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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 ...... 14

For use in preparing Business and Investment Income .... 16 2015 Returns Sickness and Injury Benefits ...... 17 Miscellaneous Income ...... 20

Repayments ...... 34

How To Get Tax Help ...... 35

Index ...... 36

Future Developments For the latest information about developments related to Publication 525, such as legislation enacted after it was published, go to www.irs.gov/pub525.

What's New Health flexible spending arrangements (health FSAs) under cafeteria plans. For plan year 2015, health FSAs are subject to a $2,550 limit on salary reduction contributions. Achieving a Better Life Experience (ABLE) account. This is a new type of savings account for individuals with disabilities and their families. For 2015, you can contribute up to $14,000. Distributions are tax-free if used to pay the ben- eficiary's qualified disability expenses. See Pub. 907 for more information. Public safety officers. Certain amounts you receive under federal or state law due to a death or disability of a public safety officer in the line of duty may be excluded from gross in- come. See section 104(a)(6) for more informa- tion. Certain amounts received by wrongfully in­ carcerated individuals. Certain amounts you receive due to a wrongful incarceration may be excluded from gross income. See section 139F for more information. Note. This new law was enacted December 18, 2015 as part of P.L. 114-113 and applies to all tax years. Generally, you have 1 year from its enactment to claim a credit or refund if you in- cluded such amounts in gross income in previ- ous years, even if that claim is otherwise not al- Get forms and other information faster and easier at: lowed by law. • IRS.gov (English) • IRS.gov/Korean (한국어) • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) • IRS.gov/Chinese (中文 ) • IRS.gov/Vietnamese (TiếngViệt)

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sources outside the United States (foreign in- tax year, and you otherwise could not get the come) on your tax return unless it is exempt by funds before the end of the year, you include Reminders U.S. law. This is true whether you reside inside the amount in your income for the next tax year. Qualified Medicaid waiver payments. Cer- or outside the United States and whether or not Assignment of income. Income received tain payments you receive for providing care for you receive a Form W-2, Wage and Tax State- by an agent for you is income you constructively an eligible individual in your home under a ment, or Form 1099 from the foreign payer. This received in the year the agent received it. If you state's Medicaid waiver program, are not inclu- applies to earned income (such as wages and agree by contract that a third party is to receive ded in your income. These payments may be tips) as well as unearned income (such as inter- income for you, you must include the amount in excluded from your income whether or not you est, dividends, capital gains, pensions, rents, your income when the third party receives it. are related to the eligible individual receiving and royalties). care. If you reside outside the United States, you Example. You and your employer agree Virtual Currency. For federal tax purposes, may be able to exclude part or all of your for- that part of your salary is to be paid directly to virtual currency is treated as property. Bitcoin is eign source earned income. For details, see one of your creditors. You must include that an example of virtual currency. Transactions Pub. 54, Tax Guide for U.S. Citizens and Resi- amount in your income when your creditor re- using virtual currency (such as Bitcoin) must be dent Aliens Abroad. ceives it. reported in U.S. dollars. Disaster mitigation payments. You can ex- The fair market value of virtual currency clude from income grants you use to mitigate Prepaid income. In most cases, prepaid in- (such as Bitcoin) paid as wages is subject to (reduce the severity of) potential damage from come, such as compensation for future serv- federal income tax withholding, FICA tax, FUTA future natural disasters that are paid to you ices, is included in your income in the year you tax and must be reported on Form W-2. Notice through state and local governments. For more receive it. However, if you use an accrual 2014-21, 2014-16 I.R.B. 938 describes how vir- information, see Disaster mitigation payments method of accounting, you can defer prepaid in- tual currency is treated for federal tax purposes under Welfare and Other Public Assistance come you receive for services to be performed and is available at www.irs.gov/irb/ Benefits, later. before the end of the next tax year. In this case, 2014–16_IRB/ar12.html. Qualified joint venture. A qualified joint ven- you include the payment in your income as you Additional Medicare Tax. In addition to the ture conducted by you and your spouse may earn it by performing the services. 1.45% Medicare tax, a 0.9% Additional Medi- not be treated as a partnership if you file a joint care Tax applies to Medicare wages, railroad return for the tax year. See Partnership Income Comments and suggestions. We welcome retirement (RRTA) compensation, and self-em- under Business and Investment Income, later. your comments about this publication and your ployment income that are more than: Photographs of missing children. The Inter- suggestions for future editions. $125,000 if married filing separately, nal Revenue Service is a proud partner with the You can send us comments from www.irs.gov/formspubs. Click on “More Infor- $250,000 if married filing jointly, or National Center for Missing and Exploited Chil- dren. Photographs of missing children selected mation” and then on “Give us feedback.” $200,000 if single, head of household, or by the Center may appear in this publication on Or you can write to: qualifying widow(er). pages that otherwise would be blank. You can For more information, see Form 8959 and its in- help bring these children home by looking at the Internal Revenue Service structions. photographs and calling 1-800-THE-LOST Tax Forms and Publications Net Investment Income Tax (NIIT). The NIIT (1-800-843-5678) if you recognize a child. 