferrals. with section 401(k) plans, section 403(b) plans, butions to: In most cases, it includes all the following pay- and governmental section 457 plans can create • Section 401(k) plans, see Elective Defer- ments. qualified Roth contribution programs so that you rals in chapter 4 of Pub. 560; may elect to have part or all of your elective de- • SARSEPs, see Salary Reduction Simpli- 1. Wages and salaries. ferrals to the plan designated as after-tax Roth fied Employee Pensions in chapter 2 of 2. Fees for professional services. contributions. Designated Roth contributions Pub. 560; are treated as elective deferrals, except that • SIMPLE plans, see SIMPLE Plans in chap- 3. The value of any employer-provided quali- they're included in income. Your retirement plan ter 3 of Pub. 560; and fied transportation fringe benefit (defined must maintain separate accounts and record- • Section 457 plans, see Limit for deferrals under Transportation, earlier) that isn't in- keeping for the designated Roth contributions. under section 457 plans, later. cluded in your income. Qualified distributions from a Roth account 4. Other amounts received (cash or non- aren't included in income. A distribution made Limit for deferrals under SIMPLE plans. If cash) for personal services you per- before the end of the 5-tax-year period begin- you're a participant in a SIMPLE plan, you gen- formed, including, but not limited to, the ning with the first tax year for which you made a erally shouldn't have deferred more than following items. designated Roth contribution to the account $13,500 in 2020. Amounts you defer under a isn't a qualified distribution. SIMPLE plan count toward the overall limit a. Commissions and tips. ($19,500 for 2020) and may affect the amount b. Fringe benefits. Reporting by employer. Your employer gen- you can defer under other elective deferral erally shouldn't include elective deferrals in your plans. c. Bonuses. wages in box 1 of Form W-2. Instead, your em- 5. Employer contributions (elective deferrals) ployer should mark the Retirement plan check- Limit for tax-sheltered annuities. If you're a to the following. box in box 13 and show the total amount defer- participant in a tax-sheltered annuity plan (sec- red in box 12. tion 403(b) plan), the limit on elective deferrals a. The section 457 plan. for 2020 is generally $19,500. However, if you Section 501(c)(18)(D) contributions. b. Qualified cash or deferred arrange- have at least 15 years of service with a public Wages shown in box 1 of Form W-2 shouldn't ments (section 401(k) plans) that school system, a hospital, a home health serv- have been reduced for contributions you made aren't included in your income. ice agency, a health and welfare service to a section 501(c)(18)(D) plan. The amount agency, a church, or a convention or associa- c. A SARSEP plan. you contributed should be identified with code tion of churches (or associated organization), H in box 12. You may deduct the amount defer- the limit on elective deferrals is increased by the d. A tax-sheltered annuity (section red subject to the limits that apply. Include your least of the following amounts. 403(b) plan). deduction in the total on Schedule 1 (Form 1040), line 22. Enter the amount and “501(c) 1. $3,000. e. A SIMPLE plan. (18)(D)” on the dotted line next to line 22. 2. $15,000, reduced by the sum of: f. A section 125 cafeteria plan. Designated Roth contributions. These a. The additional pre-tax elective defer- Instead of using the amounts listed earlier to contributions are elective deferrals but are in- rals made in earlier years because of determine your includible compensation, your cluded in your wages in box 1 of Form W-2. this rule, plus employer can use any of the following amounts. Designated Roth contributions to a section • Your wages as defined for income tax with- b. The aggregate amount of designated 401(k) plan are reported using code AA in holding purposes. box 12, or, for section 403(b) plans, code BB in Roth contributions permitted for prior • Your wages as reported in box 1 of Form tax years because of this rule. box 12. Designated Roth contributions to a gov- W-2. ernmental section 457 plan are reported using 3. $5,000 times the number of your years of • Your wages that are subject to social se- code EE in box 12. service for the organization, minus the to- curity withholding (including elective defer- tal elective deferrals made by your em- rals). Excess deferrals. If your deferrals exceed the ployer on your behalf for earlier years. Increased limit. During any, or all, of the limit, you must notify your plan by the date required by the plan. If the plan permits, the ex- If you qualify for the 15-year rule, your elec- last 3 years ending before you reach normal re- cess amount will be distributed to you. If you tive deferrals under this limit can be as high as tirement age under the plan, your plan may pro- participate in more than one plan, you can have $22,500 for 2020. vide that your limit is the lesser of: the excess paid out of any of the plans that per- For more information, see Pub. 571. 1. Twice the annual limit ($39,000 for 2020), mit these distributions. You must notify each or plan by the date required by that plan of the Limit for deferral under section 501(c)(18) 2. The basic annual limit plus the amount of amount to be paid from that particular plan. The plans. If you're a participant in a section plan must then pay you the amount of the ex- 501(c)(18) plan (a trust created before June 25, the basic limit not used in prior years (only allowed if not using age 50-or-over cess, along with any income earned on that 1959, funded only by employee contributions), amount, by April 15 of the following year. you should have deferred no more than the catch-up contributions). lesser of $7,000 or 25% of your compensation.

Page 10 Publication 525 (2020) Page 11 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

You must include the excess deferral in your Excess Contributions authority as a medium of exchange,” and that income for the year of the deferral. File Form employee stock options aren’t “money remuner- 1040 or 1040-SR to add the excess deferral If you're a highly compensated employee, the ation” subject to the Railroad Retirement Tax amount to your wages on line 1. total of your elective deferrals made for you for Act (RRTA). Tier 1 and Tier 2 taxes aren’t with- any year under a section 401(k) plan or SAR- held when employees covered by the RRTA ex- Excess not distributed. If you don't take SEP plan may be limited by the average defer- ercise stock options. Federal income tax must out the excess amount, you can't include it in rals, as a percentage of pay, made by all eligi- still be withheld on taxable compensation from the cost of the contract even though you inclu- ble non-highly compensated employees. railroad employees exercising their options. If ded it in your income. Therefore, you're taxed you receive an option to buy or sell stock or twice on the excess deferral left in the If you contributed more to the plan than al- other property as payment for your services, plan—once when you contribute it, and again lowed, the excess contributions may be distrib- you may have income when you receive the op- when you receive it as a distribution (unless the uted to you. You must include the distribution in tion (the grant), when you exercise the option excess deferral was a designated Roth contri- your income as wages on Form 1040 or (use it to buy or sell the stock or other property), bution). 1040-SR, line 1. or when you sell or otherwise dispose of the op- Excess distributed to you. If you take out tion or property acquired through exercise of the excess after the year of the deferral and you If you receive a corrective distribution of ex- the option. The timing, type, and amount of in- receive the corrective distribution by April 15 of cess contributions (and allocable income), it's come inclusion depend on whether you receive the following year, don't include it in income included in your income in the year of the distri- a nonstatutory stock option or a statutory stock again in the year you receive it. If you receive it bution. The allocable income is the amount of option. Your employer can tell you which kind of later, you must include it in income in both the gain or loss through the end of the plan year for option you hold. year of the deferral and the year you receive it which the contribution was made that is alloca- (unless the excess deferral was a designated ble to the excess contributions. You should re- Nonstatutory Stock Options Roth contribution). Any income on the excess ceive a Form 1099-R for the year the excess deferral taken out is taxable in the tax year in contributions are distributed to you. Add the dis- Grant of option. If you're granted a nonstatu- which you take it out. If you take out part of the tribution to your wages for that year. tory stock option, you may have income when excess deferral and the income on it, allocate Even though a corrective distribution of you receive the option. The amount of income the distribution proportionately between the ex- excess contributions is reported on to include and the time to include it depend on cess deferral and the income. Form 1099-R, it isn't otherwise treated whether the FMV of the option can be readily You should receive a Form 1099-R for the as a distribution from the plan. It can't be rolled determined. The FMV of an option can be read- year in which the excess deferral is distributed over into another plan, and it isn't subject to the ily determined if it’s actively traded on an estab- to you. Use the following rules to report a cor- additional tax on early distributions. lished market. rective distribution shown on Form 1099-R for The FMV of an option that isn't traded on an 2020. established market can be readily determined • If the distribution was for a 2020 excess Excess Annual Additions only if all of the following conditions exist. deferral, your Form 1099-R should have • You can transfer the option. code 8 in box 7. Add the excess deferral The amount contributed in 2020 to a defined • You can exercise the option immediately in amount to your wages on your 2020 tax re- contribution plan is generally limited to the full. turn. lesser of 100% of your compensation or • The option or the property subject to the • If the distribution was for a 2020 excess $57,000. Under certain circumstances, contri- option isn't subject to any condition or re- deferral to a designated Roth account, butions that exceed these limits (excess annual striction (other than a condition to secure your Form 1099-R should have codes B additions) may be corrected by a distribution of payment of the purchase price) that has a and 8 in box 7. Don’t add this amount to your elective deferrals or a return of your af- significant effect on the FMV of the option. your wages on your 2020 return. ter-tax contributions and earnings from these • The FMV of the option privilege can be • If the distribution was for a 2019 excess contributions. readily determined. deferral, your Form 1099-R should have The option privilege for an option to buy is the code P in box 7. If you didn't add the ex- A corrective payment of excess annual addi- opportunity to benefit during the option's exer- cess deferral amount to your wages on tions consisting of elective deferrals or earnings cise period from any increase in the value of your 2019 tax return, you must file an from your after-tax contributions is fully taxable property subject to the option without risking amended return on Form 1040-X. If you in the year paid. A corrective payment consist- any capital. For example, if during the exercise didn't receive the distribution by April 15, ing of your after-tax contributions isn't taxable. period the FMV of stock subject to an option is 2020, you must also add it to your wages greater than the option's exercise price, a profit on your 2020 tax return. If you received a corrective payment of ex- may be realized by exercising the option and • If the distribution was for the income cess annual additions, you should receive a immediately selling the stock at its higher value. earned on an excess deferral, your Form separate Form 1099-R for the year of the pay- The option privilege for an option to sell is the 1099-R should have code 8 in box 7. Add ment with code E in box 7. Report the total pay- opportunity to benefit during the exercise period the income amount to your wages on your ment shown in box 1 of Form 1099-R on line 5a from a decrease in the value of the property 2020 income tax return, regardless of of Form 1040 or 1040-SR. Report the taxable subject to the option. when the excess deferral was made. amount shown in box 2a of Form 1099-R on line 5b of Form 1040 or 1040-SR. Report a loss on a corrective distribution of an If you or a member of your family is an excess deferral in the year the excess amount Even though a corrective distribution of ! officer, director, or more-than-10% (reduced by the loss) is distributed to you. In- excess annual additions is reported on CAUTION owner of an expatriated corporation, clude the loss as a negative amount on Sched- Form 1099-R, it isn't otherwise treated you may owe an excise tax on the value of non- ule 1 (Form 1040), line 8, and identify it as as a distribution from the plan. It can't be rolled statutory options and other stock-based com- “Loss on Excess Deferral Distribution.” over into another plan, and it isn't subject to the pensation from that corporation. For more infor- additional tax on early distributions. mation on the excise tax, see section 4985. Even though a corrective distribution of TIP excess deferrals is reported on Form Option with readily determinable value. 1099-R, it isn't otherwise treated as a Stock Options If you receive a nonstatutory stock option that distribution from the plan. It can't be rolled over has a readily determinable FMV at the time it's into another plan, and it isn't subject to the addi- Employee stock options aren’t subject to granted to you, the option is treated like other tional tax on early distributions. Railroad Retirement Tax. In Wisconsin Cen- property received as compensation. See Re- tral Ltd. v. United States, 138 S. Ct. 2067, the stricted Property, later, for rules on how much U.S. Supreme Court ruled that “money remu- income to include and when to include it. How- neration” is “currency issued by a recognized ever, the rule described in that discussion for

Publication 525 (2020) Page 11 Page 12 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

choosing to include the value of property in your you generally recognize compensation income Grant of option. If you receive a statutory income for the year of the transfer doesn't apply at the time and in the amount of the reduction. stock option, don't include any amount in your to a nonstatutory option. income when the option is granted. Tax form. If you have income from the exer- Option without readily determinable cise of nonstatutory stock options, your em- Exercise of option. If you exercise a statutory value. If the FMV of the option isn't readily de- ployer should report the amount to you in stock option, don't include any amount in in- terminable at the time it's granted to you (even if box 12 of Form W-2 with code V. The employer come when you exercise the option. it's determined later), you don't have income should show the spread (that is, the FMV of until you exercise or transfer the option. stock over the exercise price of options granted Alternative minimum tax (AMT). For the to you for that stock) from your exercise of the AMT, you must treat stock acquired through the nonstatutory stock options. Your employer exercise of an ISO as if no special treatment ap- Exercise or transfer of option. When you ex- should include this amount in boxes 1, 3 (up to plied. This means that, when your rights in the ercise a nonstatutory stock option, the amount the social security wage base), and 5. Your em- stock are transferable or no longer subject to a to include in your income depends on whether ployer should include this amount in box 14 if substantial risk of forfeiture, you must include the option had a readily determinable value. it's a railroad employer. as an adjustment in figuring alternative minimum taxable income the amount by which the If you're a nonemployee spouse and you ex- Option with readily determinable value. FMV of the stock exceeds the option price. En- ercise nonstatutory stock options you received When you exercise a nonstatutory stock option ter this adjustment on line 2i of Form 6251. In- incident to a divorce, the income is reported to that had a readily determinable value at the time crease your AMT basis in any stock you acquire you in box 3 of Form 1099-MISC. the option was granted, you don't have to in- by exercising the ISO by the amount of the ad- clude any amount in income. Sale of the stock. There are no special in- justment. However, no adjustment is required if Option without readily determinable come rules for the sale of stock acquired you dispose of the stock in the same year you value. When you exercise a nonstatutory through the exercise of a nonstatutory stock op- exercise the option. stock option that didn't have a readily determi- tion. Report the sale as explained in the Instruc- See Restricted Property, later, for more in- nable value at the time the option was granted, tions for Schedule D (Form 1040) for the year of formation. the restricted property rules apply to the prop- the sale. You may receive a Form 1099-B re- Your AMT basis in stock acquired erty received. The amount to include in your in- porting the sales proceeds. through an ISO is likely to differ from come is the difference between the amount you Your basis in the property you acquire under RECORDS your regular tax basis. Therefore, keep pay for the property and its FMV when it be- the option is the amount you pay for it plus any adequate records for both the AMT and regular comes substantially vested. If it isn't substan- amount you included in income upon grant or tax so that you can figure your adjusted gain or tially vested at the time you exercise this non- exercise of the option. loss. statutory stock option (so that you may have to Your holding period begins as of the date give the stock back), you don't have to include you acquired the option, if it had a readily deter- Example 7. Your employer, Elm Company, any amount in income. You include the differ- minable value, or as of the date you exercised ence in income when the option becomes sub- granted you an ISO on April 8, 2019, to buy 100 or transferred the option if it had no readily de- shares of Elm Company at $9 a share, its FMV stantially vested. For more information on re- terminable value. stricted property, see Restricted Property, later. at the time. You exercised the option on Janu- For options granted on or after January 1, ary 7, 2020, when the stock was selling on the Transfer in arm's-length transaction. If 2014, the basis information reported to you on open market for $14 a share. On January 27, you transfer a nonstatutory stock option without Form 1099-B won't reflect any amount you in- 2020, when the stock was selling on the open a readily determinable value in an arm's-length cluded in income upon grant or exercise of the market for $16 a share, your rights to the stock transaction to an unrelated person, you must in- option. For options granted before January 1, first became transferable. You include $700 clude in your income the money or other prop- 2014, any basis information reported to you on ($1,600 value when your rights first became erty you received for the transfer as if you had Form 1099-B may or may not reflect any transferable minus $900 option price) as an ad- exercised the option. amount you included in income upon grant or justment on Form 6251, line 2i. exercise; therefore, the basis may need to be Transfer in non-arm's-length transac- adjusted. If you exercise an ISO during 2020, you tion. If you transfer a nonstatutory stock option TIP should receive Form 3921, or a state- without a readily determinable value in a It’s your responsibility to make any ap- ment, from the corporation for each non-arm's-length transaction (for example, a ! propriate adjustments to the basis in- transfer made during 2020. The corporation gift), the option isn't treated as exercised or CAUTION formation reported on Form 1099-B by must send or provide you with the form by Janu- closed at that time. You must include in your in- completing Form 8949. ary 31, 2021. Keep this information for your re- come, as compensation, any money or property cords. received. When the transferee exercises the Statutory Stock Options option, you must include in your income, as Sale of the stock. You have taxable income compensation, the excess of the FMV of the There are two kinds of statutory stock options. or a deductible loss when you sell the stock that stock acquired by the transferee over the sum • Incentive stock options (ISOs). you bought by exercising the option. Your in- of the exercise price paid and any amount you • Options granted under employee stock come or loss is the difference between the included in income at the time you transferred purchase plans. amount you paid for the stock (the option price) the option. At the time of the exercise, the trans- and the amount you receive when you sell it. feree recognizes no income and has a basis in For either kind of option, you must be an You generally treat this amount as capital gain the stock acquired equal to the FMV of the employee of the company granting the option, or loss and report it as explained in the Instruc- stock. or a related company, at all times during the pe- tions for Schedule D (Form 1040) for the year of Any transfer of this kind of option to a rela- riod beginning on the date the option is granted the sale. ted person is treated as a non-arm's-length and ending 3 months before the date you exer- However, you may have ordinary income for transaction. See Regulations section 1.83-7 for cise the option (for an ISO, 1 year before if the year that you sell or otherwise dispose of the definition of a related person. you're disabled). Also, the option must be non- the stock in either of the following situations. Recourse note in satisfaction of the ex- transferable except at death. • You don't satisfy the holding period re- ercise price of an option. If you're an em- quirement. ployee, and you issue a recourse note to your If you don't meet the employment require- • You satisfy the conditions described under employer in satisfaction of the exercise price of ments, or you receive a transferable option, Option granted at a discount under Em- an option to acquire your employer's stock, and your option is a nonstatutory stock option. ployee stock purchase plan, later. your employer and you subsequently agree to Your employer or former employer should re- reduce the stated principal amount of the note, port the ordinary income to you as wages in

Page 12 Publication 525 (2020) Page 13 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

box 1 of Form W-2, and you must report this or- Example 8. Your employer, Oak Corpora- For this purpose, if the option price wasn't fixed dinary income amount on Form 1040 or tion, granted you an ISO on March 12, 2018, to or determinable at the time the option was gran- 1040-SR, line 1. If your employer or former em- buy 100 shares of Oak Corporation stock at $10 ted, the option price is figured as if the option ployer doesn't provide you with a Form W-2, or a share, its FMV at the time. You exercised the had been exercised at the time it was granted. if the Form W-2 doesn't include the ordinary in- option on January 7, 2019, when the stock was Any excess gain is capital gain. If you have come in box 1, you must still report the ordinary selling on the open market for $12 a share. On a loss from the sale, it's a capital loss, and you income as wages on Form 1040 or 1040-SR, January 27, 2020, you sold the stock for $15 a don't have any ordinary income. line 1, for the year of the sale or other disposi- share. Although you held the stock for more tion of the stock. than a year, less than 2 years had passed from Example 10. Your employer, Willow Cor- For options granted on or after January 1, the time you were granted the option. In 2020, poration, granted you an option under its em- 2014, the basis information reported to you on you must report the difference between the op- ployee stock purchase plan to buy 100 shares Form 1099-B won't reflect any amount you in- tion price ($10) and the value of the stock when of stock of Willow Corporation for $20 a share cluded in income upon grant or exercise of the you exercised the option ($12) as wages. The at a time when the stock had a value of $22 a option. For options granted before January 1, rest of your gain is capital gain, figured as fol- share. 18 months later, when the value of the 2014, any basis information reported to you on lows. stock was $23 a share, you exercised the op- Form 1099-B may or may not reflect any tion, and 14 months after that you sold your amount you included in income upon grant or Selling price ($15 × 100 shares) ...... $ 1,500 stock for $30 a share. In the year of sale, you exercise; therefore, the basis may need to be Purchase price ($10 × 100 shares) ...... − 1,000 must report as wages the difference between adjusted. Gain ...... $ 500 the option price ($20) and the value at the time Amount reported as wages the option was granted ($22). The rest of your It’s your responsibility to make any ap- [($12 × 100 shares) − $1,000] ...... − 200 gain ($8 per share) is capital gain, figured as propriate adjustments to the basis in- follows. ! Amount reported as capital gain ..... $ 300 CAUTION formation reported on Form 1099-B by completing Form 8949. Selling price ($30 × 100 shares) ...... $ 3,000 Employee stock purchase plan. If you sold Purchase price (option price) Holding period requirement. You satisfy stock acquired by exercising an option granted ($20 × 100 shares) ...... − 2,000 the holding period requirement if you don't sell under an employee stock purchase plan, you Gain ...... $ 1,000 the stock until the end of the later of the 1-year need to determine if you satisfied the holding Amount reported as wages − 200 period after the stock was transferred to you or period requirement. [($22 × 100 shares) − $2,000] ...... the 2-year period after the option was granted. Amount reported as capital gain ..... $ 800 However, you're considered to satisfy the hold- Holding period requirement satisfied. If ing period requirement if you sold the stock to you sold stock acquired by exercising an option Holding period requirement not satis- comply with conflict-of-interest requirements. granted under an employee stock purchase fied. If you don't satisfy the holding period re- Your holding period for the property you ac- plan, and you satisfy the holding period require- quirement, your ordinary income is the amount quire when you exercise an option begins on ment, determine your ordinary income as fol- by which the stock's FMV when you exercised the day after you exercise the option. lows. Your basis is equal to the option price at the the option exceeded the option price. This ordinary income isn't limited to your gain from the ISOs. If you sell stock acquired by exercising time you exercised your option and acquired sale of the stock. Increase your basis in the an ISO, you need to determine if you satisfied the stock. The timing and amount of pay period stock by the amount of this ordinary income. the holding period requirement. deductions don't affect your basis. The difference between your increased basis Holding period requirement satisfied. If Example 9. Pine Company has an em- and the selling price of the stock is a capital you sell stock acquired by exercising an ISO ployee stock purchase plan. The option price is gain or loss. and satisfy the holding period requirement, your the lower of the stock price at the time the op- gain or loss from the sale is capital gain or loss. tion is granted or at the time the option is exer- Example 11. The facts are the same as in Report the sale as explained in the Instructions cised. The value of the stock when the option Example 10, except that you sold the stock only for Schedule D (Form 1040). The basis of your was granted was $25. Pine Company deducts 6 months after you exercised the option. You stock is the amount you paid for the stock. $5 from Adrian's pay every week for 48 weeks didn't satisfy the holding period requirement, so (total = $240 ($5 × 48)). The value of the stock you must report $300 as wages and $700 as Holding period requirement not satis- when the option is exercised is $20. Adrian re- capital gain, figured as follows. fied. If you sell stock acquired by exercising ceives 12 shares of Pine Company’s stock an ISO, don't satisfy the holding period require- ($240 ÷ $20). Adrian's holding period for all 12 Selling price ($30 × 100 shares) ...... $3,000 ment, and have a gain from the sale, the gain is shares begins the day after the option is exer- Purchase price (option price) ordinary income up to the amount by which the − 2,000 cised, even though the money used to pur- ($20 × 100 shares) ...... stock's FMV when you exercised the option ex- Gain ...... $1,000 chase the shares was deducted from Adrian's ceeded the option price. Any excess gain is Amount reported as wages pay on 48 separate days. Adrian's basis in each capital gain. If you have a loss from the sale, it's [($23 × 100 shares) − $2,000] ...... − 300 share is $20. a capital loss and you don't have any ordinary Amount reported as capital gain income. Option granted at a discount. If, at the [$3,000 – ($2,000 + $300)] ...... $700 Your employer or former employer should time the option was granted, the option price report the ordinary income to you as wages in per share was less than 100% (but not less than If you sold stock in 2020 that you ac- box 1 of Form W-2, and you must report this or- 85%) of the FMV of the share, and you dispose TIP quired by exercising an option granted dinary income amount on Form 1040 or of the share after meeting the holding period re- at a discount under an employee stock 1040-SR, line 1. If your employer or former em- quirement, or you die while owning the share, purchase plan, you should receive Form 3922 ployer doesn't provide you with a Form W-2, or you must include in your income as compensa- from the corporation. The corporation must if the Form W-2 doesn't include the ordinary in- tion the lesser of: send or provide you with the form by January come in box 1, you must still report the ordinary • The excess of the FMV of the share at the 31, 2021. Keep this information for your re- income as wages on Form 1040 or 1040-SR, time the option was granted over the op- cords. line 1, for the year of the sale or other disposition price, or tion of the stock. Report the capital gain or loss • The excess of the FMV of the share at the as explained in the Instructions for Schedule D time of the disposition or death over the Qualified Equity Grants (Form 1040). In determining capital gain or loss, amount paid for the share under the op- your basis is the amount you paid when you ex- tion. P.L. 115-97 made a change in the law that al- ercised the option plus the amount reported as lows a new election for “qualified employees” of wages. private corporations to elect to defer income

Publication 525 (2020) Page 13 Page 14 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

taxation for up to 5 years from the date of vest- Restricted Property resell the stock to the corporation at $100 a ing on “qualified stock” granted in connection share if you leave your job for any reason within with broad-based compensatory stock option In most cases, if you receive property for your 3 years from the date of transfer. You must per- and restricted stock unit (RSU) programs. This services, you must include its FMV in your in- form substantial services over a period of time, election is available for stock attributable to op- come in the year you receive the property. How- and you must resell the stock to the corporation tions exercised or RSUs settled after 2017. The ever, if you receive stock or other property that at $100 a share (regardless of its value) if you corporation must have a written plan providing has certain restrictions that affect its value, you don't perform the services; so, your rights to the RSU or option to at least 80% of U.S. employ- don't include the value of the property in your in- stock are subject to a substantial risk of forfei- ees. The recipients must have the same rights come until it has been substantially vested. ture. and privileges under RSU or option plan. (You can choose to include the value of the property in your income in the year it's transfer- Choosing to include in income for year of The term “qualified employee” doesn’t in- transfer. You can choose to include the value clude: red to you, as discussed later, rather than the year it's substantially vested.) of restricted property at the time of transfer (mi- • 1% owner of corporation (current or any nus any amount you paid for the property) in point during prior 10 calendar years), Until the property becomes substantially your income for the year it's transferred. If you • Current or former CEO or CFO (current or vested, it's owned by the person who makes the make this choice, the substantial vesting rules any point previously), transfer to you, usually your employer. How- don't apply and, generally, any later apprecia- ever, any income from the property, or the right tion in value isn't included in your compensation Family of previously mentioned individuals, • to use the property, is included in your income when the property becomes substantially ves- or as additional compensation in the year you re- ted. Your basis for figuring gain or loss when • One of the four highest compensated offi- ceive the income or have the right to use the you sell the property is the amount you paid for cers (current or any point during prior 10 property. it plus the amount you included in income as calendar years). When the property becomes substantially compensation. The term “qualified stock” means any stock vested, you must include its FMV, minus any If you make this choice, you can't re- in a corporation that is the employer of the em- amount you paid for it, in your income for that ! voke it without the consent of the IRS. ployee if: year. Your holding period for this property be- CAUTION Consent will be given only if you were • Stock is received relating to the exercise of gins when the property becomes substantially under a mistake of fact as to the underlying an option, or vested. transaction.

• Stock is received in settlement of an RSU, Example 12. Your employer, the Holly Cor- If you forfeit the property after you have in- and poration, sells you 100 shares of its stock at cluded its value in income, your loss is the • Option or RSU was granted by the corpo- $10 a share. At the time of the sale the FMV of amount you paid for the property minus any ration. the stock is $100 a share. Under the terms of amount you realized on the forfeiture. the sale, the stock is under a substantial risk of You can't make this choice for a non- The term “qualified stock” can’t include forfeiture (you have a good chance of losing it) statutory stock option. stock from stock-settled stock appreciation for a 5-year period. Your stock isn't substantially rights or restricted stock awards (restricted vested when it's transferred, so you don't in- property). It won’t include any stock if the em- clude any amount in your income in the year How to make the choice. You make the ployee may receive cash instead of stock. The you buy it. At the end of the 5-year period, the choice by filing a written statement with the In- election is made in a manner similar to the elec- FMV of the stock is $200 a share. You must internal Revenue Service Center where you file tion described under Choosing to include in include $19,000 in your income [100 shares × your return. You must file this statement no later come for year of transfer, later, under Restricted ($200 FMV − $10 you paid)]. Dividends paid by than 30 days after the date the property was Property, even though the “qualified stock” isn't the Holly Corporation on your 100 shares of transferred. Mail your statement to the address restricted property. The election must be made stock are taxable to you as additional compen- listed for your state under “Are requesting a re- no later than 30 days after the first date the sation during the period the stock can be forfei- fund or aren’t enclosing a check or money or- rights of the employee in such stock are trans- ted. der...” given in Where Do You File in the Instruc- ferable or aren’t subject to a substantial risk of tions for Forms 1040 and 1040-SR. You must forfeiture, whichever occurs earlier. See Re- Substantially vested. Property is substantially give a copy of this statement to the person for stricted Property, later, for how to make the vested when: whom you performed the services and, if some- choice. • It’s transferable, or one other than you received the property, to If an employee elects to defer income inclu- • It isn't subject to a substantial risk of forfei- that person. sion under the provision, the income must be in- ture. (You don't have a good chance of los- You must sign the statement and indicate on cluded in the employee's income for the year ing it.) it that you're making the choice under section 83(b) of the Internal Revenue Code. The state- that includes the earliest of (1) the first date the Transferable property. Property is trans- qualified stock becomes transferable, (2) the ment must contain all of the following informa- ferable if you can sell, assign, or pledge your in- tion. date the employee first becomes an excluded terest in the property to any person (other than employee (as excluded from “qualified em- • Your name, address, and TIN. the transferor), and if the person receiving your • A description of each property for which ployee”), (3) the first date on which any stock of interest in the property isn't required to give up the employer becomes readily tradable on an you're making the choice. the property, or its value, if the substantial risk • The date or dates on which the property established securities market, (4) the date 5 of forfeiture occurs. years after the first date the employee's right to was transferred and the tax year for which the stock becomes substantially vested, or (5) Substantial risk of forfeiture. Generally, you're making the choice. the date on which the employee revokes his or a substantial risk of forfeiture exists only if rights • The nature of any restrictions on the prop- her inclusion deferral election. in property that are transferred are conditioned, erty. directly or indirectly, on the future performance • The FMV at the time of transfer (ignoring The employer corporation is required to pro- (or refraining from performance) of substantial restrictions except those that will never vide notification of rights to employees covered services by any person, or on the occurrence of lapse) of each property for which you're under a qualified program or face penalties. a condition related to a purpose of the transfer if making the choice. There will be withholding at the highest mar- the possibility of forfeiture is substantial. • Any amount that you paid for the property. ginal rate. • A statement that you have provided copies Example 13. The Redwood Corporation to the appropriate persons. transfers to you as compensation for services 100 shares of its corporate stock for $100 a share. Under the terms of the transfer, you must

Page 14 Publication 525 (2020) Page 15 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

You can't make this choice for a non- Inherited property not substantially vested. in the exercise of duties required by the order, ! statutory stock option. If you inherit property not substantially vested at don't include in your income the amounts turned CAUTION the time of the decedent's death, any income over to the order. you receive from the property is considered in- If your order directs you to perform services Dividends received on restricted stock. come in respect of a decedent and is taxed ac- for another agency of the supervising church or Dividends you receive on restricted stock are cording to the rules for restricted property re- an associated institution, you're considered to treated as compensation and not as dividend ceived for services. For information about be performing the services as an agent of the income. Your employer should include these income in respect of a decedent, see Pub. 559. order. Any wages you earn as an agent of an payments on your Form W-2. If they are also re- order that you turn over to the order aren't inclu- ported on a Form 1099-DIV, you should list ded in your income. them on Schedule B (Form 1040), with a state- Special Rules for ment that you have included them as wages. Example 15. You're a member of a church Don’t include them in the total dividends re- Certain Employees order and have taken a vow of poverty. You received. nounce any claims to your earnings and turn This part of the publication deals with special over to the order any salaries or wages you Stock you chose to include in your in- rules for people in certain types of employment: earn. You're a registered nurse, so your order come. Dividends you receive on restricted members of the clergy, members of religious or- assigns you to work in a hospital that is an as- stock you chose to include in your income in the ders, people working for foreign employers, sociated institution of the church. However, you year transferred are treated the same as any military personnel, and volunteers. remain under the general direction and control other dividends. You should receive a Form of the order. You're considered to be an agent 1099-DIV showing these dividends. Don’t in- Clergy of the order and any wages you earn at the hos- clude the dividends in your wages on your re- pital that you turn over to your order aren't inclu- turn. Report them as dividends. ded in your income. If you’re a member of the clergy, you must in- Sale of property not substantially vested. clude in your income offerings and fees you re- Services performed outside the order. If These rules apply to the sale or other disposi- ceive for marriages, baptisms, funerals, you're directed to work outside the order, your tion of property that you didn't choose to include masses, etc., in addition to your salary. If the of- services aren't an exercise of duties required by in your income in the year transferred and that fering is made to the religious institution, it isn't the order unless they meet both of the following isn't substantially vested. taxable to you. requirements. If you sell or otherwise dispose of the prop- • They're the kind of services that are ordi- erty in an arm's-length transaction, include in If you’re a member of a religious organization and you give your outside earnings to the narily the duties of members of the order. your income as compensation for the year of • They're part of the duties that you must ex- sale the amount realized minus the amount you organization, you must still include the earnings in your income. However, you may be entitled ercise for, or on behalf of, the religious or- paid for the property. If you exchange the prop- der as its agent. erty in an arm's-length transaction for other to a charitable contribution deduction for the property that isn't substantially vested, treat the amount paid to the organization. See Pub. 526. If you're an employee of a third party, the serv- new property as if it were substituted for the ex- Also, see Members of Religious Orders, later. ices you perform for the third party won't be changed property. considered directed or required of you by the Pension. A pension or retirement pay for a The sale or other disposition of a nonstatu- order. Amounts you receive for these services member of the clergy is usually treated as any tory stock option to a related person isn't con- are included in your income, even if you have other pension or annuity. It must be reported on sidered an arm's-length transaction. See Regu- taken a vow of poverty. lines 5a and 5b of Form 1040 or 1040-SR. lations section 1.83-7 for the definition of a Example 16. Ivan Brown is a member of a related person. religious order and has taken a vow of poverty. If you sell the property in a transaction that Housing He renounces all claims to his earnings and isn't at arm's length, include in your income as turns over his earnings to the order. compensation for the year of sale the total of Special rules for housing apply to members of Ivan is a schoolteacher. He was instructed any money you received and the FMV of any the clergy. Under these rules, you don't include by the superiors of the order to get a job with a substantially vested property you received on in your income the rental value of a home (in- private tax-exempt school. Ivan became an em- the sale. In addition, you'll have to report including utilities) or a designated housing allow- ployee of the school, and, at his request, the come when the original property becomes sub- ance provided to you as part of your pay. How- school made the salary payments directly to the stantially vested, as if you still held it. Report as ever, the exclusion can't be more than the order. compensation its FMV minus the total of the reasonable pay for your service. If you pay for Because Ivan is an employee of the school, amount you paid for the property and the the utilities, you can exclude any allowance he’s performing services for the school rather amount included in your income from the earlier designated for utility cost, up to your actual than as an agent of the order. The wages Ivan sale. cost. The home or allowance must be provided as compensation for your services as an or- earns working for the school are included in his income. Example 14. In 2017, you paid your em- dained, licensed, or commissioned minister. ployer $50 for a share of stock that had an FMV However, you must include the rental value of Example 17. Alex Dennis is a member of a of $100 and was subject to forfeiture until 2020. the home or the housing allowance as earnings religious order who, as a condition of member- In 2019, you sold the stock to your spouse for from self-employment on Schedule SE (Form ship, has taken vows of poverty and obedience. $10 in a transaction not at arm's length. You 1040) if you’re subject to the self-employment All claims to his earnings are renounced. Alex had compensation of $10 from this transaction. tax. For more information, see Pub. 517. received permission from the order to establish In 2020, when the stock had an FMV of $120, it a private practice as a psychologist and coun- became substantially vested. For 2019, you Members of Religious sels members of religious orders as well as must report additional compensation of $60, fig- Orders nonmembers. Although the order reviews Alex's ured as follows. budget annually, Alex controls not only the de- If you're a member of a religious order who has tails of his practice but also the means by which FMV of stock at time of substantial taken a vow of poverty, how you treat earnings his work as a psychologist is accomplished. vesting ...... $120 that you renounce and turn over to the order de- Alex's private practice as a psychologist Minus: Amount paid for stock ...... $50 doesn't make him an agent of the religious or- Minus: Compensation previously pends on whether your services are performed included in income from sale to for the order. der. The psychological services provided by spouse ...... 10 − 60 Alex aren't the type of services that are provi- Additional income ...... $60 Services performed for the order. If you're ded by the order. The income Alex earns as a performing the services as an agent of the order psychologist is earned in his individual capacity.

Publication 525 (2020) Page 15 Page 16 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Alex must include in his income the earnings Differential wage payments. Any payments years after the date you paid the tax, whichever from his private practice. made to you by an employer during the time is later. See the Instructions for Form 1040-X for you're performing service in the uniformed serv- information on filing that form. ices are treated as compensation. These wages Foreign Employer are subject to income tax withholding and are reported on Form W-2. See the discussion un- Volunteers Special rules apply if you work for a foreign em- der Miscellaneous Compensation, earlier. ployer. The tax treatment of amounts you receive as a volunteer is covered in the following discus- Military retirement pay. If your retirement pay sions. U.S. citizen. If you're a U.S. citizen who works is based on age or length of service, it’s taxable in the United States for a foreign government, and must be included in your income as a pen- Peace Corps. Living allowances you receive an international organization, a foreign em- sion on lines 5a and 5b of Form 1040 or as a Peace Corps volunteer or volunteer leader bassy, or any foreign employer, you must in- 1040-SR. Don’t include in your income the for housing, utilities, household supplies, food, clude your salary in your income. amount of any reduction in retirement or re- and clothing are exempt from tax. Social security and Medicare taxes. tainer pay to provide a survivor annuity for your You're exempt from social security and Medi- spouse or children under the Retired Service- Taxable allowances. The following allow- care employee taxes if you're employed in the man's Family Protection Plan or the Survivor ances must be included in your income and re- United States by an international organization Benefit Plan. ported as wages. or a foreign government. However, you must For a more detailed discussion of survivor • Allowances paid to your spouse and minor pay self-employment tax on your earnings from annuities, see Pub. 575. children while you're a volunteer leader training in the United States. services performed in the United States, even Disability. If you're retired on disability, see though you aren't self-employed. This rule also • Living allowances designated by the Direc- Military and Government Disability Pensions tor of the Peace Corps as basic compen- applies if you're an employee of a qualifying under Sickness and Injury Benefits, later. wholly owned instrumentality of a foreign gov- sation. These are allowances for personal ernment. items such as domestic help, laundry and Qualified reservist distribution (QRD). If you clothing maintenance, entertainment and received a QRD of all or part of the balance in Employees of international organizations or recreation, transportation, and other mis- your health FSA because you're a reservist and cellaneous expenses. foreign governments. Your compensation for you have been ordered or called to active duty • Leave allowances. official services to an international organization for a period of 180 days or more, the QRD is • Readjustment allowances or termination is exempt from federal income tax if you aren't a treated as wages and is reportable on Form payments. These are considered received citizen of the United States or you're a citizen of W-2. the Philippines (whether or not you're a citizen by you when credited to your account. of the United States). Veterans' benefits. Don’t include in your in- Example 18. Gary Carpenter, a Peace Your compensation for official services to a come any veterans' benefits paid under any Corps volunteer, gets $175 a month as a read- foreign government is exempt from federal in- law, regulation, or administrative practice adjustment allowance during his period of service, come tax if all of the following are true. ministered by the Department of Veterans Af- to be paid to him in a lump sum at the end of his • You aren't a citizen of the United States or fairs (VA). The following amounts paid to veter- tour of duty. Although the allowance isn't availa- you're a citizen of the Philippines (whether ans or their families aren't taxable. ble to him until the end of his service, Gary must or not you're a citizen of the United States). Education, training, and subsistence allow- • include it in his income on a monthly basis as • Your work is like the work done by employ- ances. it’s credited to his account. ees of the United States in foreign coun- • Disability compensation and pension pay- tries. ments for disabilities paid either to veter- Volunteers in Service to America (VISTA). If • The foreign government gives an equal ex- ans or their families. you're a VISTA volunteer, you must include emption to employees of the United States • Grants for homes designed for wheelchair meal and lodging allowances paid to you in in its country. living. your income as wages. Grants for motor vehicles for veterans who Waiver of alien status. If you're an alien • lost their sight or the use of their limbs. who works for a foreign government or interna- National Senior Service Corps programs. Veterans' insurance proceeds and divi- tional organization and you file a waiver under • Don’t include in your income amounts you re- dends paid either to veterans or their bene- section 247(b) of the Immigration and National- ceive for supportive services or reimburse- ficiaries, including the proceeds of a veter- ity Act to keep your immigrant status, any salary ments for out-of-pocket expenses from the fol- an's endowment policy paid before death. you receive after the date you file the waiver lowing programs. Interest on insurance dividends left on de- isn't exempt under this rule. However, it may be • • Retired Senior Volunteer Program (RSVP). posit with the VA. exempt under a treaty or agreement. See Pub. • Foster Grandparent Program. Benefits under a dependent-care assis- 519, U.S. Tax Guide for Aliens, for more infor- • • Senior Companion Program. tance program. mation about treaties. • The death gratuity paid to a survivor of a Service Corps of Retired Executives Nonwage income. This exemption applies member of the U.S. Armed Forces who (SCORE). If you receive amounts for suppor- only to employees' wages, salaries, and fees. died after September 10, 2001. tive services or reimbursements for Pensions and other income, such as investment • Payments made under the compensated out-of-pocket expenses from SCORE, don't in- income, don't qualify for this exemption. work therapy program. clude these amounts in gross income. • Any bonus payment by a state or political Employment abroad. For information on the subdivision because of service in a combat Volunteer tax counseling. Don’t include in tax treatment of income earned abroad, see zone. your income any reimbursements you receive Pub. 54. for transportation, meals, and other expenses Note. If, in a previous year, you received a you have in training for, or actually providing, Military bonus payment by a state or political subdivi- volunteer federal income tax counseling for the sion because of service in a combat zone that elderly (TCE). you included in your income, you can file a You can deduct as a charitable contribution Payments you receive as a member of a military claim for refund of the taxes on that income. your unreimbursed out-of-pocket expenses in service are generally taxed as wages except for Use Form 1040-X to file the claim. File a sepa- taking part in the volunteer income tax assis- retirement pay, which is taxed as a pension. Al- rate form for each tax year involved. In most ca- tance (VITA) program. lowances generally aren't taxed. For more infor- ses, you must file your claim within 3 years after mation on the tax treatment of military allowan- the date you filed your original return or within 2 ces and benefits, see Pub. 3.

Page 16 Publication 525 (2020) Page 17 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Volunteer firefighters and emergency medi- If you don't rent personal property for profit, When production begins, you include all the cal responders. If you are a volunteer fire- your deductions are limited and you can't report proceeds in your income, deduct all the produc- fighter or emergency medical responder, do not a loss to offset other income. See Activity not tion expenses, and deduct depletion from that include in your income the following benefits for profit under Other Income, later. amount to arrive at your taxable income from you receive from a state or local government. the property. • Rebates or reductions of property or income taxes you receive because of serv- Royalties ices you performed as a volunteer fire- Partnership Income Royalties from copyrights; patents; and oil, gas, fighter or emergency medical responder and mineral properties are taxable as ordinary A partnership generally isn't a taxable entity. Payments you receive because of services • income. The income, gains, losses, deductions, and you performed as a volunteer firefighter or credits of a partnership are passed through to emergency medical responder, up to $50 In most cases, you report royalties on the partners based on each partner's distribu- for each month you provided services. Schedule E (Form 1040). However, if you hold tive share of these items. For more information, The excluded income reduces any related an operating oil, gas, or mineral interest or are see Pub. 541. tax or contribution deduction. in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Partner's distributive share. Your distributive Schedule C (Form 1040). share of partnership income, gains, losses, de- Business and ductions, or credits is generally based on the Copyrights and patents. Royalties from partnership agreement. You must report your Investment Income copyrights on literary, musical, or artistic works, distributive share of these items on your return and similar property, or from patents on inven- whether or not they are actually distributed to This section provides information on the treat- tions, are amounts paid to you for the right to you. However, your distributive share of the ment of income from certain rents and royalties, use your work over a specified period of time. partnership losses is limited to the adjusted ba- and from interests in partnerships and S corpo- Royalties are generally based on the number of sis of your partnership interest at the end of the rations. units sold, such as the number of books, tickets partnership year in which the losses took place. to a performance, or machines sold. Note. You may be subject to the Net Invest- Partnership agreement. The partnership ment Income Tax (NIIT). The NIIT is a 3.8% tax Oil, gas, and minerals. Royalty income from agreement usually covers the distribution of on the lesser of net investment income or the oil, gas, and mineral properties is the amount profits, losses, and other items. However, if the excess of your modified adjusted gross income you receive when natural resources are extrac- agreement doesn't state how a specific item of (MAGI) over a threshold amount. For details, ted from your property. The royalties are gener- gain or loss will be shared, or the allocation sta- see Form 8960 and its instructions. ally based on production or revenue and are ted in the agreement doesn't have substantial paid to you by a person or company who leases economic effect, your distributive share is fig- Income from sales at auctions, includ- the property from you. ured according to your interest in the partner- ! ing online auctions, may be business ship. CAUTION income. For more information, see Depletion. If you're the owner of an eco- Pub. 334. nomic interest in mineral deposits or oil and gas Partnership return. Although a partnership wells, you can recover your investment through generally pays no tax, it must file an information the depletion allowance. For information on this return on Form 1065. This shows the result of Rents From Personal subject, see chapter 9 of Pub. 535. the partnership's operations for its tax year and Property Coal and iron ore. Under certain circum- the items that must be passed through to the stances, you can treat amounts you receive partners. If you rent out personal property, such as equip- from the disposal of coal and iron ore as pay- Schedule K-1 (Form 1065). You should ment or vehicles, how you report your income ments from the sale of a capital asset, rather receive from each partnership in which you're a and expenses is in most cases determined by: than as royalty income. For information about member a copy of Schedule K-1 (Form 1065) Whether or not the rental activity is a busi- • gain or loss from the sale of coal and iron ore, showing your share of income, deductions, ness, and see chapter 2 of Pub. 544. credits, and tax preference items of the partner- Whether or not the rental activity is con- • ship for the tax year. Keep Schedule K-1 for ducted for profit. Sale of property interest. If you sell your complete interest in oil, gas, or mineral rights, your records. Don’t attach it to your Form 1040 In most cases, if your primary purpose is in- the amount you receive is considered payment or 1040-SR, unless you're specifically required come or profit and you're involved in the rental for the sale of section 1231 property, not royalty to do so. activity with continuity and regularity, your rental income. Under certain circumstances, the sale activity is a business. See Pub. 535 for details is subject to capital gain or loss treatment as Partner's return. You must generally report on deducting expenses for both business and explained in the Instructions for Schedule D partnership items on your individual return the not-for-profit activities. (Form 1040). For more information on selling same way as they're reported on the partner- section 1231 property, see chapter 3 of Pub. ship return. That is, if the partnership had a cap- Reporting business income and expenses. 544. ital gain, you report your share as explained in If you're in the business of renting personal If you retain a royalty, an overriding royalty, the Instructions for Schedule D (Form 1040). property, report your income and expenses on or a net profit interest in a mineral property for You report your share of partnership ordinary Schedule C (Form 1040). The form instructions the life of the property, you have made a lease income on Schedule E (Form 1040). have information on how to complete them. or a sublease, and any cash you receive for the In many cases, Schedule K-1 (Form assignment of other interests in the property is Reporting nonbusiness income. If you aren't TIP 1065) will tell you where to report an ordinary income subject to a depletion allow- item of income on your individual re- in the business of renting personal property, re- ance. port your rental income on Schedule 1 (Form turn. 1040), line 8. List the type and amount of the in- Part of future production sold (carved come on the dotted line next to line 8. out production payment). If you own mineral Qualified joint venture. If you and your property but sell part of the future production, in spouse each materially participate as the only Reporting nonbusiness expenses. If you most cases you treat the money you receive members of a jointly owned and operated busi- rent personal property for profit, include your from the buyer at the time of the sale as a loan ness, and you file a joint return for the tax year, rental expenses in the total amount you enter from the buyer. Don’t include it in your income you can make a joint election to be treated as a on Schedule 1 (Form 1040), line 22. Also, enter or take depletion based on it. qualified joint venture instead of a partnership. the amount and “PPR” on the dotted line next to To make this election, you must divide all items line 22.