1111 Constitution Ave. NW, IR-6526 applies at a rate of 3.8% to certain net invest- Washington, DC 20224 ment income of individuals, estates and trusts Introduction that have income above the threshold amounts. We respond to many letters by telephone. Individuals will owe the tax if they have net in- You can receive income in the form of money, Therefore, it would be helpful if you would in- vestment income and also have modified adjus- property, or services. This publication dis- clude your daytime phone number, including ted gross income over the following thresholds cusses many kinds of income and explains the area code, in your correspondence. for their filing status: Married filing jointly, whether they are taxable or nontaxable. It in- Although we cannot respond individually to $250,000; Married filing separately, $125,000; cludes discussions on employee wages and each comment received, we do appreciate your Single, $200,000; Head of household (with fringe benefits, and income from bartering, part- feedback and will consider your comments as qualifying person), $200,000; Qualifying nerships, S corporations, and royalties. It also we revise our tax products. widow(er) with dependent child, $250,000. For includes information on disability pensions, life more information, see Form 8960 and its in- insurance proceeds, and welfare and other Ordering forms and publications. Visit structions. public assistance benefits. Check the index for www.irs.gov/formspubs to download forms and publications. Otherwise, you can go to Terrorist attacks. You can exclude from in- the location of a specific subject. www.irs.gov/orderforms to order current and come certain disaster assistance, disability, and In most cases, an amount included in your prior-year forms and instructions. Your order death payments received as a result of a terro- income is taxable unless it is specifically ex- should arrive within 10 business days. rist or military action. For more information, see empted by law. Income that is taxable must be Sickness and Injury Benefits, later, and Pub. reported on your return and is subject to tax. In- Tax questions. If you have a tax question 3920, Tax Relief for Victims of Terrorist Attacks. come that is nontaxable may have to be shown not answered by this publication, check on your tax return but is not taxable. Gulf oil spill. You are required to include in IRS.gov and How To Get Tax Help at the end of this publication. your gross income payments you received for Constructively received income. You are lost wages, lost business income, or lost profits. generally taxed on income that is available to See Gulf oil spill under Other Income, later. you, regardless of whether it is actually in your Useful Items Qualified settlement income. If you are a possession. You may want to see: qualified taxpayer, you can contribute all or part A valid check that you received or that was of your qualified settlement income, up to made available to you before the end of the tax Publication $100,000, to an eligible retirement plan, includ- year is considered income constructively re- 334 Tax Guide for Small Business ing an IRA. Contributions to eligible retirement ceived in that year, even if you do not cash the plans, other than a Roth IRA or a designated check or deposit it to your account until the next 523 Selling Your Home Roth contribution, reduce the qualified settle- year. For example, if the postal service tries to ment income that you must include in income. deliver a check to you on the last day of the tax 527 Residential Rental Property See Exxon Valdez settlement income under year but you are not at home to receive it, you 541 Partnerships Other Income, later. must include the amount in your income for that Foreign income. If you are a U.S. citizen or tax year. If the check was mailed so that it could 544 Sales and Other Dispositions of resident alien, you must report income from not possibly reach you until after the end of the Assets

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550 Investment Income and Expenses employee unless you are subject to the will and for damages, unpaid life insurance premiums, control of the person who employs you as to and unpaid health insurance premiums. They 554 Tax Guide for Seniors what you are to do and how you are to do it. should be reported to you by your employer on 559 Survivors, Executors, and Form W-2. Administrators Babysitting. If you babysit for relatives or neighborhood children, whether on a regular Bonuses and awards. Bonuses or awards 575 Pension and Annuity Income basis or only periodically, the rules for childcare you receive for outstanding work are included in 907 Tax Highlights for Persons with providers apply to you. your income and should be shown on your Disabilities Form W-2. These include prizes such as vaca- Bankruptcy. If you filed for bankruptcy under tion trips for meeting sales goals. If the prize or 915 Social Security and Equivalent Chapter 11 of the Bankruptcy Code, you must award you receive is goods or services, you Railroad Retirement Benefits allocate your wages and