Publication 525 (2020) Page 17 Page 18 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

of income, gain, loss, deduction, and credit at- information on nontaxable payments, see Mili- request that it reissue the form to report some tributable to the business between you and your tary and Government Disability Pensions and or all of these payments as nontaxable income spouse in accordance with your respective in- Other Sickness and Injury Benefits, later in this in box 12 (under code J) of Form W-2 or in terests in the venture. For further information on discussion. box 1 but not in box 2a of Form 1099-R. If in- how to make the election and which sched- come taxes are being incorrectly withheld from Don’t report as income any amounts ule(s) to file, see the instructions for your indi- these payments, you may also submit Form paid to reimburse you for medical ex- vidual tax return. W-4 to the company or agency to stop the with- penses you incurred after the plan was holding of income taxes from payments repor- established. ted on Form W-2 or you may submit Form W-4P S Corporation Income to stop the withholding of income taxes from Cost paid by you. If you pay the entire cost of payments reported on Form 1099-R. In most cases, an S corporation doesn't pay tax an accident or health plan, don't include any on its income. Instead, the income, losses, de- amounts you receive from the plan for personal Disability payments you receive for injuries ductions, and credits of the corporation are injury or sickness as income on your tax return. not incurred as a direct result of a terrorist at- passed through to the shareholders based on If your plan reimbursed you for medical expen- tack or for illnesses or diseases not resulting each shareholder's pro rata share. You must re- ses you deducted in an earlier year, you may from an injury incurred as a direct result of a ter- port your share of these items on your return. In have to include some, or all, of the reimburse- rorist attack can't be excluded from your income most cases, the items passed through to you ment in your income. See Recoveries under under this provision but may be excludable for will increase or decrease the basis of your S Miscellaneous Income, later. other reasons. See Pub. 907. corporation stock as appropriate. Cafeteria plans. In most cases, if you're cov- Retirement and profit-sharing plans. If you S corporation return. An S corporation must ered by an accident or health insurance plan receive payments from a retirement or file a return on Form 1120-S. This shows the re- through a cafeteria plan, and the amount of the profit-sharing plan that doesn't provide for disa- sults of the corporation's operations for its tax insurance premiums wasn't included in your in- bility retirement, don't treat the payments as a year and the items of income, losses, deduc- come, you aren't considered to have paid the disability pension. The payments must be re- tions, or credits that affect the shareholders' in- premiums and you must include any benefits ported as a pension or annuity. dividual income tax returns. you receive in your income. If the amount of the premiums was included in your income, you're Accrued leave payment. If you retire on disa- Schedule K-1 (Form 1120-S). You should bility, any lump-sum payment you receive for receive a copy of Schedule K-1 (Form 1120-S) considered to have paid the premiums and any benefits you receive aren't taxable. accrued annual leave is a salary payment. The from any S corporation in which you're a share- payment isn't a disability payment. Include it in holder. Schedule K-1 (Form 1120-S) shows your income in the tax year you receive it. your share of income, losses, deductions, and Disability Pensions credits for the tax year. Keep Schedule K-1 (Form 1120-S) for your records. Don’t attach it Military and Government If you retired on disability, you must include in Disability Pensions to your Form 1040 or 1040-SR, unless you're income any disability pension you receive under specifically required to do so. a plan that is paid for by your employer. You Certain military and government disability pen- must report your taxable disability payments as sions aren't taxable. Shareholder's return. Your distributive share wages on line 1 of Form 1040 or 1040-SR until of the items of income, losses, deductions, or you reach minimum retirement age. Minimum Service-connected disability. You may be credits of the S corporation must be shown sep- retirement age is generally the age at which you arately on your Form 1040 or 1040-SR. The able to exclude from income amounts you re- can first receive a pension or annuity if you ceive as a pension, annuity, or similar allow- character of these items is generally the same aren't disabled. as if you had realized or incurred them person- ance for personal injury or sickness resulting ally. You may be entitled to a tax credit if from active service in one of the following gov- you were permanently and totally disa- ernment services. In many cases, Schedule K-1 (Form bled when you retired. For information • The armed forces of any country. TIP 1120-S) will tell you where to report an on this credit, see Pub. 524. • The National Oceanic and Atmospheric item of income on your individual re- Administration. turn. Beginning on the day after you reach mini- • The Public Health Service. mum retirement age, payments you receive are • The Foreign Service. Distributions. In most cases, S corporation taxable as a pension or annuity. Report the pay- Conditions for exclusion. Don’t include distributions are a nontaxable return of your ba- ments on lines 5a and 5b of Form 1040 or sis in the corporation stock. However, in certain the disability payments in your income if any of 1040-SR. For more information on pensions the following conditions apply. cases, part of the distributions may be taxable and annuities, see Pub. 575. as a dividend, or as a long-term or short-term 1. You were entitled to receive a disability capital gain, or as both. The corporation's distri- Terrorist attacks. Don’t include in your in- payment before September 25, 1975. butions may be in the form of cash or property. come disability payments you receive for inju- 2. You were a member of a listed govern- ries incurred as a direct result of terrorist at- ment service or its reserve component, or More information. For more information, see tacks directed against the United States (or its were under a binding written commitment the Instructions for Form 1120-S. allies), whether outside or within the United to become a member, on September 24, States. However, you must include in your in- 1975. come any amounts that you received that you Sickness and would have received in retirement had you not 3. You receive the disability payments for a become disabled as a result of a terrorist attack. combat-related injury. This is a personal Injury Benefits Accordingly, you must include in your income injury or sickness that: any payments you receive from a 401(k), pen- a. Results directly from armed conflict; In most cases, you must report as income any sion, or other retirement plan to the extent that amount you receive for personal injury or sick- you would have received the amount at the b. Takes place while you're engaged in ness through an accident or health plan that is same or later time regardless of whether you extra-hazardous service; paid for by your employer. If both you and your had become disabled. See Pub. 907. employer pay for the plan, only the amount you c. Takes place under conditions simulat- receive that is due to your employer's payments Contact the company or agency making war, including training exercises is reported as income. However, certain paying these payments if it incorrectly re- such as maneuvers; or ports your payments as taxable income ments may not be taxable to you. For d. Is caused by an instrumentality of war. to the IRS on Form W-2, or on Form 1099-R, to

Page 18 Publication 525 (2020) Page 19 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

4. You would be entitled to receive disability Fund are treated as incurred as a direct result of censed health care practitioner within the previ- compensation from the VA if you filed an the attack. However, you must include in your ous 12 months as one of the following. application for it. Your exclusion under this income any amounts that you received that you • An individual who, for at least 90 days, is condition is equal to the amount you would would have received in retirement had you not unable to perform at least two activities of be entitled to receive from the VA. become disabled as a result of a terrorist or daily living without substantial assistance military action. Accordingly, you must include in due to a loss of functional capacity. Activi- Pension based on years of service. If you your income any payments you receive from a ties of daily living are eating, toileting, receive a disability pension based on years of 401(k), pension, or other retirement plan to the transferring, bathing, dressing, and conti- service, in most cases, you must include it in extent that you would have received the amount nence. your income. However, if the pension qualifies at the same or later time regardless of whether • An individual who requires substantial su- for the exclusion for a service-connected disa- you had become disabled. Disability payments pervision to be protected from threats to bility (discussed earlier), don't include in income you receive for injuries not incurred as a direct health and safety due to severe cognitive the part of your pension that you would have re- result of a terrorist or military action or for ill- impairment. ceived if the pension had been based on a per- nesses or diseases not resulting from an injury centage of disability. You must include the rest incurred as a direct result of a terrorist or mili- Limit on exclusion. The exclusion for pay- of your pension in your income. tary action may be excludable from income for ments made on a per diem or other periodic ba- other reasons. See Pub. 907. sis under a long-term care insurance contract is Retroactive VA determination. If you re- A terrorist action is one that is directed subject to a limit. The limit applies to the total of tire from the U.S. Armed Forces based on years against the United States or any of its allies (in- these payments and any accelerated death of service and are later given a retroactive serv- cluding a multinational force in which the United benefits made on a per diem or other periodic ice-connected disability rating by the VA, your States is participating). A military action is one basis under a life insurance contract because retirement pay for the retroactive period is ex- that involves the U.S. Armed Forces and is a re- the insured is chronically ill. (For more informa- cluded from income up to the amount of VA dis- sult of actual or threatened violence or aggres- tion on accelerated death benefits, see Life In- ability benefits you would have been entitled to sion against the United States or any of its al- surance Proceeds under Miscellaneous In- receive. You can claim a refund of any tax paid lies, but doesn't include training exercises. come, later.) on the excludable amount (subject to the stat- Under this limit, the excludable amount for ute of limitations) by filing an amended return any period is figured by subtracting any reim- on Form 1040-X for each previous year during Long-Term Care bursement received (through insurance or oth- the retroactive period. You must include with Insurance Contracts erwise) for the cost of qualified long-term care each Form 1040-X a copy of the official VA de- services during the period from the larger of the termination letter granting the retroactive bene- In most cases, long-term care insurance con- following amounts. fit. The letter must show the amount withheld tracts are treated as accident and health insur- • The cost of qualified long-term care serv- and the effective date of the benefit. ance contracts. Amounts you receive from them ices during the period. If you receive a lump-sum disability sever- (other than policyholder dividends or premium • The dollar amount for the period ($380 per ance payment and are later awarded VA disa- refunds) are excludable in most cases from in- day for any period in 2020). bility benefits, exclude 100% of the severance come as amounts received for personal injury benefit from your income. However, you must or sickness. To claim an exclusion for payments See Section C of Form 8853 and its instructions include in your income any lump-sum readjust- made on a per diem or other periodic basis un- for more information. ment or other nondisability severance payment der a long-term care insurance contract, you you received on release from active duty, even must file Form 8853 with your return. Workers' Compensation if you're later given a retroactive disability rating by the VA. A long-term care insurance contract is an insurance contract that only provides coverage Amounts you receive as workers' compensation Special statute of limitations. In most ca- for qualified long-term care services. The con- for an occupational sickness or injury are fully ses, under the statute of limitations a claim for tract must: exempt from tax if they're paid under a workers' credit or refund must be filed within 3 years • Be guaranteed renewable; compensation act or a statute in the nature of a from the time a return was filed. However, if you • Not provide for a cash surrender value or workers' compensation act. The exemption also receive a retroactive service-connected disabil- other money that can be paid, assigned, applies to your survivors. The exemption, how- ity rating determination, the statute of limitations pledged, or borrowed; ever, doesn't apply to retirement plan benefits is extended by a 1-year period beginning on the • Provide that refunds, other than refunds on you receive based on your age, length of serv- date of the determination. This 1-year extended the death of the insured or complete sur- ice, or prior contributions to the plan, even if you period applies to claims for credit or refund filed render or cancellation of the contract, and retired because of an occupational sickness or after June 17, 2008, and doesn't apply to any dividends under the contract may be used injury. tax year that began more than 5 years before only to reduce future premiums or increase the date of the determination. If part of your workers' compensation future benefits; and ! reduces your social security or equiva- • In most cases, not pay or reimburse ex- CAUTION Example 19. You retired in 2014 and re- lent railroad retirement benefits re- penses incurred for services or items that ceived, that part is considered social security ceive a pension based on your years of service. would be reimbursed under Medicare, ex- On August 3, 2020, you receive a determination (or equivalent railroad retirement) benefits and cept where Medicare is a secondary payer may be taxable. See Pub. 554, and Pub. 915, of service-connected disability retroactive to or the contract makes per diem or other 2014. Generally, you could claim a refund for Social Security and Equivalent Railroad Retire- periodic payments without regard to ex- ment Benefits, for more information. the taxes paid on your pension for 2017, 2018, penses. and 2019. However, under the special limitation period, you can also file a claim for 2016 as Qualified long-term care services. Qualified Return to work. If you return to work after long as you file the claim by August 3, 2021. long-term care services are: qualifying for workers' compensation, salary You can't file a claim for 2014 and 2015 be- • Necessary diagnostic, preventive, thera- payments you receive for performing light du- cause those tax years began more than 5 years peutic, curing, treating, mitigating, rehabili- ties are taxable as wages. before the determination. tative services, and maintenance and personal care services; and Disability pension. If your disability pension is Terrorist attack or military action. Don’t in- • Required by a chronically ill individual and paid under a statute that provides benefits only clude in your income disability payments you provided pursuant to a plan of care prescri- to employees with service-connected disabili- receive for injuries resulting directly from a ter- bed by a licensed health care practitioner. ties, part of it may be workers' compensation. rorist or military action. In the case of the Sep- That part is exempt from tax. The rest of your tember 11 attacks, injuries eligible for coverage Chronically ill individual. A chronically ill indi- pension, based on years of service, is taxable by the September 11 Victim Compensation vidual is one who has been certified by a li- as pension or annuity income. If you die, the

Publication 525 (2020) Page 19 Page 20 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

part of your survivors' benefit that is a continua- ment. This compensation must be based house painter must include in income the FMV tion of the workers' compensation is exempt only on the injury and not on the period of of the accounting services you provided. from tax. your absence from work. These benefits aren't taxable even if your employer pays Example 22. You're self-employed and a for the accident and health plan that pro- member of a barter club. The club uses credit Other Sickness vides these benefits. units as a means of exchange. It adds credit and Injury Benefits units to your account for goods or services you Reimbursement for medical care. A reim- provide to members, which you can use to pur- In addition to disability pensions and annuities, bursement for medical care is generally not tax- chase goods or services offered by other mem- you may receive other payments for sickness or able. However, it may reduce your medical ex- bers of the barter club. The club subtracts credit injury. pense deduction. If you receive reimbursement units from your account when you receive for an expense you deducted in an earlier year, goods or services from other members. You Railroad sick pay. Payments you receive as see Recoveries, later. must include in your income the value of the sick pay under the Railroad Unemployment In- If you receive an advance reimbursement or credit units that are added to your account, surance Act are taxable and you must include loan for future medical expenses from your em- even though you may not actually receive them in your income. However, don't include ployer without regard to whether you suffered a goods or services from other members until a them in your income if they're for an on-the-job personal injury or sickness or incurred medical later tax year. injury. expenses, that amount is included in your income, whether or not you incur uninsured medi- Example 23. You own a small apartment Black lung benefit payments. These pay- cal expenses during the year. building. In return for 6 months rent-free use of ments are similar to workers' compensation and Reimbursements received under your em- an apartment, an artist gives you a work of art aren't taxable in most cases. ployer's plan for expenses incurred before the she created. You must report as rental income plan was established are included in income. on Schedule E (Form 1040) the FMV of the art- Federal Employees' Compensation Act work, and the artist must report as income on (FECA). Payments received under FECA for Amounts you receive under a reimbursement plan that provides for the payment of un- Schedule C (Form 1040) the fair rental value of personal injury or sickness, including payments the apartment. to beneficiaries in case of death, aren't taxable. used reimbursement amounts in cash or other However, you're taxed on amounts you receive benefits are included in your income. For details, see Pub. 969. Form 1099-B from barter exchange. If you under FECA as continuation of pay for up to 45 exchanged property or services through a bar- days while a claim is being decided. Report this ter exchange, Form 1099-B or a similar state- income on line 1 of Form 1040 or 1040-SR. ment from the barter exchange should be sent Also, pay for sick leave while a claim is being Miscellaneous Income to you by February 16, 2021. It should show the processed is taxable and must be included in value of cash, property, services, credits, or your income as wages. This section discusses various types of income. scrip you received from exchanges during You may have taxable income from certain If part of the payments you receive un- 2020. The IRS will also receive a copy of Form transactions even if no money changes hands. 1099-B. ! der FECA reduces your social security For example, you may have taxable income if CAUTION or equivalent railroad retirement bene- you lend money at a below-market interest rate Backup withholding. In most cases, the in- fits received, that part is considered social se- or have a debt you owe canceled. curity (or equivalent railroad retirement) benefits come you receive from bartering isn't subject to and may be taxable. See Pub. 554 for more in- regular income tax withholding. However, formation. Bartering backup withholding will apply in certain circumstances to ensure that income tax is collected on this income. Bartering is an exchange of property or serv- Qualified Indian health care benefit. For Under backup withholding, the barter ex- benefits and coverage provided after March 23, ices. You must include in your income, at the time received, the FMV of property or services change must withhold, as income tax, 28% of 2010, the value of any qualified Indian health the income if: care benefit isn't taxable. These benefits in- you receive in bartering. If you exchange services with another person and you both have • You don't give the barter exchange your clude any health service or benefits provided by TIN, or the Indian Health Service, amounts to reim- agreed ahead of time on the value of the services, that value will be accepted as FMV unless • The IRS notifies the barter exchange that burse medical care expenses provided by an you gave it an incorrect TIN. Indian tribe, coverage under accident or health the value can be shown to be otherwise. insurance, and any other medical care provided If you join a barter exchange, you must certify by an Indian tribe. Generally, you report this income on Sched- under penalties of perjury that your TIN is cor- ule C (Form 1040). However, if the barter in- rect and that you aren't subject to backup with- Other compensation. Many other amounts volves an exchange of something other than holding. If you don't make this certification, you receive as compensation for sickness or in- services, such as in Example 23, later, you may backup withholding may begin immediately. jury aren't taxable. These include the following have to use another form or schedule instead. The barter exchange will give you a Form W-9, amounts. or a similar form, for you to make this certifica- • Compensatory damages you receive for Example 20. You're a self-employed attor- tion. The barter exchange will withhold tax only physical injury or physical sickness, ney who performs legal services for a client, a up to the amount of any cash paid to you or de- whether paid in a lump sum or in periodic small corporation. The corporation gives you posited in your account and any scrip or credit payments. See Court awards and dam- shares of its stock as payment for your serv- issued to you (and converted to cash). ices. You must include the FMV of the shares in ages under Other Income, later. If tax is withheld from your barter in- • Benefits you receive under an accident or your income on Schedule C (Form 1040) in the year you receive them. TIP come, the barter exchange will report health insurance policy on which either you the amount of tax withheld on Form paid the premiums or your employer paid 1099-B or similar statement. the premiums but you had to include them Example 21. You're a self-employed ac- in your income. countant. You and a house painter are mem- • Disability benefits you receive for loss of bers of a barter club. Members contact each Canceled Debts income or earning capacity as a result of other directly and bargain for the value of the injuries under a no-fault car insurance pol- services to be performed. In return for accounting services you provided, the house painter In most cases, if a debt you owe is canceled or icy. forgiven, other than as a gift or bequest, you • Compensation you receive for permanent painted your home. You must report as your income on Schedule C (Form 1040) the FMV of must include the canceled amount in your in- loss or loss of use of a part or function of come. You have no income from the canceled your body, or for your permanent disfigure- the house painting services you received. The

Page 20 Publication 525 (2020) Page 21 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

debt if it's intended as a gift to you. A debt in- See Pub. 4681 for more information. the place where the educational activities are cludes any indebtedness for which you're liable carried on. or which attaches to property you hold. Stockholder debt. If you're a stockholder in a A section 501(c)(3) organization is any cor- corporation and the corporation cancels or for- If the debt is a nonbusiness debt, report the poration, community chest, fund, or foundation gives your debt to it, the canceled debt is a con- canceled amount on Schedule 1 (Form 1040), organized and operated exclusively for one or structive distribution that is generally dividend line 8. If it's a business debt, report the amount more of the following purposes. income to you. For more information, see Pub. on Schedule C (Form 1040) or on Schedule F • Charitable. 542. (Form 1040) if the debt is farm debt and you're • Educational. a farmer. If you're a stockholder in a corporation and • Fostering national or international amateur you cancel a debt owed to you by the corpora- sports competition (but only if none of the Starting in 2014, you must include the in- tion, you generally don't realize income. This is organization's activities involve providing come you elected to defer in 2009 or 2010 from because the canceled debt is considered as a athletic facilities or equipment). a cancellation, reacquisition, or modification of contribution to the capital of the corporation • Literary. a business debt. For information on this elec- equal to the amount of debt principal that you • Preventing cruelty to children or animals. tion, see Revenue Procedure 2009-37, availa- canceled. • Religious. ble at IRS.gov/irb/2009-36_IRB#RP-2009-37. • Scientific. Repayment of canceled debt. If you included • Testing for public safety. Form 1099-C. If a federal government agency, a canceled amount in your income and later pay financial institution, or credit union cancels or the debt, you may be able to file a claim for re- Exception. In most cases, the cancellation forgives a debt you owe of $600 or more, you fund for the year the amount was included in in- of a student loan made by an educational insti- may receive a Form 1099-C. Form 1099-C, come. You can file a claim on Form 1040-X if tution because of services you performed for box 2, shows the amount of debt either actually the statute of limitations for filing a claim is still that institution or another organization that pro- or deemed discharged. If you don't agree with open. The statute of limitations generally vided the funds for the loan must be included in the amount reported in box 2, contact your doesn't end until 3 years after the due date of gross income on your tax return. creditor. your original return. Education loan repayment assistance. Interest included in canceled debt. If any Education loan repayments made to you by the interest is forgiven and included in the amount Exceptions National Health Service Corps Loan Repay- of canceled debt in box 2, the amount of inter- ment Program (NHSC Loan Repayment Pro- est will also be shown in box 3. Whether or not There are several exceptions to the inclusion of gram), a state education loan repayment pro- you must include the interest portion of the can- canceled debt in income. These are explained gram eligible for funds under the Public Health celed debt in your income depends on whether next. Service Act, or any other state loan repayment the interest would be deductible if you paid it. or loan forgiveness program that is intended to See Deductible debt under Exceptions, later. Student loans. Certain student loans contain provide for the increased availability of health If the interest would not be deductible (such a provision that all or part of the debt incurred to services in underserved or health professional as interest on a personal loan), include in your attend the qualified educational institution will shortage areas aren't taxable. income the amount from box 2 of Form 1099-C. be canceled if you work for a certain period of If the interest would be deductible (such as on a time in certain professions for any of a broad Deductible debt. You don't have income from business loan), include in your income the net class of employers. the cancellation of a debt if your payment of the amount of the canceled debt (the amount You don't have income if your student loan debt would be deductible. This exception ap- shown in box 2 less the interest amount shown is canceled after you agreed to this provision plies only if you use the cash method of ac- in box 3). and then performed the services required. To counting. For more information, see chapter 5 qualify, the loan must have been made by: of Pub. 334. Discounted mortgage loan. If your financial 1. The federal government, a state or local Price reduced after purchase. In most ca- institution offers a discount for the early pay- government, or an instrumentality, agency, ses, if the seller reduces the amount of debt you ment of your mortgage loan, the amount of the or subdivision thereof; discount is canceled debt. You must include the owe for property you purchased, you don't have canceled amount in your income. 2. A tax-exempt public benefit corporation income from the reduction. The reduction of the that has assumed control of a state, debt is treated as a purchase price adjustment Mortgage relief upon sale or other disposi- county, or municipal hospital, and whose and reduces your basis in the property. tion. If you're personally liable for a mortgage employees are considered public employ- (recourse debt), and you're relieved of the mort- ees under state law; or Excluded debt. Don’t include a canceled debt in your gross income in the following situations. gage when you dispose of the property, you 3. An educational institution: may realize gain or loss up to the FMV of the • The debt is canceled in a bankruptcy case property. To the extent the mortgage discharge a. Under an agreement with an entity de- under title 11 of the U.S. Code. See Pub. exceeds the FMV of the property, it's income scribed in (1) or (2) that provided the 908. from discharge of indebtedness unless it quali- funds to the institution to make the • The debt is canceled when you're insol- fies for exclusion under Excluded debt, later. loan, or vent. However, you can't exclude any amount of canceled debt that is more than Report any income from discharge of indebted- b. As part of a program of the institution the amount by which you're insolvent. See ness on nonbusiness debt that doesn't qualify designed to encourage students to Pub. 908. for exclusion as other income on Schedule 1 serve in occupations or areas with un- The debt is qualified farm debt and is can- (Form 1040), line 8. met needs and under which the serv- • celed by a qualified person. See chapter 3 ices provided are for or under the di- You may be able to exclude part of the of Pub. 225. rection of a governmental unit or a TIP mortgage relief on your principal resi- The debt is qualified real property business tax-exempt section 501(c)(3) organi- • dence. See Excluded debt, later. debt. See chapter 5 of Pub. 334. zation (defined later). If you aren't personally liable for a mortgage • The cancellation is intended as a gift. (nonrecourse debt), and you're relieved of the A loan to refinance a qualified student loan • The debt is qualified principal residence in- mortgage when you dispose of the property will also qualify if it was made by an educational debtedness, discussed next. institution or a tax-exempt section 501(a) organ- (such as through foreclosure), that relief is in- Qualified principal residence indebted- ization under its program designed as descri- cluded in the amount you realize. You may have ness (QPRI). This is debt secured by your bed in item 3b earlier. a taxable gain if the amount you realize ex- principal residence that you took out to buy, ceeds your adjusted basis in the property. Re- An educational institution is an organization build, or substantially improve your principal port any gain on nonbusiness property as a with a regular faculty and curriculum and a reg- capital gain. ularly enrolled body of students in attendance at