withheld income tax. must include the fair market value of the goods 970 Tax Benefits for Education Your W-2 will show your total wages and with- or services in your income. However, if your held income tax for the year. On your tax return, 4681 Canceled Debts, Foreclosures, employer merely promises to pay you a bonus you report the wages and withheld income tax or award at some future time, it is not taxable Repossessions, and Abandonments for the period before you filed for bankruptcy. until you receive it or it is made available to you. Your bankruptcy estate reports the wages and Form (and Instructions) withheld income tax for the period after you filed Employee achievement award. If you re- 1040 U.S. Individual Income Tax Return for bankruptcy. If you receive other information ceive tangible personal property (other than returns (such as Form 1099-DIV, Dividends and cash, a gift certificate, or an equivalent item) as 1040A U.S. Individual Income Tax Return Distributions, or 1099-INT, Interest Income) that an award for length of service or safety achieve- 1040EZ Income Tax Return for Single and report gross income to you, rather than to the ment, you generally can exclude its value from Joint Filers With No Dependents bankruptcy estate, you must allocate that in- your income. However, the amount you can ex- come. clude is limited to your employer's cost and can- 1040NR U.S. Nonresident Alien Income The only exception is for purposes of figur- not be more than $1,600 ($400 for awards that Tax Return ing your self-employment tax, if you are are not qualified plan awards) for all such 1099­R Distributions From Pensions, self-employed. For that purpose, you must take awards you receive during the year. Your em- Annuities, Retirement or into account all your self-employment income ployer can tell you whether your award is a Profit-Sharing Plans, IRAs, Insurance for the year from services performed both be- qualified plan award. Your employer must make Contracts, etc. fore and after the beginning of the case. the award as part of a meaningful presentation, You must file a statement with your income under conditions and circumstances that do not W­2 Wage and Tax Statement tax return stating you filed a Chapter 11 bank- create a significant likelihood of it being dis- See How To Get Tax Help, near the end of this ruptcy case. The statement must show the allo- guised pay. publication, for information about getting these cation and describe the method used to make However, the exclusion does not apply to publications. the allocation. For a sample of this statement the following awards. and other information, see Notice 2006-83, A length-of-service award if you received it 2006-40 I.R.B. 596, available at www.irs.gov/ for less than 5 years of service or if you re- Employee irb/2006-40_IRB/ar12.html. ceived another length-of-service award during the year or the previous 4 years. Compensation A safety achievement award if you are a Miscellaneous manager, administrator, clerical employee, In most cases, you must include in gross in- Compensation or other professional employee or if more come everything you receive in payment for than 10% of eligible employees previously personal services. In addition to wages, salar- This section discusses many types of employee received safety achievement awards dur- ies, commissions, fees, and tips, this includes compensation. The subjects are arranged in al- ing the year. other forms of compensation such as fringe phabetical order. benefits and stock options. Example. Ben Green received three em- Advance commissions and other earnings. ployee achievement awards during the year: a You should receive a Form W-2 from your If you receive advance commissions or other nonqualified plan award of a watch valued at employer or former employer showing the pay amounts for services to be performed in the fu- $250, and two qualified plan awards of a stereo you received for your services. Include all your ture and you are a cash-method taxpayer, you valued at $1,000 and a set of golf clubs valued pay on line 7 of Form 1040 or Form 1040A or on must include these amounts in your income in at $500. Assuming that the requirements for line 1 of Form 1040EZ, even if you do not re- the year you receive them. qualified plan awards are otherwise satisfied, ceive Form W-2, or you receive a Form W-2 If you repay unearned commissions or other each award by itself would be excluded from in- that does not include all pay that should be in- amounts in the same year you receive them, re- come. However, because the $1,750 total value cluded on the Form W-2. duce the amount included in your income by the of the awards is more than $1,600, Ben must in- If you performed services, other than as an repayment. If you repay them in a later tax year, clude $150 ($1,750 − $1,600) in his income. independent contractor, and your employer did you can deduct the repayment as an itemized not withhold social security and Medicare taxes deduction on your Schedule A (Form 1040), Differential wage payments. This is any pay- from your pay, you must file Form 8919, Uncol- Itemized Deductions, or you may be able to ment made by an employer to an individual for lected Social Security and Medicare Tax on take a credit for that year. See Repayments, any period during which the individual is, for a Wages, with your Form 1040. These wages later. period of more than 30 days, an active duty must be included on line 7 of Form 1040. See member of the uniformed services and repre- Form 8919 for more information. Allowances and reimbursements. If you re- sents all or a portion of the wages the individual ceive travel, transportation, or other business