Publication 525 (2020) Page 21 Page 22 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

residence. QPRI can't be more than the cost of income received as a result of life insurance a. The employee was your employee your principal residence plus improvements. proceeds may be taxable. within the 12-month period before You must reduce the basis of your principal death, or, at the time the contract was residence by the amount excluded from gross Proceeds not received in installments. If issued, was a director or highly com- income. To claim the exclusion, you must file death benefits are paid to you in a lump sum or pensated employee; or Form 982 with your tax return. other than at regular intervals, include in your b. The amount is paid to the family or income only the benefits that are more than the designated beneficiary of the em- Principal residence. Your principal resi- amount payable to you at the time of the in- ployee. dence is the home where you ordinarily live sured person's death. If the benefit payable at most of the time. You can have only one princi- death isn't specified, you include in your income Interest option on insurance. If an insurance pal residence at any one time. the benefit payments that are more than the company pays you interest only on proceeds present value of the payments at the time of Amount eligible for exclusion. The ex- from life insurance left on deposit, the interest death. clusion applies only to debt discharged after you've paid is taxable. 2006 and in most cases before 2026. The maxi- If your spouse died before October 23, mum amount you can treat as QPRI is $2 mil- Proceeds received in installments. If you receive life insurance proceeds in installments, 1986, and you chose to receive only the interest lion ($1 million if married filing separately). You from your insurance proceeds, the $1,000 inter- can't exclude debt canceled because of serv- you can exclude part of each installment from your income. est exclusion for a surviving spouse doesn't ap- ices performed for the lender or on account of ply. If you later decide to receive the proceeds To determine the excluded part, divide the any other factor not directly related to a decline from the policy in installments, you can take the amount held by the insurance company (gener- in the value of your residence or to your finan- interest exclusion from the time you begin to re- ally, the total lump sum payable at the death of cial condition. ceive the installments. the insured person) by the number of install- Limitation. If only part of a loan is QPRI, ments to be paid. Include anything over this ex- Surrender of policy for cash. If you surren- the exclusion applies only to the extent the can- cluded part in your income as interest. celed amount is more than the amount of the der a life insurance policy for cash, you must include in income any proceeds that are more loan immediately before the cancellation that Example 25. The face amount of the policy than the cost of the life insurance policy. In most isn't QPRI. is $75,000 and, as beneficiary, you choose to cases, your cost (or investment in the contract) receive 120 monthly installments of $1,000 is the total of premiums that you paid for the life Example 24. Your principal residence is each. The excluded part of each installment is insurance policy, less any refunded premiums, secured by a debt of $1 million, of which $625 ($75,000 ÷ 120), or $7,500 for an entire rebates, dividends, or unrepaid loans that $800,000 is QPRI. Your residence is sold for year. The rest of each payment, $375 a month weren’t included in your income. $700,000 and $300,000 of debt is canceled. (or $4,500 for an entire year), is interest income Only $100,000 of the canceled debt may be ex- to you. You should receive a Form 1099-R showing cluded from income (the $300,000 that was dis- the total proceeds and the taxable part. Report charged minus the $200,000 of nonqualified Installments for life. If, as the beneficiary these amounts on lines 5a and 5b of Form 1040 debt). under an insurance contract, you're entitled to or 1040-SR. receive the proceeds in installments for the rest For information on when the proceeds of your life without a refund or period-certain are excluded from income, see Accel- Host or Hostess guarantee, you figure the excluded part of each TIP erated Death Benefits, later. installment by dividing the amount held by the If you host a party or event at which sales are insurance company by your life expectancy. If made, any gift or gratuity you receive for giving there is a refund or period-certain guarantee, Split-dollar life insurance. In most cases, a the event is a payment for helping a direct seller the amount held by the insurance company for split-dollar life insurance arrangement is an ar- make sales. You must report this item as in- this purpose is reduced by the actuarial value of rangement between an owner and a nonowner come at its FMV. the guarantee. of a life insurance contract under which either party to the arrangement pays all or part of the Your out-of-pocket party expenses are sub- Surviving spouse. If your spouse died be- premiums, and one of the parties paying the ject to the 50% limit for meal expenses. For tax fore October 23, 1986, and insurance proceeds premiums is entitled to recover all or part of years beginning after 2017, no deduction is al- paid to you because of the death of your those premiums from the proceeds of the con- lowed for any expenses related to activities spouse are received in installments, you can tract. There are two mutually exclusive rules to generally considered entertainment, amuse- exclude up to $1,000 a year of the interest in- tax split-dollar life insurance arrangements. ment, or recreation. Taxpayers may continue to cluded in the installments. If you remarry, you deduct 50% of the cost of business meals if the can continue to take the exclusion. 1. Under the economic benefit rule, the taxpayer (or an employee of the taxpayer) is owner of the life insurance contract is trea- present and the food or beverages aren’t con- Employer-owned life insurance contract. If ted as providing current life insurance pro- sidered lavish or extravagant. The meals may you're the policyholder of an employer-owned tection and other taxable economic bene- be provided to a current or potential business life insurance contract, you must include in in- fits to the nonowner of the contract. customer, client, consultant, or similar business come any life insurance proceeds received that 2. Under the loan rule, the nonowner of the contact. Food and beverages that are provided are more than the premiums and any other life insurance contract is treated as loan- during entertainment events won’t be consid- amounts you paid on the policy. You're subject ing premium payments to the owner of the ered entertainment if purchased separately to this rule if you have a trade or business, you contract. from the event. own a life insurance contract on the life of your employee, and you (or a related person) are a Only one of these rules applies to any one pol- For more information about the 50% limit for beneficiary under the contract. icy. For more information, see sections 1.61-22 meal expenses, see 50% Limit in Pub. 463. However, you may exclude the full amount and 1.7872-15 of the regulations. of the life insurance proceeds if the following Life Insurance Proceeds apply. Endowment Contract Proceeds 1. Before the policy is issued, you provide Life insurance proceeds paid to you because of written notice about the insurance to the An endowment contract is a policy under which the death of the insured person aren't taxable employee and the employee provides writ- you're paid a specified amount of money on a unless the policy was turned over to you for a ten consent to be insured. certain date unless you die before that date, in price. This is true even if the proceeds were which case the money is paid to your designa- paid under an accident or health insurance pol- 2. Either: ted beneficiary. Endowment proceeds paid in a icy or an endowment contract issued on or be- lump sum to you at maturity are taxable only if fore December 31, 1984. However, interest the proceeds are more than the cost

Page 22 Publication 525 (2020) Page 23 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

(investment in the contract) of the policy. To de- other periodic basis, you must file Form 8853 choose to deduct ($9,200 − $1,500 = $7,700). termine your cost, subtract any amount that you with your return. You don't have to file Form Because you didn't choose to deduct the state previously received under the contract and ex- 8853 to exclude accelerated death benefits income tax, you don't include the state income cluded from your income from the total premi- paid on the basis of actual expenses incurred. tax refund in income. ums (or other consideration) paid for the contract. Include the part of the lump payment that Mortgage interest refund. If you received a is more than your cost in your income. Recoveries refund or credit in 2020 of mortgage interest paid in an earlier year, the amount should be A recovery is a return of an amount you deduc- Endowment proceeds that you choose to re- shown in box 4 of your Form 1098. Don’t sub- ted or took a credit for in an earlier year. The ceive in installments instead of a lump sum pay- tract the refund amount from the interest you most common recoveries are refunds, reim- ment at the maturity of the policy are taxed as paid in 2020. You may have to include it in your bursements, and rebates of itemized deduc- an annuity. This is explained in Pub. 575. For income under the rules explained in the follow- tions. You may also have recoveries of noni- this treatment to apply, you must choose to re- ing discussions. temized deductions (such as payments on ceive the proceeds in installments before re- previously deducted bad debts) and recoveries ceiving any part of the lump sum. This election Interest on recovery. Interest on any of the of items for which you previously claimed a tax must be made within 60 days after the amounts you recover must be reported as inter- credit. lump-sum payment first becomes payable to est income in the year received. For example, you. report any interest you received on state or lo- Tax benefit rule. You must include a recovery cal income tax refunds on Form 1040 or in your income in the year you receive it up to 1040-SR, line 2b, or Form 1040-NR, line 9a. Accelerated Death Benefits the amount by which the deduction or credit you took for the recovered amount reduced your tax Recovery and expense in same year. If the Certain amounts paid as accelerated death in the earlier year. For this purpose, any in- refund or other recovery and the expense occur benefits under a life insurance contract or viati- crease to an amount carried over to the current in the same year, the recovery reduces the de- cal settlement before the insured's death are year that resulted from the deduction or credit is duction or credit and isn't reported as income. excluded from income if the insured is termi- considered to have reduced your tax in the ear- nally or chronically ill. lier year. Recovery for 2 or more years. If you receive a refund or other recovery that is for amounts Viatical settlement. This is the sale or assign- Federal income tax refund. Refunds of fed- you paid in 2 or more separate years, you must ment of any part of the death benefit under a life eral income taxes aren't included in your in- allocate, on a pro rata basis, the recovered insurance contract to a viatical settlement pro- come because they're never allowed as a de- amount between the years in which you paid it. vider. A viatical settlement provider is a person duction from income. This allocation is necessary to determine the who regularly engages in the business of buy- amount of recovery from any earlier years and ing or taking assignment of life insurance con- State tax refund. If you received a state or lo- to determine the amount, if any, of your allowa- tracts on the lives of insured individuals who are cal income tax refund (or credit or offset) in ble deduction for this item for the current year. terminally or chronically ill and who meets the 2020, you must generally include it in income if requirements of section 101(g)(2)(B) of the In- you deducted the tax in an earlier year. The Example 28. You paid 2019 estimated ternal Revenue Code. payer should send Form 1099-G to you by Jan- state income tax of $4,000 in four equal pay- uary 31, 2021. The IRS will also receive a copy ments. You made your fourth payment in Janu- Exclusion for terminal illness. Accelerated of the Form 1099-G. If you file Form 1040 or ary 2020. You had no state income tax withheld death benefits are fully excludable if the insured 1040-SR, use the worksheet in the 2020 In- during 2019. In 2020, you received a $400 tax is a terminally ill individual. This is a person who structions for Schedule 1 (Form 1040) to figure refund based on your 2019 state income tax re- has been certified by a physician as having an the amount (if any) to include in your income. turn. You claimed itemized deductions each illness or physical condition that can reasonably See Itemized Deduction Recoveries, later, for year on Schedule A (Form 1040). be expected to result in death within 24 months when you must use Worksheet 2, later in this You must allocate the $400 refund between from the date of the certification. publication. 2019 and 2020, the years in which you paid the If you could choose to deduct for a tax year tax on which the refund is based. You paid 75% Exclusion for chronic illness. If the insured either: ($3,000 ÷ $4,000) of the estimated tax in 2019, is a chronically ill individual who isn't terminally • State and local income taxes, or so 75% of the $400 refund, or $300, is for ill, accelerated death benefits paid on the basis • State and local general sales taxes, then amounts you paid in 2019 and is a recovery of costs incurred for qualified long-term care item. If all of the $300 is a taxable recovery services are fully excludable. Accelerated death the maximum refund that you may have to include in income is limited to the excess of the item, you'll include $300 on Schedule 1 (Form benefits paid on a per diem or other periodic 1040), line 1, for 2020, and attach a copy of basis are excludable up to a limit. For 2020, this tax you chose to deduct for that year over the tax you didn't choose to deduct for that year. your calculation showing why that amount is limit is $380. It applies to the total of the accel- less than the amount shown on the Form erated death benefits and any periodic pay- Example 26. For 2019, you can choose a 1099-G you received from the state. ments received from long-term care insurance $10,000 state income tax deduction or a $9,000 The balance ($100) of the $400 refund is for contracts. For information on the limit and the state general sales tax deduction. You choose your January 2020 estimated tax payment. definitions of chronically ill individual, qualified to deduct the state income tax. In 2020, you re- When you figure your deduction for state and long-term care services, and long-term care in- ceive a $2,500 state income tax refund. The local income taxes paid during 2020, you'll re- surance contracts, see Long-Term Care Insur- maximum refund that you may have to include duce the $1,000 paid in January by $100. Your ance Contracts under Sickness and Injury Ben- in income is $1,000, because you could have deduction for state and local income taxes paid efits, earlier. deducted $9,000 in state general sales tax. during 2020 will include the January net amount of $900 ($1,000 − $100), plus any estimated Exception. The exclusion doesn't apply to any Example 27. For 2019, you can choose a state income taxes paid in 2020 for 2020, and amount paid to a person (other than the in- $9,500 state general sales tax deduction based any state income tax withheld during 2020. sured) who has an insurable interest in the life on actual expenses or a $9,200 state income of the insured because the insured: tax deduction. You choose to deduct the gen- Joint state or local income tax return. If you • Is a director, officer, or employee of the eral sales tax deduction. In 2020, you return an filed a joint state or local income tax return in an person; or item you had purchased and receive a $500 earlier year and you aren't filing a joint Form • Has a financial interest in the person's sales tax refund. In 2020, you also receive a 1040 or 1040-SR with the same person for business. $1,500 state income tax refund. The maximum 2020, any refund of a deduction claimed on that refund that you may have to include in income state or local income tax return must be alloca- Form 8853. To claim an exclusion for acceler- is $500, because it's less than the excess of the ted to the person that paid the expense. If both ated death benefits made on a per diem or tax deducted ($9,500) over the tax you didn't

Publication 525 (2020) Page 23 Page 24 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

persons paid a portion of the expense, allocate 8. You couldn't use the full amount of credits 4. You had no unused tax credits. (If you had the refund based on your individual portion. For you were entitled to in 2019 because the unused tax credits, see Unused tax cred- example, if you paid 25% of the expense, then total credits were more than the amount its, later.) you would use 25% of the refund to figure if you shown on your 2019 Form 1040, line 12b. 5. You weren’t subject to AMT. (If you were must include any portion of the refund in your 9. You could be claimed as a dependent by subject to AMT, see Subject to AMT, income. someone else in 2019. later.) Registered domestic partners (RDPs) domi- 10. You received a refund because of a jointly If any of the earlier statements isn't true, see ciled in community property states. For the filed state or local income tax return, but Total recovery not included in income, later. rules that apply to RDPs who are domiciled in you aren't filing a joint 2020 Form 1040 or community property states, see Pub. 555 and 1040-SR with the same person. State tax refund. In addition to the previ- Form 8958. ous six items, you must include in your income If you also recovered an amount de- the full amount of a refund of state or local in- Deductions not itemized. If you didn't itemize ! ducted as a nonitemized deduction, come tax or general sales tax if the excess of deductions for the year for which you received CAUTION figure the amount of that recovery to in- the tax you deducted over the tax you didn't de- the recovery of an expense that was deductible clude in your income and add it to your adjusted duct is more than the refund of the tax deduc- only if you itemized, don't include any of the re- gross income (AGI) before applying the rules ted. covery amount in your income. explained here. See Nonitemized Deduction If the refund is more than the excess, see Recoveries, later. Total recovery not included in income, later. Example 29. You claimed the standard de- Where to report. Enter your state or local duction on your 2019 federal income tax return. Nonresident aliens. If you're a nonresident income tax refund on Schedule 1 (Form 1040), In 2020, you received a refund of your 2019 alien and file Form 1040-NR, you can't claim the line 1, and the total of all other recoveries as state income tax. Don’t report any of the refund standard deduction. If you recover an itemized other income on Schedule 1 (Form 1040), as income because you didn't itemize deduc- deduction that you claimed in an earlier year, line 8. tions for 2019. you must generally include the full amount of the recovery in your income in the year you re- Example 30. For 2019, you filed a joint re- Itemized Deduction Recoveries ceive it. However, if you had no taxable income turn on Form 1040. Your taxable income was in that earlier year (see Negative taxable in- $60,000 and you weren’t entitled to any tax The following discussion explains how to deter- come, later), you should complete Worksheet 2 credits. Your standard deduction was $24,400, mine the amount to include in your income from to determine the amount you must include in in- and you had itemized deductions of $26,200. In a recovery of an amount deducted in an earlier come. If any other statement under Total recov- 2020, you received the following recoveries for year as an itemized deduction. However, you ery included in income isn't true, see the discus- amounts deducted on your 2018 return: generally don't need to use this discussion if sion referenced in the statement to determine you file Form 1040 or 1040-SR and the recov- the amount to include in income. Medical expenses ...... $200 ery is for state or local income taxes paid in State and local income tax refund ...... 400 Capital gains. If you determined your tax in 2019. Instead, use the State and Local Income Refund of mortgage interest ...... 325 the earlier year by using the Schedule D Tax Tax Refund Worksheet—Schedule 1, Line 1, in Total recoveries ...... $925 the 2020 Instructions for Schedule 1 (Form Worksheet, or the Qualified Dividends and Cap- ital Gain Tax Worksheet, and you receive a re- 1040) for line 1 to figure the amount (if any) to None of the recoveries were more than the fund in 2020 of a deduction claimed in that year, include in your income. See the Instructions for deductions taken for 2019. The difference be- you'll have to refigure your tax for the earlier Forms 1040 and 1040-SR. tween the state and local income tax you de- year to determine if the recovery must be inclu- ducted and your local general sales tax you ded in your income. If inclusion of the recovery You can't use the State and Local Income could have deducted was more than $400. doesn't change your total tax, you don't include Tax Refund Worksheet—Schedule 1, Line 1, Your total recoveries are less than the the recovery in income. However, if your total and must use this discussion if you're a nonresi- amount by which your itemized deductions ex- tax increases by any amount, you must include dent alien (discussed later) or any of the follow- ceeded the standard deduction ($26,200 − the recovery in your income up to the amount of ing statements are true. $24,400 = $1,800), so you must include your to- the deduction that reduced your tax in the ear- 1. You received a refund in 2020 that is for a tal recoveries in your income for 2020. Report lier year. tax year other than 2019. the state and local income tax refund of $400 on Schedule 1 (Form 1040), line 1, and the bal- 2. You received a refund other than an in- Total recovery included in income. If you re- ance of your recoveries, $525, on Schedule 1 come tax refund, such as a general sales cover any itemized deduction that you claimed (Form 1040), line 8. tax or real property tax refund, in 2020 of in an earlier year, you must generally include the full amount of the recovery in your income in an amount deducted or credit claimed in Total recovery not included in income. If the year you receive it. This rule applies if, for an earlier year. one or more of the five statements listed earlier the earlier year, all of the following statements under Total recovery included in income isn't 3. The amount on your 2019 Form 1040, are true. line 10, was more than the amount on your true, you may be able to exclude at least part of 2019 Form 1040, line 8b minus line 9. 1. Your itemized deductions exceeded the the recovery from your income. See the discus- standard deduction by at least the amount sion referenced in the statement. You may be 4. You had taxable income on your 2019 of the recovery. (If your itemized deduc- able to use Worksheet 2 to determine the part Form 1040, line 11b, but no tax on your tions didn't exceed the standard deduction of your recovery to include in your income. You Form 1040, line 12a, because of the 0% by at least the amount of the recovery, see can also use Worksheet 2 to determine the part tax rate on net capital gains and qualified Standard deduction limit, later.) of a state tax refund (discussed earlier) to in- dividends in certain situations. See Capital clude in income. gains, later. 2. You had taxable income. (If you had no taxable income, see Negative taxable in- 5. Your 2019 state and local income tax re- Allocating the included part. If you aren't come, later.) fund is more than your 2019 state and lo- required to include all of your recoveries in your cal income tax deduction minus the 3. Your deduction for the item recovered income, and you have both a state income tax amount you could have deducted as your equals or exceeds the amount recovered. refund and other itemized deduction recoveries, 2019 state and local general sales taxes. (If your deduction was less than the you must allocate the taxable recoveries be- amount recovered, see Recovery limited tween the state income tax refund you report on 6. You made your last payment of 2019 esti- to deduction, later.) Schedule 1 (Form 1040 or 1040-NR), line 1, mated state or local income tax in 2020. and the amount you report as other income on 7. You owed AMT in 2019. Schedule 1 (Form 1040 or 1040-NR), line 8. If

Page 24 Publication 525 (2020) Page 25 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

you don't use Worksheet 2, make the allocation prior years to locate the standard deduction for Example 34. For 2019, you paid $1,700 for as follows. the filing status for that prior year. If you filed medical expenses. Because of the limit on de- Form 1040-NR or 1040-NR-EZ, you couldn't ducting medical expenses, you deducted only 1. Divide your state income tax refund by the claim the standard deduction. $200 as an itemized deduction. In 2020, you re- total of all your itemized deduction recov- ceived a $500 reimbursement from your medi- eries. Example 32. You filed a joint return on cal insurance for your 2019 expenses. The only 2. Multiply the amount of taxable recoveries Form 1040 for 2019 with taxable income of amount of the $500 reimbursement that must by the percentage in (1). This is the $45,000. Your itemized deductions were be included in your income for 2020 is $200, the amount you report as a state income tax $24,650. The standard deduction that you could amount actually deducted. refund. have claimed was $24,400. In 2020, you recov- 3. Subtract the result in (2) above from the ered $2,100 of your 2019 itemized deductions. Overall limitation on itemized deductions amount of taxable recoveries. This is the None of the recoveries were more than the ac- no longer applies. For tax years beginning amount you report as other income. tual deductions for 2019. Include $250 of the re- after 2017, there is no limitation on itemized de- coveries in your 2020 income. This is the ductions based on your AGI. Example 31. In 2020, you recovered smaller of your recoveries ($2,100) or the To determine the part of the recovery you $2,500 of your 2019 itemized deductions amount by which your itemized deductions must include in income, follow the two steps be- claimed on Schedule A (Form 1040), but the re- were more than the standard deduction low. ($24,650 − $24,400 = $250). coveries you must include in your 2020 income 1. Figure the greater of: are only $1,500. Of the $2,500 you recovered, $500 was due to your state income tax refund. Negative taxable income. If your taxable in- a. The standard deduction for the earlier Your state income tax was more than your state come for the prior year (Worksheet 2, line 10) year, or was a negative amount, the recovery you must general sales tax by $600. The amount you re- b. The amount of itemized deductions port as a state tax refund on Schedule 1 (Form include in income is reduced by that amount. You have a negative taxable income for 2019 if you would have been allowed for the 1040), line 1, is $300 [($500 ÷ $2,500) × earlier year if you had figured them $1,500]. The balance of the taxable recoveries, your: • Form 1040, the sum of lines 9 and 10, was using only the net amount of the re- $1,200, is reported as other income on Sched- covery item. The net amount is the ule 1 (Form 1040), line 8. more than line 8b; • Form 1040-NR, line 40, was more than amount you actually paid reduced by the recovery amount. Standard deduction limit. You are generally line 35; or allowed to claim the standard deduction if you • Form 1040-NR-EZ, line 11, was more than Note. If you were required to itemize don't itemize your deductions. Only your item- line 10. your deductions in the earlier year, use ized deductions that are more than your stand- step 1b and not step 1a. ard deduction are subject to the recovery rule Example 33. The facts are the same as in 2. Subtract the amount in step 1 from the (unless you're required to itemize your deduc- Example 32, except line 12b was $200 more amount of itemized deductions actually al- tions). If your total deductions on the earlier than line 11b on your 2019 Form 1040, giving lowed in the earlier year after applying the year return weren’t more than your income for you a negative taxable income of $200. You limit on itemized deductions. that year, include in your income this year the must include $50 in your 2020 income, rather than $250. lesser of: The result of step 2 is the amount of the recov- • Your recoveries, or ery to include in your income for the year you Recovery limited to deduction. You don't in- • The amount by which your itemized deduc- receive the recovery. If your taxable income for clude in your income any amount of your recov- tions exceeded the standard deduction. the earlier year was a negative amount, reduce ery that is more than the amount you deducted your recovery by the negative amount. Standard deduction for earlier years. To in the earlier year. The amount you include in If you had unused tax credits in the earlier determine if amounts recovered in the current your income is limited to the smaller of: year, see Unused tax credits, later. year must be included in your income, you must • The amount deducted, or know the standard deduction for your filing sta- • The amount recovered. For more information on this calculation, see tus for the year the deduction was claimed. Revenue Ruling 93-75. This ruling is in Cumula- Look in the instructions for your tax return from tive Bulletin 1993-2.

Publication 525 (2020) Page 25 Page 26 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Worksheet 2a. Computations for Worksheet 2, lines 1a and 1b Keep for Your Records To determine amounts to enter on lines 1a and 1b of Worksheet 2, complete the following:

1. Enter the income tax refund from Form(s) 1099–G (or similar statement) ...... 1. 2. Enter the refunds received for state and local real estate taxes and state and local personal property taxes ...... 2.

3. Total state and local refunds. Add lines 1 and 2. But don’t enter more than the amount of your state and local taxes shown on your 2019 Schedule A, line 5d ...... 3. 4. Is the amount of state and local income taxes (or general sales taxes), real estate taxes, and personal property taxes paid in 2019 (generally, this is the amount reported on your 2019 Schedule A, line 5d), more than the amount on your 2019 Schedule A, line 5e?

No. Enter the amount from line 3 on line 4 and go to line 5.

Yes. Subtract the amount on your 2019 Schedule A, line 5e, from the amount of state and local income taxes (or general sales taxes), real estate taxes, and personal property taxes paid in 2019 (generally, this is the amount reported on your 2019 Schedule A, line 5d). Enter the result here ...... 4. 5. Is the amount on line 3 more than the amount on line 4?

No. [STOP] None of the refunds on lines 1 or 2 is taxable.

Yes. Subtract line 4 from line 3 and enter the result here ...... 5. 6. Add lines 1 and 2 and enter the result here ...... 6. 7. Divide line 1 by line 6. Then multiply by the amount on line 5 and enter the result here and on Worksheet 2, line 1a ...... 7. 8. Divide line 2 by line 6. Then multiply by the amount on line 5 and enter the result here and on Worksheet 2, line 1b ...... 8.

Page 26 Publication 525 (2020) Page 27 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Worksheet 2. Recoveries of Itemized Deductions Keep for Your Records To determine whether you should complete this worksheet to figure the part of a recovery amount to include in income on your 2020 tax return, see Itemized Deduction Recoveries. If you recovered amounts from more than 1 year, such as a state income tax refund from 2019 and a casualty loss reimbursement from 2018, complete a separate worksheet for each year. Use information from your tax return for the year the expense was deducted. A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the deduction). If you were subject to the AMT or your tax credits reduced your tax to zero, see Unused tax credits and Subject to AMT under Itemized Deduction Recoveries. If your recovery was for an itemized deduction that was limited, you should read Itemized deductions limited under Itemized Deduction Recoveries.

NOTE: Before completing lines 1a and 1b, see Worksheet 2a, Computations for Worksheet 2, lines 1a and 1b.

1a. State/local income tax refund or credit1a ...... 1a.

1b. State/local real estate and personal property taxes1a ...... 1b. 2. Enter the total of all other Schedule A refunds or reimbursements (excluding the amounts you entered on lines 1a and 1b)2 ...... 2. 3. Add lines 1a, 1b, and 2 ...... 3. 4. Itemized deductions for the prior year. For 2019: • Form 1040, Schedule A, line 17 ...... • Form 1040-NR, Schedule A, line 15 ...... • Form 1040-NR-EZ, line 11 ...... 4. 5. Enter any amount previously refunded to you (don't enter an amount from lines 1a or 1b or line 2) ...... 5. 6. Subtract line 5 from line 4 ...... 6. 7. Standard deduction for the prior year.3 If you filed Form 1040-NR or 1040-NR-EZ, enter -0- ...... 7. 8. Subtract line 7 from line 6. If the result is zero or less, stop here. The amounts on lines 1a, 1b, and 2 aren't taxable ...... 8. 9. Enter the smaller of line 3 or line 8 ...... 9. 10. Taxable income for prior year4 (2019 Form 1040, line 11b; 2019 Form 1040-NR, line 41; or 2019 Form 1040-NR-EZ, line 14) ...... 10. 11. Amount to include in income for 2020: • If line 10 is zero or more, enter the amount from line 9. • If line 10 is a negative amount, add lines 9 and 10 and enter the result (but not less than zero)5 ...... 11.

If line 11 equals line 3— Enter the amount from line 1a on Schedule 1 (Form 1040), line 1. Enter the amounts from lines 1b and 2 on Schedule 1 (Form 1040), line 8.

If line 11 is less than line 3 and either lines 1a or 1b or line 2 is zero— If there is an amount on line 1a, enter the amount from line 11 on Schedule 1 (Form 1040), line 1. If there is an amount on lines 1b and/or 2, enter the amount from line 11 on Schedule 1 (Form 1040), line 8.

If line 11 is less than line 3, and there are amounts on line 1a and on line 1b or 2, complete the following worksheet. A. Divide the amount on line 1a by the amount on line 3. Enter the percentage ...... A. B. Multiply the amount on line 11 by the percentage on line A. Enter the result here and on Schedule 1 (Form 1040), line 1 ...... B. C. Subtract the amount on line B from the amount on line 11. Enter the result here and on Schedule 1 (Form 1040), line 8 ...... C.

1a Don’t enter more than the amount deducted for the prior year. Don’t enter more than the excess of your state and local income tax deduction over your state and local general sales taxes you could have deducted. 2 Don’t enter more than the amount deducted for the prior year. If you deducted state and local general sales taxes and received a refund of those taxes, include the amount on line 2, but don't enter more than the excess of your sales tax deduction over your state and local income tax you could have deducted. 3 See the instructions for prior year forms at IRS.gov for prior year standard deduction. 4 If taxable income is a negative amount, enter that amount in brackets. Don’t enter zero unless your taxable income is exactly zero. See Negative taxable income. Taxable income will have to be adjusted for any net operating loss carryover. For more information, see Pub. 536. 5 For example, $700 + ($400) = $300. Unused tax credits. If you recover an item de- recovery in your income. To do this, add the tax, after application of the credits, is more than ducted in an earlier year in which you had un- amount of the recovery to your earlier year's the actual tax in the earlier year, include the re- used tax credits, you must refigure the earlier taxable income and refigure the tax and the covery in your income up to the amount of the year's tax to determine if you must include the credits on the refigured amount. If the refigured deduction that reduced the tax in the earlier

Publication 525 (2020) Page 27 Page 28 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

year. For this purpose, any increase to a credit • Form 1040-NR, line 40, was more than Survivor Benefits carried over to the current year that resulted line 35; or from deducting the recovered amount in the • Form 1040-NR-EZ, line 11, was more than In most cases, payments made by or for an em- earlier year is considered to have reduced your line 10. ployer because of an employee's death must be tax in the earlier year. If the recovery is for an If you had a net operating loss (NOL) in a prior included in income. The following discussions itemized deduction claimed in a year in which year, you'll have to adjust your taxable income explain the tax treatment of certain payments the deductions were limited, see Itemized de- for any NOL carryover. See Pub. 536 for more made to survivors. For additional information, ductions limited, earlier. information. see Pub. 559. If your tax, after application of the credits, doesn't change, you didn't have a tax benefit Unused tax credits. If you recover an item de- Lump-sum payments. Lump-sum payments from the deduction. Don’t include the recovery ducted in an earlier year in which you had un- you receive from a decedent's employer as the in your income. used tax credits, you must refigure the earlier surviving spouse or beneficiary may be accrued year's tax to determine if you must include the salary payments; distributions from employee Example 35. In 2019, Jean Black filed as recovery in your income. To do this, add the profit-sharing, pension, annuity, or stock bonus head of household and itemized her deductions amount of the recovery to your earlier year's plans; or other items that should be treated sep- on Schedule A (Form 1040). Her taxable in- taxable income and refigure the tax and the arately for tax purposes. The tax treatment of come was $5,260 and her tax was $528. She credits on the refigured amount. If the refigured these lump-sum payments depends on the type claimed a child care credit of $1,200. The credit tax, after application of the credits, is more than of payment. reduced her tax to zero, and she had an unused the actual tax in the earlier year, include the re- tax credit of $672 ($1,200 − $528). In 2020, covery in your income up to the amount of the Salary or wages. Salary or wages re- Jean recovered $1,000 of her itemized deduc- deduction that reduced the tax in the earlier ceived after the death of the employee are usu- tions. She reduces her 2019 itemized deduc- year. For this purpose, any increase to a credit ally ordinary income to you. tions by $1,000 and refigures that year's tax on carried over to the current year that resulted Qualified employee retirement plans. taxable income of $6,260. However, the child from deducting the recovered amount in the Lump-sum distributions from qualified em- care credit exceeds the refigured tax of $628. earlier year is considered to have reduced your ployee retirement plans are subject to special Jean's tax liability for 2019 isn't changed by re- tax in the earlier year. tax treatment. For information on these distribu- ducing her deductions by the recovery. She If your tax, after application of the credits, tions, see Pub. 575 (or Pub. 721 if you're the didn't have a tax benefit from the recovered de- doesn't change, you didn't have a tax benefit survivor of a federal employee or retiree). duction and doesn't include any of the recovery from the deduction. Don’t include the recovery in her income for 2020. in your income. Public safety officer killed in the line of duty. If you're a survivor of a public safety offi- Subject to AMT. If you were subject to the Capital gains. If you determined your tax in cer who was killed in the line of duty, you can AMT in the year of the deduction, you'll have to the earlier year by using the Schedule D Tax exclude from income any amount received as a refigure your tax for the earlier year to deter- Worksheet, or the Qualified Dividends and Cap- survivor annuity on account of the death of a mine if the recovery must be included in your in- ital Gain Tax Worksheet, and you receive a re- public safety officer killed in the line of duty. come. This will require a refiguring of your regu- fund in 2020 of a deduction claimed in that year, For this purpose, the term “public safety offi- lar tax, as shown in Example 35, and a you'll have to refigure your tax for the earlier refiguring of your AMT. If inclusion of the recov- cer” includes law enforcement officers, firefight- year to determine if the recovery must be inclu- ers, chaplains, and rescue squad and ambu- ery doesn't change your total tax, you don't in- ded in your income. If inclusion of the recovery clude the recovery in your income. However, if lance crew members. For more information, see doesn't change your total tax, you don't include Pub. 559. your total tax increases by any amount, you re- the recovery in income. However, if your total ceived a tax benefit from the deduction and you tax increases by any amount, you must include must include the recovery in your income up to the recovery in your income up to the amount of Unemployment Benefits the amount of the deduction that reduced your the deduction that reduced your tax in the ear- tax in the earlier year. lier year. The tax treatment of unemployment benefits you receive depends on the type of program Nonitemized Deduction Amounts Recovered for Credits paying the benefits. Recoveries Unemployment compensation. Generally, If you received a recovery in 2020 for an item you must include in income all unemployment This section discusses recovery of deductions for which you claimed a tax credit in an earlier compensation you receive. You should receive other than itemized deductions. year, you must increase your 2020 tax by the a Form 1099-G showing in box 1 the total un- amount of the recovery, up to the amount by employment compensation paid to you. In most Total recovery included in income. If you re- which the credit reduced your tax in the earlier cases, you enter unemployment compensation cover an amount that you deducted in an earlier year. You had a recovery if there was a down- on Schedule 1 (Form 1040), line 7. year when you were figuring your AGI, you must ward price adjustment or similar adjustment on generally include the full amount of the recovery the item for which you claimed a credit. in your income in the year received. Exclusion from income tax on a portion of unemployment compensation for 2020. This rule doesn't apply to the investment For individuals with adjusted gross income of Total recovery not included in income. If credit or the foreign tax credit. Recoveries of any part of the deduction you took for the recov- less than $150,000, up to $10,200 of unemploy- these credits are covered by other provisions of ment compensation is excluded from gross in- ered amount didn't reduce your tax, you may be the law. See Pub. 514 or Form 4255 for details. able to exclude at least part of the recovery come. In the case of a joint return, up to from your income. You must include the recov- $10,200 received by each spouse is excluded. ery in your income only up to the amount of the Sharing/Gig Economy (See P.L. 117–2 and section 85(c).) deduction that reduced your tax in the year of If you received unemployment com- Generally, if you work in the gig economy or did the deduction. (See Tax benefit rule, earlier.) pensation but didn't receive Form gig work, you must include all income received ! CAUTION 1099–G, Certain Government Pay- from all jobs whether you received a Form Negative taxable income. If your taxable in- ments, through the mail, you may need to ac- 1099-K, Payment Card and Third-Party Net- come for the prior year was a negative amount, cess your information through your state’s web- work Transactions, or not. See the Instructions the recovery you must include in income is re- site to get your electronic Form 1099-G. duced by that amount. You have a negative tax- for Schedule C (Form 1040) and the Instruc- tions for Schedule SE (Form 1040). able income for 2019 if your: Types of unemployment compensation. • Form 1040, the sum of lines 9 and 10, was Unemployment compensation generally in- more than line 8b; cludes any amount received under an

Page 28 Publication 525 (2020) Page 29 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

unemployment compensation law of the United Repayment of benefits. You may have to your income, as long as the payments (exclu- States or of a state. It includes the following repay some of your supplemental unemploy- sive of extra allowances for transportation or benefits. ment benefits to qualify for trade readjustment other costs) don't total more than the public wel- • Benefits paid by a state or the District of allowances under the Trade Act of 1974. If you fare benefits you would have received other- Columbia from the Federal Unemployment repay supplemental unemployment benefits in wise. If the payments are more than the welfare Trust Fund. the same year you receive them, reduce the to- benefits you would have received, the entire • State unemployment insurance benefits. tal benefits by the amount you repay. If you re- amount must be included in your income as wa- • Railroad unemployment compensation pay the benefits in a later year, you must in- ges. benefits. clude the full amount of the benefits in your • Disability payments from a government income for the year you received them. Reemployment Trade Adjustment Assis- program paid as a substitute for unemploy- Deduct the repayment in the later year as an tance (RTAA) payments. Payments you re- ment compensation. (Amounts received as adjustment to gross income on Form 1040 or ceive from a state agency under the RTAA must workers' compensation for injuries or ill- 1040-SR. Include the repayment on Schedule 1 be included in your income. The state must ness aren't unemployment compensation. (Form 1040), line 22, and enter “Sub-Pay TRA” send you Form 1099-G to advise you of the See Workers' Compensation under Sick- and the amount on the dotted line next to amount you should include in income. The ness and Injury Benefits, earlier.) line 22. If the amount you repay in a later year is amount should be reported on Schedule 1 • Trade readjustment allowances under the more than $3,000, you may be able to take a (Form 1040), line 8. Trade Act of 1974. credit against your tax for the later year instead • Unemployment assistance under the Dis- of deducting the amount repaid. For information Persons with disabilities. If you have a disa- aster Relief and Emergency Assistance on this, see Repayments, later. bility, you must include in income compensation Act of 1974. you receive for services you perform unless the • Unemployment assistance under the Air- Private unemployment fund. Unemployment compensation is otherwise excluded. However, line Deregulation Act of 1978 Program. benefit payments from a private (nonunion) you don't include in income the value of goods, fund to which you voluntarily contribute are tax- services, and cash that you receive, not in re- Governmental program. If you contribute able only if the amounts you receive are more turn for your services, but for your training and to a governmental unemployment compensa- than your total payments into the fund. Report rehabilitation because you have a disability. Ex- tion program and your contributions aren't de- the taxable amount on Schedule 1 (Form 1040), cludable amounts include payments for trans- ductible, amounts you receive under the pro- line 8. portation and attendant care, such as inter- gram aren't included as unemployment preter services for the deaf, reader services for compensation until you recover your contribu- Payments by a union. Benefits paid to you as the blind, and services to help individuals with tions. If you deducted all of your contributions to an unemployed member of a union from regular an intellectual disability do their work. the program, the entire amount you receive un- union dues are included in your income on der the program is included in your income. Schedule 1 (Form 1040), line 8. However, if you Disaster relief grants. Don’t include post-dis- contribute to a special union fund and your pay- aster grants received under the Disaster Relief Repayment of unemployment compen- and Emergency Assistance Act in your income sation. If you repaid in 2020 unemployment ments to the fund aren't deductible, the unemployment benefits you receive from the fund are if the grant payments are made to help you compensation you received in 2020, subtract meet necessary expenses or serious needs for the amount you repaid from the total amount includible in your income only to the extent they're more than your contributions. medical, dental, housing, personal property, you received and enter the difference on transportation, or funeral expenses. Don’t de- Schedule 1 (Form 1040), line 7. On the dotted duct casualty losses or medical expenses that line next to your entry, enter “Repaid” and the Guaranteed annual wage. Payments you receive from your employer during periods of un- are specifically reimbursed by these disaster re- amount you repaid. If you repaid unemployment lief grants. If you have deducted a casualty loss compensation in 2020 that you included in your employment, under a union agreement that guarantees you full pay during the year, are tax- for the loss of your personal residence and you income in an earlier year, you can deduct the later receive a disaster relief grant for the loss of amount repaid on Schedule A (Form 1040), able as wages. Include them on line 1 of Form 1040 or 1040-SR. the same residence, you may have to include line 16, if you itemize deductions and if the part or all of the grant in your taxable income. amount is more than $3,000. See Repayments, State employees. Payments similar to a See Recoveries, earlier. Unemployment assis- later. state's unemployment compensation may be tance payments under the Act are taxable un- Tax withholding. You can choose to have made by the state to its employees who aren't employment compensation. See Unemploy- federal income tax withheld from your unem- covered by the state's unemployment compen- ment compensation under Unemployment ployment compensation. To make this choice, sation law. Although the payments are fully tax- Benefits, earlier. complete Form W-4V and give it to the paying able, don't report them as unemployment com- office. Tax will be withheld at 10% of your pay- pensation. Report these payments on Schedule Disaster relief payments. You can exclude ment. 1 (Form 1040), line 8. from income any amount you receive that is a qualified disaster relief payment. A qualified dis- If you don't choose to have tax withheld aster relief payment is an amount paid to you: from your unemployment compensa- Welfare and Other ! 1. To reimburse or pay reasonable and nec- CAUTION tion, you may be liable for estimated Public Assistance Benefits essary personal, family, living, or funeral tax. If you don't pay enough tax, either through expenses that result from a qualified dis- withholding or estimated tax, or a combination Don’t include in your income governmental ben- aster; of both, you may have to pay a penalty. For efit payments from a public welfare fund based more information, see Pub. 505. upon need, such as payments due to blindness. 2. To reimburse or pay reasonable and nec- Payments from a state fund for the victims of essary expenses incurred for the repair or Supplemental unemployment benefits. crime shouldn't be included in the victims' in- rehabilitation of your home or repair or re- Benefits received from an employer-financed comes if they're in the nature of welfare pay- placement of its contents to the extent it’s fund (to which the employees didn't contribute) ments. Don’t deduct medical expenses that are due to a qualified disaster; reimbursed by such a fund. You must include in aren't unemployment compensation. They're 3. By a person engaged in the furnishing or your income any welfare payments that are taxable as wages and are subject to withholding sale of transportation as a common carrier compensation for services or that are obtained for income tax. They may be subject to social because of the death or personal physical fraudulently. security and Medicare taxes. For more informa- injuries incurred as a result of a qualified tion, see Supplemental Unemployment Benefits disaster; or in section 5 of Pub. 15-A. Report these pay- Work-training program. Payments you re- ments on line 1 of Form 1040 or 1040-SR. ceive from a state welfare agency for taking part 4. By a federal, state, or local government, or in a work-training program aren't included in agency or instrumentality in connection

Publication 525 (2020) Page 29 Page 30 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

with a qualified disaster in order to pro- income, but are includible in the basis of the benefits, and lump-sum death benefits. The mote the general welfare. newly acquired property. Social Security Administration (SSA) provides benefits such as old-age benefits, benefits to You can exclude this amount only to the extent Relocation payments and home rehabilita- disabled workers, and benefits to spouses and any expense it pays for isn't paid for by insur- tion grants. A relocation payment under sec- dependents. These benefits may be subject to ance or otherwise. The exclusion doesn't apply tion 105(a)(11) of the Housing and Community federal income tax depending on your filing sta- if you were a participant or conspirator in a ter- Development Act made by a local jurisdiction to tus and other income. See Pub. 915 for more in- rorist action or a representative of one. a displaced individual moving from a flood-dam- formation. An individual originally denied bene- A qualified disaster is: aged residence to another residence isn't in- fits, but later approved, may receive a • A disaster that results from a terrorist or cludible in gross income. Home rehabilitation lump-sum payment for the period when benefits military action; grants received by low-income homeowners in were denied (which may be prior years). See • A federally declared disaster; or a defined area under the same Act are also not Pub. 915 for information on how to make a • A disaster that results from an accident in- includible in gross income. lump-sum election, which may reduce your tax volving a common carrier, or from any liability. There are also other types of benefits other event, which is determined to be Indian financing grants. Nonreimbursable paid by the SSA. However, SSI benefits and catastrophic by the Secretary of the Treas- grants under title IV of the Indian Financing Act lump-sum death benefits (one-time payment to ury or his or her delegate. of 1974 to Indians to expand profit-making In- spouse and children of deceased) aren't sub- For amounts paid under item 4, a disaster is dian-owned economic enterprises on or near ject to federal income tax. For more information qualified if it's determined by an applicable fed- reservations aren't includible in gross income. on these benefits, go to SSA.gov. eral, state, or local authority to warrant assis- Form SSA-1099. If you received social se- tance from the federal, state, or local govern- Indian general welfare benefit. Gross in- curity benefits during the year, you'll receive ment, agency, or instrumentality. come doesn't include the value of any Indian general welfare benefit. “Indian general welfare Form SSA-1099, Social Security Benefit State- Disaster mitigation payments. You can benefit” includes any payment made or services ment. An IRS Notice 703 will be enclosed with also exclude from income any amount you re- provided to or on behalf of a member of an In- your Form SSA-1099. This notice includes a ceive that is a qualified disaster mitigation pay- dian tribe (or any spouse or dependent of that worksheet you can use to figure whether any of ment. Qualified disaster mitigation payments member) under an Indian tribal government your benefits are taxable. are commonly paid to you in the period immedi- program, but only if: For an explanation of the information found ately following damage to property as a result of on your Form SSA-1099, see Pub. 915. 1. The program is administered under speci- a natural disaster. However, disaster mitigation fied guidelines and doesn't discriminate in Form RRB-1099. If you received equiva- payments are used to mitigate (reduce the se- favor of members of the governing body of lent railroad retirement or special guaranty ben- verity of) potential damage from future natural the tribe; and efits during the year, you'll receive Form disasters. They're paid to you through state and RRB-1099, Payments by the Railroad Retire- local governments based on the provisions of 2. The benefits provided under the program ment Board. the Robert T. Stafford Disaster Relief and (a) are available to any tribal member who For an explanation of the information found Emergency Assistance Act or the National meets guidelines, (b) are for the promotion on your Form RRB-1099, see Pub. 915. Flood Insurance Act. of general welfare, (c) aren't lavish or ex- You can't increase the basis or adjusted ba- travagant, and (d) aren't compensation for Joint return. If you're married and file a sis of your property for improvements made services. joint return, you and your spouse must combine with nontaxable disaster mitigation payments. your incomes and your social security and Any items of cultural significance, reim- equivalent railroad retirement benefits when fig- Home Affordable Modification Program bursement of costs, or cash honorarium for par- uring whether any of your combined benefits (HAMP). If you benefit from Pay-for-Perform- ticipation in cultural or ceremonial activities for are taxable. Even if your spouse didn't receive ance Success Payments under HAMP, the pay- the transmission of tribal culture aren't treated any benefits, you must add your spouse's in- ments aren't taxable. as compensation for services. come to yours when figuring if any of your benefits are taxable. Hardest Hit Fund and Emergency Home- Note. The above exclusion was enacted by the owners' Loan Program. If you receive or ben- Tribal General Welfare Exclusion Act of 2014, Taxable amount. Use the worksheet in the efit from payments made under: September 26, 2014. The exclusion applies to Forms 1040 and 1040-SR instruction package • A State Housing Finance agency (State tax years for which the period of limitation on re- to determine the amount of your benefits to in- HFA) Hardest Hit Fund program in which fund or credit under section 6511 has not exclude in your income. Pub. 915 also has work- program payments can be used to pay pired (generally, within 3 years from the time the sheets you can use. However, you must use the mortgage interest, or return was filed or 2 years from the time the tax worksheets in Pub. 915 if any of the following • An Emergency Homeowners' Loan Pro- was paid, whichever expires later). Additionally, situations apply. gram (EHLP) administered by the Depart- a claim for the above exclusion will be allowed if • You received a lump-sum benefit payment ment of Housing and Urban Development made within 1 year of the enactment of the ex- during the year that is for one or more ear- (HUD) or a state, clusion. lier years. • You exclude employer-provided adoption the payments aren't included in gross income Note. The enactment of the above exclusion benefits or interest from qualified U.S. sav- and aren't taxable. generally codifies the exclusion afforded under ings bonds. Revenue Procedure 2014-35, June 4, 2014. • You take the foreign earned income exclu- Mortgage assistance payments under sec- See Revenue Procedure 2014-35 for more de- sion, the foreign housing exclusion or de- tion 235 of the National Housing Act. Pay- tails. duction, the exclusion of income from ments made under section 235 of the National American Samoa, or the exclusion of in- Housing Act for mortgage assistance aren't in- Medicare. Medicare benefits received under ti- come from Puerto Rico by bona fide resi- cluded in the homeowner's income. Interest tle XVIII of the Social Security Act aren't includi- dents of Puerto Rico. paid for the homeowner under the mortgage as- ble in the gross income of the individuals for sistance program can't be deducted. whom they're paid. This includes basic (Part A Benefits may affect your IRA deduction. (Hospital Insurance Benefits for the Aged)) and You must use the special worksheets in Appen- Replacement housing payments. Replace- supplementary (Part B (Supplementary Medical dix B of Pub. 590-A to figure your taxable bene- ment housing payments made under the Uni- Insurance Benefits for the Aged)). fits and your IRA deduction if all of the following form Relocation Assistance and Real Property conditions apply. Acquisition Policies Act for Federal and Feder- Social security benefits (including • You receive social security or equivalent ally Assisted Programs aren't includible in gross lump-sum payments attributable to prior railroad retirement benefits. years), Supplemental Security Income (SSI) • You have taxable compensation.