would have received from the employer for that Childcare providers. If you provide childcare, expense allowances or reimbursements from period. These payments are treated as wages either in the child's home or in your home or your employer, see Pub. 463, Travel, Entertain- and are subject to income tax withholding, but other place of business, the pay you receive ment, Gift, and Car Expenses. If you are reim- not FICA or FUTA taxes. The payments are re- must be included in your income. If you are not bursed for moving expenses, see Pub. 521, ported as wages on Form W-2. an employee, you are probably self-employed Moving Expenses. and must include payments for your services on Government cost­of­living allowances. Schedule C (Form 1040), Profit or Loss From Back pay awards. Include in income amounts Most payments received by U.S. Government Business, or Schedule C-EZ (Form 1040), Net you are awarded in a settlement or judgment for civilian employees for working abroad are taxa- Profit From Business. You generally are not an back pay. These include payments made to you ble. However, certain cost-of-living allowances

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are tax free. Pub. 516, U.S. Government Civil- Medicare taxes. As noted in section 15 of Pub. the fair market value on the date the right was ian Employees Stationed Abroad, explains the 15, Special Rules for Various Types of Service granted. You include the cash payment in in- tax treatment of allowances, differentials, and and Payments, severance payments are also come in the year you use the right. other special pay you receive for employment subject to income tax withholding and FUTA abroad. tax. Virtual Currency. If your employer gives you virtual currency (such as Bitcoin) as payment Nonqualified deferred compensation plans. Accrued leave payment. If you are a fed- for your services, you must include the fair mar- Your employer will report to you the total eral employee and receive a lump-sum pay- ket value of the currency in your income. The amount of deferrals for the year under a non- ment for accrued annual leave when you retire fair market value of virtual currency (such as qualified deferred compensation plan. This or resign, this amount will be included as wages Bitcoin) paid as wages is subject to federal in- amount is shown on Form W-2, box 12, using on your Form W-2. come tax withholding, Federal Insurance Contri- code Y. This amount is not included in your in- If you resign from one agency and are reem- bution Act (FICA) tax, and Federal Unemploy- come. ployed by another agency, you may have to re- ment Tax Act (FUTA) tax and must be reported However, if at any time during the tax year, pay part of your lump-sum annual leave pay- on Form W-2, Wage and Tax Statement. the plan fails to meet certain requirements, or is ment to the second agency. You can reduce gross wages by the amount you repaid in the not operated under those requirements, all Fringe Benefits amounts deferred under the plan for the tax same tax year in which you received it. Attach year and all preceding tax years are included in to your tax return a copy of the receipt or state- Fringe benefits received in connection with the your income for the current year. This amount is ment given to you by the agency you repaid to performance of your services are included in included in your wages shown on Form W-2, explain the difference between the wages on box 1. It is also shown on Form W-2, box 12, your return and the wages on your Forms W-2. your income as compensation unless you pay using code Z. fair market value for them or they are specifi- Outplacement services. If you choose to cally excluded by law. Abstaining from the per- accept a reduced amount of severance pay so Nonqualified deferred compensation plans formance of services (for example, under a cov- that you can receive outplacement services of nonqualified entities. In most cases, any enant not to compete) is treated as the (such as training in résumé writing and inter- compensation deferred under a nonqualified performance of services for purposes of these view techniques), you must include the unre- deferred compensation plan of a nonqualified rules. duced amount of the severance pay in income. entity is included in gross income when there is However, you can deduct the value of these See Valuation of Fringe Benefits, later in this no substantial risk of forfeiture of the rights to outplacement services (up to the difference be- discussion, for information on how to determine such compensation. For this purpose, a non- tween the severance pay included in income the amount to include in income. qualified entity is: and the amount actually received) as a miscel- 1. A foreign corporation unless substantially laneous deduction (subject to the 2%-of-adjus- Recipient of fringe benefit. You are the recip- all of its income is: ted-gross-income (AGI) limit) on Schedule A ient of a fringe benefit if you perform the serv- (Form 1040). ices for which the fringe benefit is provided. You a. Effectively connected with the con- are considered to be the recipient even if it is duct of a trade or business in the Uni- Sick pay. Pay you receive from your employer given to another person, such as a member of ted States, or while you are sick or injured is part of your sal- your family. An example is a car your employer b. Subject to a comprehensive foreign ary or wages. In addition, you must include in gives to your spouse for services you perform. income tax. your income sick pay benefits received from The car is considered to have been provided to any of the following payers. you and not to your spouse. 