Page 30 Publication 525 (2020) Page 31 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• You contribute to your IRA. low-market gift or demand loan, you must in- Example 36. You buy a new car for • You or your spouse is covered by a retire- clude the forgone interest (at the federal rate) $24,000 cash and receive a $2,000 rebate ment plan at work. as interest income on your return. These loans check from the manufacturer. The $2,000 isn't are considered a transaction in which you, the income to you. Your basis in the car is $22,000. How to report. If any of your benefits are lender, are treated as having made: This is the basis on which you figure gain or taxable, you must use Form 1040 or 1040-SR to • A loan to the borrower in exchange for a loss if you sell the car, and figure depreciation if report the taxable part. Report your net benefits note that requires the payment of interest you use it for business. (as shown on your Forms SSA-1099 and at the applicable federal rate; and RRB-1099) on line 6a of Form 1040 or • An additional payment to the borrower, Casualty insurance and other reimburse- 1040-SR. Report the taxable part on line 6b of which the borrower transfers back to you ments. You generally shouldn't report these re- Form 1040 or 1040-SR. as interest. imbursements on your return unless you're figuring gain or loss from the casualty or theft. See Depending on the transaction, the additional Nutrition Program for the Elderly. Food ben- Pub. 547. efits you receive under the Nutrition Program for payment to the borrower is treated as a: Gift, the Elderly aren't taxable. If you prepare and • Charitable gift annuities. If you're the benefi- Dividend, serve free meals for the program, include in • ciary of a charitable gift annuity, you must in- Contribution to capital, your income as wages the cash pay you re- • clude the yearly annuity or fixed percentage Payment of compensation, or ceive, even if you're also eligible for food bene- • payment in your income. • Another type of payment. fits. The payer will report the types of income The borrower may have to report this payment you received on Form 1099-R. Report the gross Payments to reduce cost of winter energy. as income, depending on its classification. distribution from box 1 on Form 1040 or Payments made by a state to qualified people For more information on below-market 1040-SR, line 5a, and the part taxed as ordinary to reduce their cost of winter energy use aren't loans, see chapter 1 of Pub. 550. income (box 2a minus box 3) on Form 1040 or taxable. 1040-SR, line 5b. Report the portion taxed as Bribes. If you receive a bribe, include it in your capital gain as explained in the Instructions for Other Income income. Schedule D (Form 1040).

The following brief discussions are arranged in Campaign contributions. These contribu- Child support payments. You shouldn't re- alphabetical order. Other income items briefly tions aren't income to a candidate unless port these payments on your return. See Pub. discussed below are referenced to publications they're diverted to his or her personal use. To 504 for more information. that provide more information. be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund Court awards and damages. To determine if Activity not for profit. You must include on for use in future campaigns. However, interest settlement amounts you receive by compromise your return income from an activity from which earned on bank deposits, dividends received or judgment must be included in your income, you don't expect to make a profit. An example on contributed securities, and net gains realized you must consider the item that the settlement of this type of activity is a hobby or a farm you on sales of contributed securities are taxable replaces. The character of the income as ordi- operate mostly for recreation and pleasure. En- and must be reported on Form 1120-POL. Ex- nary income or capital gain depends on the na- ter this income on Schedule 1 (Form 1040), cess campaign funds transferred to an office ture of the underlying claim. Include the follow- line 8. Deductions for expenses related to the account must be included in the officeholder's ing as ordinary income. activity are limited. They can't total more than income on Schedule 1 (Form 1040), line 8, in 1. Interest on any award. the income you report and can be taken only if the year transferred. you itemize deductions on Schedule A (Form 2. Compensation for lost wages or lost profits 1040). See Not-for-Profit Activities in chapter 1 Canceled sales contract. If you sell property in most cases. (such as land or a residence) under a contract, of Pub. 535 for information on whether an activ- 3. Punitive damages in most cases. It doesn't but the contract is canceled and you return the ity is considered carried on for a profit. matter if they relate to a physical injury or buyer's money in the same tax year as the origi- physical sickness. Alaska Permanent Fund dividend. If you re- nal sale, you have no income from the sale. If ceived a payment from Alaska's mineral income the contract is canceled and you return the buy- 4. Amounts received in settlement of pension fund (Alaska Permanent Fund dividend), report er's money in a later tax year, you must include rights (if you didn't contribute to the plan). your gain in your income for the year of the sale. it as income on Schedule 1 (Form 1040), line 8. 5. Damages for: The state of Alaska sends each recipient a When you return the money and take back the document that shows the amount of the pay- property in the later year, you treat the transac- a. Patent or copyright infringement, tion as a purchase that gives you a new basis in ment with the check. The amount is also repor- b. Breach of contract, or ted to the IRS. the property equal to the funds you return to the buyer. c. Interference with business operations. Alimony. Include in your income on Schedule Special rules apply to the reacquisition of 6. Back pay and damages for emotional dis- 1 (Form 1040), line 2a, any taxable alimony real property where a secured indebtedness tress received to satisfy a claim under title payments you receive. Amounts you receive for (mortgage) to the original seller is involved. For VII of the Civil Rights Act of 1964. child support aren't income to you. For com- further information, see Repossession in Pub. plete information, see Pub. 504 and the Instruc- 537. 7. Attorney fees and costs (including contin- tions for Forms 1040 and 1040-SR. gent fees) where the underlying recovery Car pools. Don’t include in your income is included in gross income. Don’t include alimony payments you amounts you receive from the passengers for receive under a divorce or separation 8. Attorney fees and costs relating to whistle- ! driving a car in a car pool to and from work. CAUTION agreement (1) executed after 2018, or blower awards where the underlying re- These amounts are considered reimbursement (2) executed before 2019 but later modified if covery is included in gross income. for your expenses. However, this rule doesn't the modification expressly states the repeal of apply if you have developed car pool arrange- Don’t include in your income compensatory the deduction for alimony payments applies to ments into a profit-making business of trans- damages for personal physical injury or physi- the modification. porting workers for hire. cal sickness (whether received in a lump sum or installments). Below-market loans. A below-market loan is Cash rebates. A cash rebate you receive from a loan on which no interest is charged or on a dealer or manufacturer of an item you buy Emotional distress. Emotional distress it- which the interest is charged at a rate below the isn't income, but you must reduce your basis by self isn't a physical injury or physical sickness, applicable federal rate. If you make a be- the amount of the rebate. but damages you receive for emotional distress due to a physical injury or sickness are treated

Publication 525 (2020) Page 31 Page 32 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

as received for the physical injury or sickness. Energy conservation subsidies. You can ex- as a corporation, the payment may be taxable Don’t include them in your income. clude from gross income any subsidy provided, to you depending upon your relationship with If the emotional distress is due to a personal either directly or indirectly, by public utilities for that person and the nature of the payment. But injury that isn't due to a physical injury or sick- the purchase or installation of an energy con- if the payment makes up for a loss caused by ness (for example, unlawful discrimination or in- servation measure for a dwelling unit. that person, and only restores you to the posi- jury to reputation), you must include the dam- tion you were in before the loss, the payment ages in your income, except for any damages Energy conservation measure. This in- isn't includible in your income. you receive for medical care due to that emo- cludes installations or modifications that are pri- tional distress. Emotional distress includes marily designed to reduce consumption of elec- Exxon Valdez settlement income. Include in physical symptoms that result from emotional tricity or natural gas, or improve the your income on Schedule 1 (Form 1040), line 8, distress, such as headaches, insomnia, and management of energy demand. any qualified settlement income you receive as stomach disorders. Dwelling unit. This includes a house, a qualified taxpayer. See Statement, later. Qualified settlement income is any interest and Deduction for costs involved in unlawful apartment, condominium, mobile home, boat, or similar property. If a building or structure con- punitive damage awards that are: discrimination suits. You may be able to de- • Otherwise includible in taxable income, duct attorney fees and court costs paid to re- tains both dwelling and other units, any subsidy must be properly allocated. and cover a judgment or settlement for a claim of • Received in connection with the civil action unlawful discrimination under various provisions Estate and trust income. An estate or trust, In re Exxon Valdez, No. 89-095-CV (HRH) of federal, state, and local law listed in section (Consolidated) (D. Alaska). 62(e), a claim against the U.S. Government, or unlike a partnership, may have to pay federal in- a claim under section 1862(b)(3)(A) of the So- come tax. If you're a beneficiary of an estate or You're a qualified taxpayer if you were a cial Security Act. You can claim this deduction trust, you may be taxed on your share of its in- plaintiff in the civil action mentioned earlier or as an adjustment to income on Schedule 1 come distributed or required to be distributed to you were a beneficiary of the estate of your (Form 1040), line 22. The following rules apply. you. However, there is never a double tax. Es- spouse or a close relative who was such a • The attorney fees and court costs may be tates and trusts file their returns on Form 1041, plaintiff and from whom you acquired the right and your share of the income is reported to you paid by you or on your behalf in connection to receive qualified settlement income. with the claim for unlawful discrimination, on Schedule K-1 (Form 1041). The income can be received as a lump sum the claim against the U.S. Government, or Current income required to be distrib- or as periodic payments. You'll receive a Form the claim under section 1862(b)(3)(A) of uted. If you're the beneficiary of an estate or 1099-MISC showing the gross amount of the the Social Security Act. trust that must distribute all of its current in- settlement income paid to you in the tax year. The deduction you're claiming can't be • come, you must report your share of the distrib- Contributions to eligible retirement plan. more than the amount of the judgment or utable net income, whether or not you actually If you're a qualified taxpayer, you can contribute settlement you're including in income for received it. all or part of your qualified settlement income, the tax year. up to $100,000, to an eligible retirement plan, The judgment or settlement to which your Current income not required to be dis- • including an IRA. Contributions to eligible retire- attorney fees and court costs apply must tributed. If you're the beneficiary of an estate ment plans, other than a Roth IRA or a designa- occur after October 22, 2004. or trust and the fiduciary has the choice of whether to distribute all or part of the current in- ted Roth account, reduce the qualified settle- Pre-existing agreement. If you receive come, you must report all income that is re- ment income that you must include in income. damages under a written binding agreement, quired to be distributed to you, whether or not See Statement, later. For more information on court decree, or mediation award that was in efit's actually distributed, plus all other amounts these contributions, see Pubs. 575 and 590-A. fect (or issued on or before) September 13, actually paid or credited to you, up to the Legal expenses. For tax years after 2017, 1995, don't include in income any of those dam- amount of your share of distributable net in- you can no longer deduct legal expenses that ages received on account of personal injuries or come. were subject to the 2%-of-adjusted-gross-in- sickness. How to report. Treat each item of income come floor. If the qualified settlement income was received in connection with your trade or Credit card insurance. In most cases, if you the same way that the estate or trust would treat business (other than as an employee), you can receive benefits under a credit card disability or it. For example, if a trust's dividend income is reduce the taxable amount of qualified settle- unemployment insurance plan, the benefits are distributed to you, you report the distribution as ment income by these expenses. taxable to you. These plans make the minimum dividend income on your return. The same rule monthly payment on your credit card account if applies to distributions of tax-exempt interest Statement. If you report on Schedule 1 you can't make the payment due to injury, ill- and capital gains. (Form 1040), line 8, qualified settlement income ness, disability, or unemployment. Report on The fiduciary of the estate or trust must tell that is less than the gross amount shown on Schedule 1 (Form 1040), line 8, the amount of you the type of items making up your share of Form 1099-MISC, you must attach a statement benefits you received during the year that is the estate or trust income and any credits you're to your tax return. The statement must identify more than the amount of the premiums you paid allowed on your individual income tax return. and show the gross amount of the qualified set- during the year. Losses. Losses of estates and trusts gen- tlement income, the reductions for the amount erally aren't deductible by the beneficiaries. contributed to an eligible retirement plan, and Down payment assistance. If you purchase the net amount. a home and receive assistance from a nonprofit Grantor trust. Income earned by a grantor corporation to make the down payment, that as- trust is taxable to the grantor, not the benefi- Income averaging. For purposes of the in- sistance isn't included in your income. If the cor- ciary, if the grantor keeps certain control over come averaging rules that apply to an individual poration qualifies as a tax-exempt charitable or- the trust. (The grantor is the one who transfer- engaged in a farming or fishing business, quali- ganization, the assistance is treated as a gift red property to the trust.) This rule applies if the fied settlement income is treated as attributable and is included in your basis of the house. If the property (or income from the property) put into to a fishing business for the tax year in which it's corporation doesn't qualify, the assistance is the trust will or may revert (be returned) to the received. See Schedule J (Form 1040) and its treated as a rebate or reduction of the purchase grantor or the grantor's spouse. instructions for more information. price and isn't included in your basis. Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at Fees for services. Include all fees for your Employment agency fees. If you get a job the date of transfer) at more than 5% of the services in your income. Examples of these through an employment agency, and the fee is value of the transferred property, or has certain fees are amounts you receive for services you paid by your employer, the fee isn't includible in other powers. perform as: your income if you aren't liable for it. However, if • A corporate director; you pay it and your employer reimburses you Expenses paid by another. If your personal • An executor, administrator, or personal for it, it’s includible in your income. expenses are paid for by another person, such representative of an estate;

Page 32 Publication 525 (2020) Page 33 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• A manager of a trade or business you op- 1. Is living in a foster family home; and through 2025, professional gambling losses erated before declaring chapter 11 bank- and expenses are limited to the amount of your 2. Was placed there by: ruptcy; winnings. • A notary public; or a. An agency of a state or one of its polit- • An election precinct official. ical subdivisions, or Lotteries and raffles. Winnings from lotteries and raffles are gambling winnings. In ad- If you aren't an employee and the fees b. A qualified foster care placement dition to cash winnings, you must include in TIP for your services from a single payer in agency. your income the FMV of bonds, cars, houses, the course of the payer's trade or busi- and other noncash prizes. However, the differ- Difficulty-of-care payments. These are ness total $600 or more for the year, the payer ence between the FMV and the cost of an oil payments that are designated by the payer as should send you Form 1099-MISC. and gas lease obtained from the government compensation for providing the additional care through a lottery isn't includible in income. that is required for physically, mentally, or emo- Corporate director. Corporate director tionally handicapped qualified foster individuals. fees are self-employment income. Report these Installment payments. Generally, if you A state must determine that the additional com- payments on Schedule C (Form 1040). win a state lottery prize payable in installments, pensation is needed, and the care for which the you must include in your gross income the an- Personal representatives. All personal payments are made must be provided in the nual payments and any amounts you receive representatives must include in their gross in- foster care provider's home in which the quali- designated as interest on the unpaid install- come fees paid to them from an estate. If you fied foster individual was placed. ments. If you sell future lottery payments for a aren't in the trade or business of being an exec- Certain Medicaid waiver payments are trea- lump sum, you must report the amount you re- utor (for instance, you're the executor of a ted as difficulty-of-care payments when receive from the sale as ordinary income (on friend's or relative's estate), report these fees ceived by an individual care provider for caring Schedule 1 (Form 1040), line 8) in the year you on Schedule 1 (Form 1040), line 8. If you're in for an eligible individual (whether related or un- receive it. the trade or business of being an executor, re- related) living in the provider's home. See No- port these fees as self-employment income on tice 2014-7, available at IRS.gov/irb/ Form W-2G. You may have received a Schedule C (Form 1040). The fee isn't includi- 2014-4_IRB#NOT-2014-7, and related ques- Form W-2G, showing the amount of your gam- ble in income if it's waived. tions and answers, available at IRS.gov/ bling winnings and any tax taken out of them. Individuals/Certain-Medicaid-Waiver- Include the amount from box 1 on Schedule 1 Manager of trade or business for bank- Payments-May-Be-Excludable-From-Income, (Form 1040), line 8. Include the amount shown ruptcy estate. Include in your income all pay- for more information. in box 4 on Form 1040 or 1040-SR, line 25, as ments received from your bankruptcy estate for You must include in your income diffi- federal income tax withheld. managing or operating a trade or business that culty-of-care payments to the extent they're re- you operated before you filed for bankruptcy. ceived for more than: Gifts and inheritances. In most cases, prop- Report this income on Schedule 1 (Form 1040), • 10 qualified foster individuals under age erty you receive as a gift, bequest, or inheri- line 8. 19, or tance isn't included in your income. However, if property you receive this way later produces in- Notary public. Report payments for these • Five qualified foster individuals age 19 or older. come such as interest, dividends, or rents, that services on Schedule C (Form 1040). These income is taxable to you. If property is given to payments aren't subject to self-employment tax. Maintaining space in home. If you're paid a trust and the income from it is paid, credited, See the separate Instructions for Schedule SE to maintain space in your home for emergency or distributed to you, that income is also taxable (Form 1040) for details. foster care, you must include the payment in to you. If the gift, bequest, or inheritance is the Election precinct official. You should re- your income. income from the property, that income is taxable to you. ceive a Form W-2 showing payments for serv- Reporting taxable payments. If you re- ices performed as an election official or election ceive payments that you must include in your Inherited pension or IRA. If you inherited worker. Report these payments on line 1 of income and you're in business as a foster care a pension or an IRA, you may have to include Form 1040 or 1040-SR. provider, report the payments on Schedule C part of the inherited amount in your income. (Form 1040). See Pub. 587 to help you deter- See Survivors and Beneficiaries in Pub. 575 if Food program payments to daycare provid- mine the amount you can deduct for the use of you inherited a pension. See What if You Inherit ers. If you operate a daycare service and re- your home. an IRA? in Pubs. 590-A and 590-B if you inheri- ceive payments under the Child and Adult Care ted an IRA. Food Program administered by the Department Found property. If you find and keep property of Agriculture that aren't for your services, the that doesn't belong to you that has been lost or Expected inheritance. If you sell an inter- payments aren't included in your income in abandoned (treasure trove), it's taxable to you est in an expected inheritance from a living per- most cases. However, you must include in your at its FMV in the first year it's your undisputed son, include the entire amount you receive in income any part of the payments you don't use possession. gross income on Schedule 1 (Form 1040), to provide food to individuals eligible for help line 8. under the program. Free tour. If you received a free tour from a Bequest for services. If you receive cash travel agency for organizing a group of tourists, or other property as a bequest for services you Foreign currency transactions. If you have a you must include its value in your income. Re- performed while the decedent was alive, the gain on a personal foreign currency transaction port the FMV of the tour on Schedule 1 (Form value is taxable compensation. because of changes in exchange rates, you 1040), line 8, if you aren't in the trade or busi- don't have to include that gain in your income ness of organizing tours. You can't deduct your Gulf oil spill. If you received payments for lost unless it's more than $200. If the gain is more expenses in serving as the voluntary leader of than $200, report it as a capital gain. wages or income, property damage, or physical the group at the group's request. If you organize injury due to the Gulf oil spill, the payment may tours as a trade or business, report the tour's be taxable. Foster care providers. Generally, payment value on Schedule C (Form 1040). you receive from a state, political subdivision, or Lost wages or income. Payments you re- a qualified foster care placement agency for Gambling winnings. You must include your ceived for lost wages, lost business income, or caring for a qualified foster individual in your gambling winnings in your income on Schedule lost profits are taxable. home is excluded from your income. However, 1 (Form 1040), line 8. If you itemize your deduc- you must include in your income payment to the tions on Schedule A (Form 1040), you can de- Property damage. Payments you received extent it's received for the care of more than 5 duct gambling losses you had during the year, for property damage aren't taxable if the pay- qualified foster individuals age 19 years or but only up to the amount of your winnings. If ments aren't more than your adjusted basis in older. you're in the trade or business of gambling, use the property. If the payments are more than A qualified foster individual is a person who: Schedule C (Form 1040). For tax years 2018 your adjusted basis, you'll realize a gain. If the

Publication 525 (2020) Page 33 Page 34 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

damage was due to an involuntary conversion, Indian fishing rights. If you're a member of a ses, the amount you receive isn't taxable in you may defer the tax on the gain if you pur- qualified Indian tribe that has fishing rights se- most cases. You include in income only the chase qualified replacement property. See Pub. cured by treaty, executive order, or an Act of amount you receive that is more than your ac- 544. Congress as of March 17, 1988, don't include in tual expenses. If the payments (including insurance pro- your income amounts you receive from activi- ceeds) you received, or expect to receive, are ties related to those fishing rights. The income Jury duty. Jury duty pay you receive must be less than your adjusted basis, you may be able isn't subject to income tax, self-employment tax, included in your income on Schedule 1 (Form to claim a casualty deduction. See Pub. 547. or employment taxes. 1040), line 8. If you must give the pay to your employer because your employer continues to Physical injury. Payments you received Indian money account litigation settlement. pay your salary while you serve on the jury, you for personal physical injuries or physical sick- Amounts received by an individual Indian as a can deduct the amount turned over to your em- ness aren't taxable. This includes payments for lump sum or periodic payment pursuant to the ployer as an adjustment to income. Enter the emotional distress that is attributable to per- Class Action Settlement Agreement dated De- amount you repay your employer on Schedule 1 sonal physical injuries or physical sickness. cember 7, 2009, aren't included in gross in- (Form 1040), line 22. Enter “Jury Pay” and the Payments for emotional distress that aren't at- come. This amount won't be used to figure AGI amount on the dotted line next to line 22. tributable to personal physical injuries or physi- or MAGI in applying any Internal Revenue Code cal sickness are taxable. provision that takes into account excludable in- Kickbacks. You must include kickbacks, side More information. For the most recent come. commissions, push money, or similar payments guidance, go to IRS.gov and enter “Gulf Oil you receive in your income on Schedule 1 Spill” in the search box. Interest on frozen deposits. In general, you (Form 1040), line 8, or on Schedule C (Form exclude from your income the amount of inter- 1040) if from your self-employment activity. Historic preservation grants. Don’t include in est earned on a frozen deposit. A deposit is fro- your income any payment you receive under zen if, at the end of the calendar year, you can't Example 37. You sell cars and help ar- the National Historic Preservation Act to pre- withdraw any part of the deposit because: range car insurance for buyers. Insurance brok- serve a historically significant property. • The financial institution is bankrupt or in- ers pay back part of their commissions to you solvent, or for referring customers to them. You must in- Hobby losses. Losses from a hobby aren't de- • The state where the institution is located clude the kickbacks in your income. ductible from other income. A hobby is an activ- has placed limits on withdrawals because ity from which you don't expect to make a profit. other financial institutions in the state are Manufacturer incentive payments. You must See Activity not for profit, earlier, under Other bankrupt or insolvent. include as other income on Schedule 1 (Form Income. 1040), line 8 (or Schedule C (Form 1040) if Excludable amount. The amount of inter- you're self-employed), incentive payments from If you collect stamps, coins, or other est you exclude from income for the year is the a manufacturer that you receive as a salesper- ! items as a hobby for recreation and interest that was credited on the frozen deposit son. This is true whether you receive the pay- CAUTION pleasure, and you sell any of the items, for that tax year minus the sum of: ment directly from the manufacturer or through your gain is taxable as a capital gain. However, 1. The net amount withdrawn from the de- your employer. if you sell items from your collection at a loss, posit during that year, and you can't deduct the loss. Example 38. You sell cars for an automo- 2. The amount that could have been with- bile dealership and receive incentive payments drawn at the end of that tax year (not re- Holocaust victims restitution. Restitution from the automobile manufacturer every time duced by any penalty for premature with- payments you receive as a Holocaust victim (or you sell a particular model of car. You report the drawals of a time deposit). the heir of a Holocaust victim) and interest incentive payments on Schedule 1 (Form 1040), line 8. earned on the payments aren't taxable. Exclud- The excluded part of the interest is included in able interest is earned by escrow accounts or your income in the tax year it becomes with- Medical savings accounts (Archer MSAs settlement funds established for holding funds drawable. prior to the settlement. You also don't include and Medicare Advantage MSAs). In most cases, you don't include in income amounts you the restitution payments and interest the funds Interest on qualified savings bonds. You withdraw from your Archer MSA or Medicare earned prior to disbursement in any calculation may be able to exclude from income the interest Advantage MSA if you use the money to pay for in which you ordinarily would add excludable in- from qualified U.S. savings bonds you redeem if qualified medical expenses. Generally, qualified come to your AGI, such as the calculation to de- you pay qualified higher education expenses in medical expenses are those you can deduct on termine the taxable part of social security bene- the same year. Qualified higher education ex- Schedule A (Form 1040). For more information fits. If the payments are made in property, your penses are those you pay for tuition and re- about Archer MSAs or Medicare Advantage basis in the property is its FMV when you required fees at an eligible educational institution MSAs, see Pub. 969. ceive it. for you, your spouse, or your dependent. A Excludable restitution payments are pay- qualified U.S. savings bond is a series EE bond Moving expense reimbursements. For tax ments or distributions made by any country or issued after 1989 or a series I bond. The bond years beginning after 2017, reimbursements for any other entity because of persecution of an must have been issued to you when you were certain moving expenses are no longer exclu- individual on the basis of race, religion, physical 24 years of age or older. For more information ded from the gross income of nonmilitary tax- or mental disability, or sexual orientation by on this exclusion, see Education Savings Bond payers. See Pub. 521 for more information. Nazi Germany, any other Axis regime, or any Program in chapter 1 of Pub. 550 and in chapter 10 of Pub. 970. other Nazi-controlled or Nazi-allied country, Prizes and awards. If you win a prize in a whether the payments are made under a law or lucky number drawing, television or radio quiz Interest on state and local government obli- as a result of a legal action. They include com- program, beauty contest, or other event, you gations. This interest is usually exempt from pensation or reparation for property losses re- must include it in your income. For example, if federal tax. However, you must show the sulting from Nazi persecution, including pro- you win a $50 prize in a photography contest, amount of any tax-exempt interest on your fed- ceeds under insurance policies issued before you must report this income on Schedule 1 eral income tax return. For more information, and during World War II by European insurance (Form 1040), line 8. If you refuse to accept a see State or Local Government Obligations in companies. prize, don't include its value in your income. chapter 1 of Pub. 550. Illegal activities. Income from illegal activities, Prizes and awards in goods or services such as money from dealing illegal drugs, must Job interview expenses. If a prospective em- must be included in your income at their FMV. be included in your income on Schedule 1 ployer asks you to appear for an interview and Employee awards or bonuses. Cash (Form 1040), line 8, or on Schedule C (Form either pays you an allowance or reimburses you awards or bonuses given to you by your em- 1040) if from your self-employment activity. for your transportation and other travel expen- ployer for good work or suggestions must