2. A partnership unless substantially all of its A welfare fund. You do not have to be an employee of the income is allocated to persons other than: A state sickness or disability fund. provider to be a recipient of a fringe benefit. If a. Foreign persons for whom the income you are a partner, director, or independent con- An association of employers or employees. is not subject to a comprehensive for- tractor, you also can be the recipient of a fringe eign income tax, and An insurance company, if your employer benefit. paid for the plan. b. Tax-exempt organizations. However, if you paid the premiums on an acci- Provider of benefit. Your employer or another person for whom you perform services is the Note received for services. If your employer dent or health insurance policy, the benefits you provider of a fringe benefit regardless of gives you a secured note as payment for your receive under the policy are not taxable. For whether that person actually provides the fringe services, you must include the fair market value more information, see Other Sickness and In- benefit to you. The provider can be a client or (usually the discount value) of the note in your jury Benefits under Sickness and Injury Bene- customer of an independent contractor. income for the year you receive it. When you fits, later. later receive payments on the note, a propor- Accounting period. You must use the same tionate part of each payment is the recovery of Social security and Medicare taxes paid by accounting period your employer uses to report the fair market value that you previously inclu- employer. If you and your employer have an your taxable noncash fringe benefits. Your em- ded in your income. Do not include that part agreement that your employer pays your social ployer has the option to report taxable noncash again in your income. Include the rest of the security and Medicare taxes without deducting fringe benefits by using either of the following payment in your income in the year of payment. them from your gross wages, you must report rules. If your employer gives you a nonnegotiable the amount of tax paid for you as taxable wages The general rule: benefits are reported for unsecured note as payment for your services, on your tax return. The payment is also treated a full calendar year (January 1–December payments on the note that are credited toward as wages for figuring your social security and 31). the principal amount of the note are compensa- Medicare taxes and your social security and The special accounting period rule: bene- tion income when you receive them. Medicare benefits. However, these payments fits provided during the last 2 months of the are not treated as social security and Medicare calendar year (or any shorter period) are Severance pay. You must include in income wages if you are a household worker or a farm treated as paid during the following calen- amounts you receive as severance pay and any worker. dar year. For example, each year your em- payment for the cancellation of your employ- ployer reports the value of benefits provi- ment contract. Stock appreciation rights. Do not include a stock appreciation right granted by your em- ded during the last 2 months of the prior year and the first 10 months of the current Severance payments are subject to social ployer in income until you exercise (use) the year. security and Medicare taxes, income tax right. When you use the right, you are entitled to withholding, and FUTA tax. Severance pay- a cash payment equal to the fair market value of Your employer does not have to use the same ments are wages subject to social security and the corporation's stock on the date of use minus accounting period for each fringe benefit, but

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must use the same period for all employees deductions. Contributions made by your em- most cases, the value of benefits such as dis- who receive a particular benefit. ployer are not included in your income. Distribu- counts at company cafeterias, cab fares home You must use the same accounting period tions from your HSA that are used to pay quali- when working overtime, and company picnics that you use to report the benefit to claim an fied medical expenses are not included in your are not included in your income. Also see Em- employee business deduction (for use of a car, income. Distributions not used for qualified ployee Discounts, later. for example). medical expenses are included in your income. See Pub. 969 for the requirements of an HSA. Holiday gifts. If your employer gives you a tur- Form W­2. Your employer must include all tax- Contributions by a partnership to a bona fide key, ham, or other item of nominal value at able fringe benefits in box 1 of Form W-2 as wa- partner's HSA are not contributions by an em- Christmas or other holidays, do not include the ges, tips and other compensation and, if appli- ployer. The contributions are treated as a distri- value of the gift in your income. However, if your cable, in boxes 3 and 5 as social security and bution of money and are not included in the employer gives you cash, a gift certificate, or a Medicare wages. Although not required, your partner's gross income. Contributions by a part- similar item that you can easily exchange for employer may include the total value of fringe nership to a partner's HSA for services ren- cash, you include the value of that gift as extra benefits in box 14 (or on a separate statement). dered are treated as guaranteed payments that salary or wages regardless of the amount in- However, if your employer provided you with a are includible in the partner's gross income. In volved. vehicle and included 100% of its annual