Page 34 Publication 525 (2020) Page 35 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

generally be included in your income as wages. come for eligible gains invested in QOFs, and a scholarship or fellowship is any amount you re- However, certain noncash employee achieve- stepped-up basis to fair market value of the in- ceive that is for: ment awards can be excluded from income. vestment in the QOF at time of sale or ex- • Tuition and fees required to enroll at or at- See Bonuses and awards under Miscellaneous change, if the investment is held for at least 10 tend an eligible educational institution; or Compensation, earlier. years. See the Form 8949 instructions on how • Course-related expenses, such as fees, to report your election to defer eligible gains in- books, and equipment that are required for Prize points. If you're a salesperson and vested in a QOF. See Form 8997, Initial and courses at the eligible educational institu- receive prize points redeemable for merchan- Annual Statement of Qualified Opportunity tion. These items must be required of all dise that are awarded by a distributor or manu- Fund (QOF) Investments, and its instructions students in your course of instruction. facturer to employees of dealers, you must infor reporting information. For additional informa- clude their FMV in your income. The prize Amounts used for room and board don't qualify tion, see Opportunity Zones Frequently Asked for the exclusion. See Pub. 970 for more infor- points are taxable in the year they're paid or Questions, available at IRS.gov/Newsroom/ made available to you, rather than in the year mation on qualified scholarships and fellowship Opportunity-Zones-Frequently-Asked- grants. you redeem them for merchandise. Questions. Pulitzer, Nobel, and similar prizes. If you Payment for services. Generally, you were awarded a prize in recognition of accom- Qualified tuition program (QTP). A QTP can't exclude from your gross income the part plishments in religious, charitable, scientific, ar- (also known as a 529 program) is a program set of any scholarship or fellowship that represents tistic, educational, literary, or civic fields, you up to allow you to either prepay or contribute to payment for teaching, research, or other serv- must generally include the value of the prize in an account established for paying a student's ices required as a condition for receiving the your income. However, you don't include this qualified higher education expenses at an eligi- scholarship. This applies even if all candidates prize in your income if you meet all of the follow- ble educational institution. A program can be for a degree must perform the services to re- ing requirements. established and maintained by a state, an ceive the degree. agency or instrumentality of a state, or an eligi- 1. You were selected without any action on ble educational institution. Exceptions. You don't have to include in your part to enter the contest or proceed- The part of a distribution representing the income the part of any scholarship or fellowship ing. amount paid or contributed to a QTP isn't inclu- that represents payment for teaching, research, or other services if you receive the amount un- 2. You aren't required to perform substantial ded in income. This is a return of the investment der: future services as a condition for receiving in the program. • The National Health Services Corps Schol- the prize or award. In most cases, the beneficiary doesn't in- arship Program, clude in income any earnings distributed from a 3. The prize or award is transferred by the The Armed Forces Health Professions QTP if the total distribution is less than or equal • payer directly to a governmental unit or Scholarship and Financial Assistance Pro- to adjusted qualified higher education expen- tax-exempt charitable organization as des- gram, or ses. See Pub. 970 for more information. ignated by you. The following conditions • A comprehensive student work-learn- apply to the transfer. Railroad retirement annuities. The following ing-service program (as defined in section a. You can't use the prize or award be- types of payments are treated as pension or an- 448(e) of the Higher Education Act of fore it's transferred. nuity income and are taxable under the rules 1965) operated by a work college (as de- explained in Pub. 575. fined in that section). b. You should provide the designation Tier 1 railroad retirement benefits that are before the prize or award is presented • For information about the rules that apply to more than the social security equivalent to prevent a disqualifying use. The a tax-free qualified tuition reduction provided to benefit. designation should contain: employees and their families by an educational • Tier 2 benefits. institution, see Pub. 970. i. The purpose of the designation • Vested dual benefits. by making a reference to section VA payments. Allowances paid by the VA 74(b)(3); Rewards. If you receive a reward for providing for education, training, or subsistence under information, include it in your income. ii. A description of the prize or any law administered by the Department of Vet- award; erans Affairs, aren't included in your income. Sale of home. You may be able to exclude These allowances aren't considered scholar- iii. The name and address of the or- from income all or part of any gain from the sale ship or fellowship grants. ganization to receive the prize or or exchange of your main home. See Pub. 523. award; Prizes. Scholarship prizes won in a contest Sale of personal items. If you sold an item aren't scholarships or fellowships if you don't iv. Your name, address, and TIN; you owned for personal use, such as a car, re- have to use the prizes for educational purpo- and frigerator, furniture, stereo, jewelry, or silver- ses. You must include these amounts in your in- v. Your signature and the date ware, your gain is taxable as a capital gain. Re- come on Schedule 1 (Form 1040), line 8, signed. port it as explained in the Instructions for whether or not you use the amounts for educa- Schedule D (Form 1040). You can't deduct a tional purposes. c. In the case of an unexpected presen- loss. tation, you must return the prize or Smallpox vaccine injuries. If you're an eligi- award before using it (or spending, However, if you sold an item you held for investment, such as gold or silver bullion, coins, ble individual who receives benefits under the depositing, or investing it, etc., in the Smallpox Emergency Personnel Protection Act case of money) and then prepare the or gems, any gain is taxable as a capital gain and any loss is deductible as a capital loss. of 2003 for a covered injury resulting from a statement as described in (b) above. covered countermeasure, you can exclude the d. After the transfer, you should receive Example 39. You sold a painting on an on- payment from your income (to the extent it isn't from the payer a written response line auction website for $100. You bought the allowed as a medical and dental expense de- stating when and to whom the desig- painting for $20 at a garage sale years ago. Re- duction on Schedule A (Form 1040)). Eligible nated amounts were transferred. port your $80 gain as a capital gain as ex- individuals include health care workers, emer- plained in the Instructions for Schedule D (Form gency personnel, and first responders in a These rules don't apply to scholarship or fel- 1040). smallpox emergency who have received a lowship awards. See Scholarships and fellow- smallpox vaccination. ships, later. Scholarships and fellowships. A candidate for a degree can exclude amounts received as Stolen property. If you steal property, you Qualified opportunity fund (QOF). Effective a qualified scholarship or fellowship. A qualified must report its FMV in your income in the year December 22, 2017, section 1400Z-2 provides a temporary deferral of inclusion in gross in-

Publication 525 (2020) Page 35 Page 36 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

you steal it unless in the same year, you return it Type of deduction. The type of deduction Example 40. For 2019, you filed a return to its rightful owner. you're allowed in the year of repayment de- and reported your income on the cash method. pends on the type of income you included in the In 2020, you repaid $5,000 included in your Transporting school children. Don’t include earlier year. In most cases, you deduct the re- 2019 income under a claim of right. Your filing in your income a school board mileage allow- payment on the same form or schedule on status in 2020 and 2019 is single. Your income ance for taking children to and from school if which you previously reported it as income. For and tax for both years are as follows: you aren't in the business of taking children to example, if you reported it as self-employment school. You can't deduct expenses for provid- income, deduct it as a business expense on 2019 ing this transportation. Schedule C (Form 1040) or Schedule F (Form With Income Without Income 1040). If you reported it as a capital gain, de- Taxable Union benefits and dues. Amounts deducted duct it as a capital loss as explained in the In- Income $15,000 $10,000 from your pay for union dues, assessments, structions for Schedule D (Form 1040). If you Tax $1,609 $1,009 contributions, or other payments to a union reported it as wages, unemployment compen- can't be excluded from your income. sation, or other nonbusiness income, you may 2020 For tax years beginning after 2017, you can be able to deduct it as an other itemized deduc- Without Deduction With Deduction no longer deduct job-related expenses or other tion if the amount repaid is over $3,000. Taxable miscellaneous itemized deductions subject to Income $49,950 $44,950 For tax years beginning after 2017, you the 2%-of-adjusted-gross-income floor. ! can no longer claim any miscellaneous Tax $6,785 $5,685 Strike and lockout benefits. Benefits paid CAUTION itemized deductions; so, if the amount Your tax under method 1 is $5,685. Your tax to you by a union as strike or lockout benefits, repaid was $3,000 or less, you aren’t able to under method 2 is $6,185, figured as follows. including both cash and the FMV of other prop- deduct it from your income in the year you re- erty, are usually included in your income as paid it. compensation. You can exclude these benefits Tax previously determined for 2019 ...... $1,609 Less: Tax as refigured ...... − 1,009 from your income only when the facts clearly Repaid social security benefits. If you repaid Decrease in 2019 tax $ 600 show that the union intended them as gifts to social security or equivalent railroad retirement you. benefits, see Pub. 915. Regular tax liability for 2020 ...... $6,785 Reimbursed union convention expen- Less: Decrease in 2019 tax ...... − 600 Repayment over $3,000. If the amount you ses. If you're a delegate of your local union Refigured tax for 2020 $6,185 chapter and you attend the annual convention repaid was more than $3,000, you can deduct the repayment as an other itemized deduction of the international union, don't include in your You pay less tax using method 1, so you should on Schedule A (Form 1040), line 16, if you in- income amounts you receive from the interna- take a deduction for the repayment in 2020. tional union to reimburse you for expenses of cluded the income under a claim of right. This means that at the time you included the income, traveling away from home to attend the conven- Repaid wages subject to social security it appeared that you had an unrestricted right to tion. You can't deduct the reimbursed expen- and Medicare taxes. If you had to repay an it. However, you can choose to take a credit for ses, even if you're reimbursed in a later year. If amount that you included in your wages or com- the year of repayment. Figure your tax under you're reimbursed for lost salary, you must in- pensation in an earlier year on which social se- both methods and compare the results. Use the clude that reimbursement in your income. curity, Medicare, or tier 1 RRTA taxes were method (deduction or credit) that results in less paid, ask your employer to refund the excess tax. Utility rebates. If you're a customer of an elec- amount to you. If the employer refuses to refund tric utility company and you participate in the When determining whether the amount the taxes, ask for a statement indicating the utility's energy conservation program, you may you repaid was less than $3,000, con- amount of the overcollection to support your receive on your monthly electric bill either: sider the total amount being repaid on claim. File a claim for refund using Form 843. • A reduction in the purchase price of elec- the return. Each instance of repayment isn't tricity furnished to you (rate reduction), or considered separately. Repaid wages subject to Additional Medi- • A nonrefundable credit against the pur- care Tax. Employers can't make an adjust- chase price of the electricity. Method 1. Figure your tax for the year of ment or file a claim for refund for Additional The amount of the rate reduction or nonrefund- repayment claiming a deduction for the repaid Medicare Tax withholding when there is a re- able credit isn't included in your income. amount. payment of wages received by an employee in a prior year because the employee determines Method 2. Figure your tax for the year of Whistleblower's award. If you receive a whis- liability for Additional Medicare Tax on the em- repayment claiming a credit for the repaid tleblower's award from the IRS, you must in- ployee's income tax return for the prior year. If amount. Follow these steps. clude it in your income. Any deduction allowed you had to repay an amount that you included in for attorney fees and court costs paid by you, or 1. Figure your tax for the year of repayment your wages or compensation in an earlier year, on your behalf, in connection with the award are without deducting the repaid amount. and on which Additional Medicare Tax was deducted as an adjustment to income, but can't paid, you may be able to recover the Additional 2. Refigure your tax from the earlier year be more than the amount included in income for Medicare Tax paid on the amount. To recover without including in income the amount the tax year. Additional Medicare Tax on the repaid wages or you repaid in the year of repayment. compensation, you must file Form 1040-X for 3. Subtract the tax in (2) from the tax shown the prior year in which the wages or compensa- Repayments on your return for the earlier year. This is tion were originally received. See the Instruc- the credit. tions for Form 1040-X. If you had to repay an amount that you included 4. Subtract the answer in (3) from the tax for Repayment rules don’t apply. This discus- in your income in an earlier year, you may be the year of repayment figured without the sion doesn't apply to: able to deduct the amount repaid from your in- deduction (step 1). • Deductions for bad debts; come for the year in which you repaid it. Or, if • Deductions for theft losses due to criminal If method 1 results in less tax, deduct the the amount you repaid is more than $3,000, you fraud or embezzlement in a transaction en- amount repaid. If method 2 results in less tax, may be able to take a credit against your tax for tered into for profit; claim the credit figured in (3) above on Form the year in which you repaid it. In most cases, • Deductions from sales to customers, such 1040 or 1040-SR. (If the year of repayment is you can claim a deduction or credit only if the as returns and allowances, and similar 2019, and you're taking the credit, enter the repayment qualifies as an expense or loss in- items; or credit on Schedule 3 (Form 1040), line 12, and curred in your trade or business or in a for-profit • Deductions for legal and other expenses of see the instructions for it.) transaction. contesting the repayment.

Page 36 Publication 525 (2020) Page 37 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Year of deduction (or credit). If you use the then filed electronically regardless of in- Although the tax preparer always signs the cash method, you can take the deduction (or come. return, you're ultimately responsible for provid- credit, if applicable) for the tax year in which ing all the information required for the preparer you actually make the repayment. If you use Using online tools to help prepare your re- to accurately prepare your return. Anyone paid any other accounting method, you can deduct turn. Go to IRS.gov/Tools for the following. to prepare tax returns for others should have a the repayment or claim a credit for it only for the • The Earned Income Tax Credit Assistant thorough understanding of tax matters. For tax year in which it’s a proper deduction under (IRS.gov/EITCAssistant) determines if more information on how to choose a tax pre- your accounting method. For example, if you you’re eligible for the earned income credit parer, go to Tips for Choosing a Tax Preparer use an accrual method, you're entitled to the (EIC). on IRS.gov. deduction or credit in the tax year in which the • The Online EIN Application (IRS.gov/EIN) obligation for the repayment accrues. helps you get an employer identification Coronavirus. Go to www.IRS.gov/Coronavirus number (EIN). for links to information on the impact of the co- • The Tax Withholding Estimator (IRS.gov/ ronavirus, as well as tax relief available for indi- How To Get Tax Help W4app) makes it easier for everyone to viduals and families, small and large busi- pay the correct amount of tax during the nesses, and tax-exempt organizations. If you have questions about a tax issue, need year. The tool is a convenient, online way help preparing your tax return, or want to down- to check and tailor your withholding. It’s Tax reform. Tax reform legislation affects indi- load free publications, forms, or instructions, go more user-friendly for taxpayers, including viduals, businesses, and tax-exempt and gov- to www.IRS.gov and find resources that can retirees and self-employed individuals. The ernment entities. Go to IRS.gov/TaxReform for help you right away. features include the following. information and updates on how this legislation – Easy to understand language. affects your taxes. Preparing and filing your tax return. After – The ability to switch between screens, receiving all your wage and earnings state- correct previous entries, and skip Employers can register to use Business ments (Form W-2, W-2G, 1099-R, 1099-MISC, screens that don’t apply. Services Online. The Social Security Adminis- 1099-NEC, etc.); unemployment compensation – Tips and links to help you determine if tration (SSA) offers online service at SSA.gov/ statements (by mail or in a digital format) or you qualify for tax credits and deduc- employer for fast, free, and secure online W-2 other government payment statements (Form tions. filing options to CPAs, accountants, enrolled 1099-G); and interest, dividend, and retirement – A progress tracker. agents, and individuals who process Form W-2, statements from banks and investment firms – A self-employment tax feature. Wage and Tax Statement, and Form W-2c, (Forms 1099), you have several options to – Automatic calculation of taxable social Corrected Wage and Tax Statement. choose from to prepare and file your tax return. security benefits. You can prepare the tax return yourself, see if IRS social media. Go to www.IRS.gov/ • The First Time Homebuyer Credit Account SocialMedia to see the various social media you qualify for free tax preparation, or hire a tax Look-up (IRS.gov/HomeBuyer) tool pro- professional to prepare your return. tools the IRS uses to share the latest informa- vides information on your repayments and tion on tax changes, scam alerts, initiatives, account balance. products, and services. At the IRS, privacy and Free options for tax preparation. Go to • The Sales Tax Deduction Calculator IRS.gov to see your options for preparing and security are paramount. We use these tools to (IRS.gov/SalesTax) figures the amount you share public information with you. Don’t post filing your return online or in your local commun- can claim if you itemize deductions on ity, if you qualify, which include the following. your SSN or other confidential information on Schedule A (Form 1040). social media sites. Always protect your identity • Free File. This program lets you prepare when using any social networking site. and file your federal individual income tax Getting answers to your tax ques- return for free using brand-name tax-prep- tions. On IRS.gov, you can get The following IRS YouTube channels pro- aration-and-filing software or Free File filla- up-to-date information on current vide short, informative videos on various tax-re- ble forms. However, state tax preparation events and changes in tax law. lated topics in English, Spanish, and ASL. • Youtube.com/irsvideos. may not be available through Free File. Go • IRS.gov/Help: A variety of tools to help you • Youtube.com/irsvideosmultilingua. to IRS.gov/FreeFile to see if you qualify for get answers to some of the most common • Youtube.com/irsvideosASL. free online federal tax preparation, e-filing, tax questions. and direct deposit or payment options. IRS.gov/ITA: The Interactive Tax Assistant, • Watching IRS videos. The IRS Video portal • VITA. The Volunteer Income Tax Assis- a tool that will ask you questions on a num- (IRSVideos.gov) contains video and audio pre- tance (VITA) program offers free tax help ber of tax law topics and provide answers. sentations for individuals, small businesses, to people with low-to-moderate incomes, IRS.gov/Forms: Find forms, instructions, • and tax professionals. persons with disabilities, and limited-Eng- and publications. You will find details on lish-speaking taxpayers who need help 2020 tax changes and hundreds of interac- Online tax information in other languages. preparing their own tax returns. Go to tive links to help you find answers to your You can find information on IRS.gov/ IRS.gov/VITA, download the free IRS2Go questions. MyLanguage if English isn’t your native lan- app, or call 800-906-9887 for information • You may also be able to access tax law in- guage. on free tax return preparation. formation in your electronic filing software. TCE. The Tax Counseling for the Elderly • Free interpreter service. Multilingual assis- (TCE) program offers free tax help for all tance, provided by the IRS, is available at Tax- taxpayers, particularly those who are 60 Need someone to prepare your tax return? payer Assistance Centers (TACs) and other years of age and older. TCE volunteers There are various types of tax return preparers, IRS offices. Over-the-phone interpreter service specialize in answering questions about including tax preparers, enrolled agents, certi- is accessible in more than 350 languages. pensions and retirement-related issues fied public accountants (CPAs), attorneys, and unique to seniors. Go to IRS.gov/TCE, many others who don’t have professional cre- Getting tax forms and publications. Go to download the free IRS2Go app, or call dentials. If you choose to have someone pre- IRS.gov/Forms to view, download, or print all of 888-227-7669 for information on free tax pare your tax return, choose that preparer the forms, instructions, and publications you return preparation. wisely. A paid tax preparer is: may need. You can also download and view MilTax. Members of the U.S. Armed Primarily responsible for the overall sub- • • popular tax publications and instructions (in- Forces and qualified veterans may use Mil- stantive accuracy of your return, cluding the Instructions for Forms 1040 and Tax, a free tax service offered by the De- Required to sign the return, and • 1040-SR) on mobile devices as an eBook at partment of Defense through Military One- Required to include their preparer tax iden- • IRS.gov/eBooks. Or you can go to IRS.gov/ Source. tification number (PTIN). OrderForms to place an order. Also, the IRS offers Free Fillable Forms, which can be completed online and

Publication 525 (2020) Page 37 Page 38 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Access your online account (individual tax- Making a tax payment. The IRS uses the lat- Contacting your local IRS office. Keep in payers only). Go to IRS.gov/Account to se- est encryption technology to ensure your elec- mind, many questions can be answered on curely access information about your federal tax tronic payments are safe and secure. You can IRS.gov without visiting an IRS Taxpayer Assis- account. make electronic payments online, by phone, tance Center (TAC). Go to IRS.gov/LetUsHelp • View the amount you owe, pay online, or and from a mobile device using the IRS2Go for the topics people ask about most. If you still set up an online payment agreement. app. Paying electronically is quick, easy, and need help, IRS TACs provide tax help when a • Access your tax records online. faster than mailing in a check or money order. tax issue can’t be handled online or by phone. • Review your payment history. Go to IRS.gov/Payments for information on how All TACs now provide service by appointment, • Go to IRS.gov/SecureAccess to review the to make a payment using any of the following so you’ll know in advance that you can get the required identity authentication process. options. service you need without long wait times. Be- • IRS Direct Pay: Pay your individual tax bill fore you visit, go to IRS.gov/TACLocator to find Using direct deposit. The fastest way to re- or estimated tax payment directly from the nearest TAC and to check hours, available ceive a tax refund is to file electronically and your checking or savings account at no services, and appointment options. Or, on the choose direct deposit, which securely and elec- cost to you. IRS2Go app, under the Stay Connected tab, tronically transfers your refund directly into your • Debit or Credit Card: Choose an approved choose the Contact Us option and click on “Lo- financial account. Direct deposit also avoids the payment processor to pay online, by cal Offices.” possibility that your check could be lost, stolen, phone, or by mobile device. or returned undeliverable to the IRS. Eight in 10 • Electronic Funds Withdrawal: Offered only taxpayers use direct deposit to receive their re- when filing your federal taxes using tax re- The Taxpayer Advocate funds. The IRS issues more than 90% of return preparation software or through a tax Service (TAS) Is Here To funds in less than 21 days. professional. Help You • Electronic Federal Tax Payment System: Getting a transcript of your return. The Best option for businesses. Enrollment is What Is TAS? quickest way to get a copy of your tax transcript required. TAS is an independent organization within the is to go to IRS.gov/Transcripts. Click on either Check or Money Order: Mail your payment • IRS that helps taxpayers and protects taxpayer “Get Transcript Online” or “Get Transcript by to the address listed on the notice or in- rights. Their job is to ensure that every taxpayer Mail” to order a free copy of your transcript. If structions. is treated fairly and that you know and under- you prefer, you can order your transcript by call- Cash: You may be able to pay your taxes • stand your rights under the Taxpayer Bill of ing 800-908-9946. with cash at a participating retail store. Rights. • Same-Day Wire: You may be able to do Reporting and resolving your tax-related same-day wire from your financial institu- identity theft issues. tion. Contact your financial institution for How Can You Learn About Your • Tax-related identity theft happens when availability, cost, and cut-off times. Taxpayer Rights? someone steals your personal information to commit tax fraud. Your taxes can be af- What if I can’t pay now? Go to IRS.gov/ The Taxpayer Bill of Rights describes 10 basic fected if your SSN is used to file a fraudu- Payments for more information about your op- rights that all taxpayers have when dealing with lent return or to claim a refund or credit. tions. the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to • The IRS doesn’t initiate contact with tax- • Apply for an online payment agreement you and how they apply. These are your rights. payers by email, text messages, telephone (IRS.gov/OPA) to meet your tax obligation Know them. Use them. calls, or social media channels to request in monthly installments if you can’t pay personal or financial information. This in- your taxes in full today. Once you complete cludes requests for personal identification the online process, you will receive imme- What Can TAS Do For You? numbers (PINs), passwords, or similar in- diate notification of whether your agree- formation for credit cards, banks, or other ment has been approved. TAS can help you resolve problems that you financial accounts. • Use the Offer in Compromise Pre-Qualifier can’t resolve with the IRS. And their service is • Go to IRS.gov/IdentityTheft, the IRS Iden- to see if you can settle your tax debt for free. If you qualify for their assistance, you will tity Theft Central webpage, for information less than the full amount you owe. For be assigned to one advocate who will work with on identity theft and data security protec- more information on the Offer in Compro- you throughout the process and will do every- tion for taxpayers, tax professionals, and mise program, go to IRS.gov/OIC. thing possible to resolve your issue. TAS can businesses. If your SSN has been lost or help you if: stolen or you suspect you’re a victim of Filing an amended return. You can now file • Your problem is causing financial difficulty tax-related identity theft, you can learn Form 1040-X electronically with tax filing soft- for you, your family, or your business; what steps you should take. ware to amend 2019 Forms 1040 and 1040-SR. • You face (or your business is facing) an • Get an Identity Protection PIN (IP PIN). IP To do so, you must have e-filed your original immediate threat of adverse action; or PINs are six-digit numbers assigned to eli- 2019 return. Amended returns for all prior years • You’ve tried repeatedly to contact the IRS gible taxpayers to help prevent the misuse must be mailed. See Tips for taxpayers who but no one has responded, or the IRS of their SSNs on fraudulent federal income need to file an amended tax return and go to hasn’t responded by the date promised. tax returns. When you have an IP PIN, it IRS.gov/Form1040X for information and up- prevents someone else from filing a tax re- dates. How Can You Reach TAS? turn with your SSN. To learn more, go to Checking the status of your amended re- IRS.gov/IPPIN. TAS has offices in every state, the District of turn. Go to IRS.gov/WMAR to track the status Columbia, and Puerto Rico. Your local advo- of Form 1040-X amended returns. Please note Checking on the status of your refund. cate’s number is in your local directory and at that it can take up to 3 weeks from the date you • Go to IRS.gov/Refunds. TaxpayerAdvocate.IRS.gov/Contact-Us. You filed your amended return for it to show up in • The IRS can’t issue refunds before can also call them at 877-777-4778. mid-February 2021 for returns that claimed our system, and processing it can take up to 16 weeks. the EIC or the additional child tax credit How Else Does TAS Help (ACTC). This applies to the entire refund, Taxpayers? not just the portion associated with these Understanding an IRS notice or letter you’ve received. Go to IRS.gov/Notices to credits. TAS works to resolve large-scale problems that • Download the official IRS2Go app to your find additional information about responding to an IRS notice or letter. affect many taxpayers. If you know of one of mobile device to check your refund status. these broad issues, please report it to them at • Call the automated refund hotline at IRS.gov/SAMS. 800-829-1954.

Page 38 Publication 525 (2020) Page 39 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

TAS for Tax Professionals Low Income Taxpayer collection disputes. In addition, clinics can provide information about taxpayer rights and re- TAS can provide a variety of information for tax Clinics (LITCs) sponsibilities in different languages for individu- professionals, including tax law updates and als who speak English as a second language. LITCs are independent from the IRS. LITCs guidance, TAS programs, and ways to let TAS Services are offered for free or a small fee for represent individuals whose income is below a know about systemic problems you’ve seen in eligible taxpayers. To find a clinic near you, visit certain level and need to resolve tax problems your practice. TaxpayerAdvocate.IRS.gov/about/LITC or see with the IRS, such as audits, appeals, and tax IRS Pub. 4134, Low Income Taxpayer Clinic List.

To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Qualified reservist Casualty insurance: Death benefits 22 1231 property sale 17 distribution 16 Reimbursements from 31 (See also Life insurance) 401(k) plans 9 Rehabilitative program Catch-up contributions 10 Accelerated 23 Excess contributions 11 payments 16 Charitable gift annuities 31 Debts: 403(b) plans 9 Retirement pay 16 Child and Adult Care Food Canceled 20 Limit for 10 Veterans benefits 16 Program: Excluded debt 21 457 plans 9 Assistance (See Tax help) Payments to daycare Nonrecourse debts 21 Limit for deferrals under 10 Athletic facilities, providers 33 Recourse 21 501(c)(18)(D) plans 9 employer-provided 5 Childcare providers 3, 33 Stockholder's 21 Contributions 10 Automobile (See Vehicle, Child support payments 31 Deduction: 501(c)(3) organizations 21 employer-provided) Chronic illness 19 Costs of discrimination suits 32 529 program 35 Awards (See Damages from Accelerated death benefits paid Deferred compensation: 83(b) election 14 lawsuits) to 23 Nonqualified plans 4 Citizens outside U.S.: De minimis (minimal) benefits 6, Exclusion of foreign income 2 8 A B Civil Rights Act of 1964, Title VII: Dependent care benefits 6 Academic health centers: Babysitting 3 Back pay and damages for Depletion allowance 17 Meals and lodging when Back pay, award for 4 emotional distress under 31 Differential wage payments 4 teaching and research Backup withholding: Clergy 15 Armed forces 16 organization 8 Barter exchange Coal 17 Directors' fees 33 Accelerated death benefits 23 transactions 20 Colleges and universities: Disability: Accidental death benefits 6 Bankruptcy 3 Faculty lodging 8 Military 16 Accident insurance 5 Canceled debt not deemed to be Scholarships and fellowships 35 Pensions 18 Accrual method taxpayers 3 income 21 Commissions: Workers' compensation 19 Accrued leave payment: Barter income 20 Advance 3 Person with 29 At time of retirement or Below-market loans 31 Commuter highway vehicles 8 Unemployment compensation, resignation 4 Bequest for services 33 Compensation: paid as substitute for 29 Disability retirement 18 Bitcoin 5 Employee 3 Disaster relief: Activity not for profit 31 Black lung benefit payments 20 Miscellaneous 3 Disaster mitigation payments 30 Adoption: Bonuses 4, 34 Unemployment 28 Disaster Relief and Emergency Employer assistance 5 Breach of contract: Workers' 19 Assistance Act: Advance commissions 3 Damages as income 31 Compensatory damages 20, 31 Grants 29 Aircraft 9 Bribes 31 Constructive receipt of income 2 Unemployment benefits 28 Airlines: Business expenses: Copyrights: Payments 29 No-additional-cost services 8 Reimbursements 4 Infringement damages 31 Discounts: Valuation of flights on Business income 17, 18 Royalties 17 Employee discounts 6 employer-provided aircraft 9 Corporate directors 33 Employee stock purchase Alaska Permanent Fund Cost-of-living allowances 4 plans 13 dividend 31 C Court awards 31 Mortgage loan for early Aliens: Cafeteria plans 18 (See also Damages from lawsuits) payment 21 Nonresident 24 Campaign contributions 31 Credit card Insurance 32 Dividends: Alien status, waiver of 16 Campus lodging 8 Credits: Restricted stock 15 Alimony 31 Cancellation of debt 20 Recoveries, refiguring of unused Divorced taxpayers: Alternative minimum tax (AMT): Cancellation of sales credits 27, 28 Stock options exercised incident Recoveries, refiguring of 28 contracts 31 Currency transactions, to divorce 12 Stock options 12 Capital gains: foreign 33 Down payment assistance 32 Annuities: Recoveries 24, 28 Charitable gift 31 Capital gains or losses: Railroad retirement 35 Employee stock option plans D E Tax-sheltered 10 (ESOPs) 13 Damages from lawsuits 31 Educational assistance: Archer MSAs 5, 34 ISOs (ISOs) 13 Back pay awards 4 Employer-provided 6 Armed forces 16 Sale of personal property 35 Breach of contract 31 Scholarships and fellowships 35 Combat zone bonus 16 Car (See Vehicle, Compensatory damages 20, 31 Educational institutions: Disability 16 employer-provided) Emotional distress under Title Faculty lodging 8 Disability pensions 18 Car pools 31 VII, Civil Rights Act of Elderly persons: Health professions Cash or deferred arrangements 1964 31 Nutrition Program for the scholarship 9 (CODAs) 9 Punitive damages 31 Elderly 31 Military action as cause of Cash rebates 31 Daycare providers 3 Tax Counseling for the disability injuries 19 (See also Childcare providers) Elderly 16 Food program payments to 33 Election precinct officials 33

Publication 525 (2020) Page 39 Page 40 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Elective deferrals 9 Fees for services 32 Form 1065, Schedule K-1: Accrued leave payment at time Catch-up contributions 10 Financial counseling fees 6 Partner's share of income 17 of retirement or resignation 4 Excess annual additions 11 Fellowships 35 Form 1065: Back pay awards 4 Excess contributions 11 FICA withholding: Partnership return 17 Bonuses or awards 4 Excess deferrals 10 Foreign employers, U.S. citizens Form 1098: Elective deferrals, reporting by Increased limit for last 3 years working for in U.S. 16 Mortgage interest statement 23 employer 10 prior to retirement age 10 Paid by employer 4 Form 1099-B: Failure to receive from Limit on 9 Fiduciaries: Barter exchange employer 3 Reporting by employer 10 Fees for services 32, 33 transactions 20 Fringe benefits reported on 5 Emergency Homeowners' Loan Financial counseling fees 6 Form 1099-C: Stock options from Program 30 (See also Retirement planning Cancellation of debt 21 employers 12 Emotional distress damages 31 services) Form 1099-DIV: Wage and tax statement 3 Employee achievement Fitness programs: Restricted stock dividends 15 Form W-2G: awards 4 Employer-provided 5 Form 1099-G: Gambling winnings 33 Employee awards or bonuses 34 Flights: State tax refunds 23 Form W-4V: Employee compensation 3–15 Employer-provided aircraft 9 Unemployment Unemployment compensation, Fringe benefits 5–9 No-additional-cost services 8 compensation 28 voluntary withholding Restricted property 14, 15 Food benefits: Form 1099-K, Payment Card and request 29 Retirement plan contributions 9 Daycare providers, food program Third-Party Network Form W-9: Stock options 11–13 payments to 33 Transactions. Applies when Request for taxpayer Employee discounts 6 Nutrition Program for the you have either (a) accepted identification number 20 Employee stock purchase Elderly 31 payment cards for payments, Foster care 33 plans 12, 13 Foreign: or (b) received payments Foster Grandparent Employer, foreign 16 Currency transactions 33 through a third-party network Program 16, 17 Employer-owned life Employment 16 that exceeded $20,000 in Found property 33 insurance 22 Governments, employees of 16 gross total reportable Fringe benefit FMV 9 Employer-provided: Income 2 transactions and the Fringe benefits 5 Educational assistance 6 Service 18 aggregate number of those Accident and health insurance 5 Vehicles 9 Form 1040, Schedule A: transactions exceeded 200 for Adoption, employer Employment: Repayment of commissions paid the calendar year. 28 assistance 5 Abroad 16 in advance 4 Form 1099-MISC: Athletic facilities 5 Agency fees 32 Form 1040, Schedule C: Services totaling $600 or Commuter highway vehicles 8 Contracts: Bartering 20 more 33 De minimis benefits 6, 8 Severance pay for Childcare providers to use 3 Stock options exercised incident Dependent care benefits 6 cancellation of 4 Personal property rental, to divorce 12 Educational assistance 6 Endowment proceeds 22 reporting income from 17 Form 1099-R: Employee discounts 6 Energy: Royalties 17 Charitable gift annuities 31 Faculty lodging 8 Assistance 31 Form 1040, Schedule C-EZ: Excess annual additions 11 Financial counseling fees 6 Conservation: Bartering 20 Excess deferral amounts 11 Holiday gifts 6 Subsidies 32 Childcare Providers to use 3 Surrender of life insurance policy Meals and lodging 8 Utility rebates 36 Personal property rental, for cash 22 Moving expenses (See Moving Estate income 32 reporting income from 17 Form 1120-POL: expenses) Estimated tax: Royalties 17 Political organizations 31 No-additional-cost services 8 Unemployment Form 1040, Schedule D: Form 1120S, Schedule K-1: Retirement compensation 29 Stock options 12 Shareholder's share of income, planning (See Retirement Excess: Stock options reported on 12 credits, deductions, etc. 18 planning services) Annual additions 11 Form 1040, Schedule E: Form 1120S: Transit pass 8 Contributions 11 Partner's return 17 S corporation return 18 Tuition reduction 9 Deferrals 10 Royalties 17 Form 2441: Valuation of 9 Expected inheritance 33 Form 1040: Child and dependent care Vehicle 9 Expenses paid by another 32 Excess contributions to elective expenses 6 Working condition benefits 9 Exxon Valdez settlement 32 deferrals 11 Form 4255: Frozen deposits: Eligible retirement plan 32 Recoveries 24 Recapture of investment Interest on 34 Income averaging 32 Unemployment credit 28 Legal expenses 32 compensation 28 Form 6251: Reporting Wages from Form W-2 3 Alternative minimum tax 12 G requirement-statement 32 Form 1040A: Form 8839: Gambling winnings and Recoveries 24 Adoption assistance 5 losses 33 Unemployment Form 8853: Gas: F compensation 28 Accelerated death benefits 23 Royalties from 17 Faculty lodging 8 Wages from Form W-2 3 Archer MSAs and long-term care Gifts 33 Fair Market Value (FMV) 3 Form 1040EZ: insurance contracts 5 Holiday gifts from employer 6 Farming: Recoveries 24 Form 8919: Government Qualified farm debt, cancellation Unemployment Uncollected social security and employees (See Federal of 21 compensation 28 Medicare tax on wages 3 employees; State employees) Federal employees: Wages from Form W-2 3 Form RRB-1099: Grantor trusts 32 Accrued leave payment 4 Form 1040 or 1040A, Schedule B: Railroad retirement board Group-term life insurance: Compensation Act (FECA) Restricted stock dividends 15 payments 30 Worksheets 6, 7 payments 20 Form 1041, Schedule K-1: Form SSA-1099: Gulf oil spill 33 Cost-of-living allowances 4 Beneficiary's share of income, Social security benefit Disability pensions 18 deductions, credits, etc. 32 statement 30 Thrift Savings Plan for 9 Form 1041: Form W-2: Federal income tax: Estates and trusts 32 501(c)(18)(D) contributions 10 Refunds 23

Page 40 Publication 525 (2020) Page 41 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Interview expenses 34 Medicare: Military 16 H Investment counseling fees 6 Advantage MSAs 34 Personal property: HAMP: (See also Retirement planning Benefits 30 Rental income and expense 17 Home affordable modification services) Tax paid by employer 4 Sale of 35 program: Investment income 17, 18 Medicare tax (See Social security Personal Pay-for-performance success IRAs (See Individual retirement and Medicare taxes) representatives (See Fiduciarie payments 30 arrangements (IRAs)) Military (See Armed forces) s) Hardest Hit Fund Program 30 Iron ore 17 Minerals: Prepaid income 3 Health: ISOs (ISOs) 12, 13 Royalties from 17 Price reduced after purchase 21 Flexible spending Itemized deductions: Miscellaneous: Prizes and awards 4, 34 arrangement 5 Recoveries 23, 24 Compensation 3 Achievement awards 4 Insurance 5 Income 20 Employee awards or Reimbursement arrangement 5 Missing children, photographs bonuses 34 Savings account 5 J of 2 Length-of-service awards 4 Highly compensated employees: Job interview expenses 34 Mortgage: Pulitzer, Nobel, and similar Excess contributions to elective Joint returns: Assistance payment (under sec. prizes 35 deferrals 11 Social security benefits or 235 of National Housing Safety achievement 4 Historic preservation grants 34 railroad retirement Act) 30 Scholarship prizes 35 Hobby losses 34 payments 30 Discounted loan 21 Profit-sharing plan 18 Holding period requirement 13 Joint state/local tax return: Interest refund 23 Public assistance benefits 29 Holiday gifts 6 Recoveries 23 Qualified principal residence Publications (See Tax help) Holocaust victims restitution 34 Jury duty pay 34 indebtedness 21 Public Health Service 18 Home, sale of 35 Relief 21 Public safety officers killed in Host or hostess 22 Motor vehicle, line of duty 28 Hotels: K employer-provided 9 Public transportation passes, No-additional-cost services 8 Kickbacks 34 Moving expenses: employer-provided 8 Housing (See Lodging) Reimbursements 4, 34 Pulitzer prize 35 MSAs (Medical savings Punitive damages 31 L accounts) 34 I Labor unions: Illegal activities 34 Convention expenses, Q Income: reimbursed 36 N Qualified tuition program Assigned 3 Dues 36 National Health Service Corps (QTP) 35 Business and investment 17, 18 Strike and lockout benefits 36 Scholarship Program 9 Constructive receipt of 2 Unemployment benefits paid National Oceanic and Estate and trust 32 from 29 Atmospheric R Foreign employers 16 Last day of tax year, income Administration 18 Raffles 33 Illegal 34 received on 2 National Senior Service Railroad: Miscellaneous 20 Leave (See Accrued leave Corps 16, 17 Retirement annuities 35 Other 31 payment) No-additional-cost services 8 Sick pay 20 Partnership 17 Length-of-service awards 4 Nobel prize 35 Unemployment compensation Prepaid 3 Life insurance: No-fault car insurance: benefits 29 S corporation 18 Employer-owned 22 Disability benefits under 20 Real estate: Indian fishing rights 34 Proceeds 22 Nonrecourse debt 21 Qualified real property business Indian money account 34 Surrender of policy for cash 22 Nonstatutory stock options 11 debt, cancellation of 21 Individual retirement Loans 21 Nontaxable income 2 Rebates: arrangements (IRAs): (See also Mortgage) Notary fees 33 Cash 31 Deduction 30 Below-market 31 Notes received for services 4 Utility 36 Inherited IRA 33 Student 21 Not-for-profit activities 31 Recovery of amounts previously Inheritance 33 Lockout benefits 36 Nutrition Program for the deducted 23, 25 IRA 33 Lodging: Elderly 31 Itemized deductions 23, 24 Property not substantially Campus lodging 8 Non-itemized deductions 28 vested 15 Clergy 15 Unused tax credits, refiguring Injury benefits 18–20 Employer-paid or reimbursed 8 O of 27, 28 Insurance: Faculty lodging 8 Oil: Worksheet of itemized Credit card 32 Replacement housing Royalties from 17 deductions (Worksheet Health 5 payments 30 Options, stock 11, 13 2) 26, 27 Life (See Life insurance) Long-term care insurance 5, 19 Outplacement services 4 Refunds: Long-term care (See Long-term Lotteries and raffles 33 Overseas work 2 Federal income tax 23 care insurance) Lump-sum distributions: Mortgage interest 23 Interest: Survivor benefits 28 State tax 23 Canceled debt including 21 P Rehabilitative program Frozen deposits 34 Parking fees: payments 16 Mortgage refunds 23 M Employer-paid or reimbursed 8 Reimbursements: Option on insurance 22 Manufacturer incentive Partner and partnership Business expenses 4 Recovery amounts 23 payments 34 income 17 Casualty losses 31 Savings bond 34 Meals: Patents: Meals and lodging 8 State and local government Employer-paid or reimbursed 8 Infringement damages 31 Medical expenses 20 obligations 34 Nutrition Program for the Royalties 17 Moving expenses 4, 34 Interference with business Elderly 31 Peace Corps 16 Related party transactions: operations: Medicaid waiver payments 2, 33 Pensions: Stock option transfer 12 Damages as income 31 Medical: Clergy 15 Religious order members 15 International organizations, Care reimbursements 20 Disability pensions 18 Rental income and expenses: employees of 16 Savings accounts 34 Inherited pensions 33 Personal property rental 17

Publication 525 (2020) Page 41 Page 42 of 42 Fileid: … tions/P525/2020/A/XML/Cycle08/source 13:42 - 6-Apr-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Reporting of 17 SIMPLE plans 9 Tax Counseling for the Repayments 36, 37 Limit for deferrals under 10 Elderly 16 V Repossession 31 Smallpox vaccine injuries 35 Tax help 37 Valuation: Restricted property 14, 15 Social security and Medicare Tax-sheltered annuity plans Fringe benefits 9 Retired Senior Volunteer taxes: (403(b) plans) 9 Stock options 11 Program (RSVP) 16, 17 Foreign employers, U.S. citizens Limit for 10 VA payments 35 Retirement: working for in U.S. 16 Terminal illness 23 Vehicle: Settlement 2 Paid by employer 4 Terrorist attacks: Commuter highway 8 Retirement planning services 6, Standard deduction: Disability payments for injuries Employer-provided 9 8 Recoveries 25 from 19 Veterans benefits 16 Retirement plans 16 State employees: Victims of, tax relief 18 Disability compensation 19 (See also Pensions) Unemployment benefits paid Victims of tax relief 2 Retroactive VA Automatic contribution to 29 Thrift Savings Plan 9 determination 19 arrangements 9 State or local governments: Title VII, Civil Rights Act of 1964: Special statute of limitations. 19 Contributions 9, 11, 12 Interest on obligations of 34 Back pay and damages for Viatical settlements 23 Elective deferrals (See Elective State or local taxes: emotional distress under 31 Virtual Currency 5 deferrals) Refunds 23 Tour guides, free tours for 33 Volunteers in Service to America Rewards 35 Statutory stock option holding Trade Act of 1974: (VISTA) 16 Roth contributions 10 period 13 Trade readjustment allowances Volunteer work 16 Royalties 17 Stock appreciation rights 5 under 29 Tax counseling (Volunteer Stockholder debts 21 Transferable property 14 Income Tax Assistance Stock options 11, 13 Transit passes 8 Program) 16 S Stock options, nonstatutory: Travel agencies: Safety achievement awards 4 Exercise or transfer 12 Free tour to organizer of group of Salary reduction simplified Grant 11 tourists 33 W employee pension Sale 12 Travel and transportation W-2 form (See Form W-2) plans (See SARSEPs) Stock options, statutory: expenses: Welfare benefits 29 Sale of home 35 Exercise 12 Free tours from travel Whistleblower 36 Sales contracts: Grant 12 agencies 33 Winter energy payments 31 Cancellation of 31 Sale 12 Fringe benefits 8 Withholding: SARSEPs 9 Stolen property 35 Reimbursements 4 Barter exchange Excess contributions 11 Strike benefits 36 School children, transporting transactions 20 Savings bonds 34 Student loans: of 36 Unemployment Savings incentive match plans Cancellation of debt 21 Trusts: compensation 29 for employees (See SIMPLE Substantially vested property 14 Grantor trusts 32 Workers' compensation 19 plans) Substantial risk of forfeiture 14 Income 32 Working condition benefits 9 Scholarships and fellowships 35 Supplemental unemployment Tuition program, qualified Worksheets: S corporations 18 benefits 29 (QTP) 35 Computations for Worksheet 2, Self-employed persons: Surviving spouse: Tuition reduction 9 lines 1a and 1b (Worksheet U.S. citizens working for foreign Life insurance proceeds paid 2a) 26 employers in U.S. treated to 22 Group-term life insurance as 16 Survivor benefits 28 U (Worksheet 1) 6, 7 Senior Companion Program 16 Unemployment Recoveries of itemized Service Corps of Retired compensation 28 deductions (Worksheet Executives (SCORE) 16 T Unions (See Labor unions) 2) 26, 27 Severance pay 4 Tables and figures: Unlawful discrimination suits: Work-training programs 29 Outplacement services 4 Group-term life insurance Deduction for costs 32 Sickness and injury benefits 20 (Table 1) 7 Sick pay 4 Tax benefit rule 23

Page 42 Publication 525 (2020)