lease both situations, the partner can deduct the con- value in your income, the employer must sepa- tribution made to the partner's HSA. Dependent Care Benefits rately report this value to you in box 14 (or on a Contributions by an S corporation to a 2% separate statement). shareholder-employee's HSA for services ren- If your employer provides dependent care ben- dered are treated as guaranteed payments and efits under a qualified plan, you may be able to Accident or Health Plan are includible in the shareholder-employee's exclude these benefits from your income. De- gross income. The shareholder-employee can pendent care benefits include: In most cases, the value of accident or health deduct the contribution made to the share- Amounts your employer pays directly to ei- plan coverage provided to you by your em- holder-employee's HSA. ther you or your care provider for the care ployer is not included in your income. Benefits of your qualifying person while you work, you receive from the plan may be taxable, as Qualified HSA funding distribution. You and explained, later, under Sickness and Injury Ben- can make a one-time distribution from your indi- The fair market value of care in a daycare efits. vidual retirement account (IRA) to an HSA and facility provided or sponsored by your em- you generally will not include any of the distribu- ployer. For information on the items covered in this tion in your income. See Pub. 590-B, Distribu- section, other than Long-term care coverage, tions from Individual Retirement Arrangements The amount you can exclude is limited to the see Pub. 969, Health Savings Accounts and (IRAs), for the requirements for these qualified lesser of: Other Tax-Favored Health Plans. HSA funding distributions. The total amount of dependent care bene- fits you received during the year, Long­term care coverage. Contributions by Adoption Assistance The total amount of qualified expenses you your employer to provide coverage for incurred during the year, long-term care services generally are not inclu- You may be able to exclude from your income Your earned income, ded in your income. However, contributions amounts paid or expenses incurred by your em- Your spouse's earned income, or made through a flexible spending or similar ar- ployer for qualified adoption expenses in con- $5,000 ($2,500 if married filing separately). rangement (such as a cafeteria plan) must be nection with your adoption of an eligible child. included in your income. This amount will be re- See Instructions for Form 8839, Qualified Adop- Your employer must show the total amount ported as wages in box 1 of your Form W-2. tion Expenses, for more information. of dependent care benefits provided to you dur- Archer MSA contributions. Contributions by ing the year under a qualified plan in box 10 of your employer to your Archer MSA generally Adoption benefits are reported by your em- your Form W-2. Your employer also will include are not included in your income. Their total will ployer in box 12 of Form W-2 with code T. They any dependent care benefits over $5,000 in be reported in box 12 of Form W-2, with code also are included as social security and Medi- your wages shown in box 1 of your Form W-2. R. You must report this amount on Form 8853, care wages in boxes 3 and 5. However, they Archer MSAs and Long-Term Care Insurance are not included as wages in box 1. To deter- To claim the exclusion, you must complete Contracts. File the form with your return. mine the taxable and nontaxable amounts, you Part III of Form 2441, Child and Dependent must complete Part III of Form 8839. File the Care Expenses. See the Instructions for Form Health flexible spending arrangement form with your return. 2441 for more information. (health FSA). If your employer provides a health FSA that qualifies as an accident or Athletic Facilities Educational Assistance health plan, the amount of your salary reduc- tion, and reimbursements of your medical care If your employer provides you with the free or You can exclude from your income up to $5,250 expenses, in most cases, are not included in low-cost use of an employer-operated gym or of qualified employer-provided educational as- your income. other athletic club on your employer's premises, sistance. For more information, see Pub. 970. For 2015, health FSAs are subject to a the value is not included in your compensation. $2,550 limit (as indexed for inflation) on salary The gym must be used primarily by employees, Employee Discounts reduction contribution. their spouses, and their dependent children. If your employer sells you property or services Health reimbursement arrangement (HRA). If your employer pays for a fitness program at a discount, you may be able to exclude the If your employer provides an HRA that qualifies provided to you at an off-site resort hotel or ath- amount of the discount from your income. The as an accident or health plan, coverage and re- letic club, the value of the program is included exclusion applies to discounts on property or imbursements of your medical care expenses in your compensation. services offered to customers in the ordinary generally are not included in your income. course of the line of business in which you De Minimis (Minimal) Benefits work. However, it does not apply to discounts Health savings account (HSA). If you are an on real property or property commonly held for eligible individual, you and any other person, in- investment (such as stocks or bonds). cluding your employer or a family member, can If your employer provides you with a product or make contributions to your HSA. Contributions, service and the cost of it is so small that it would other than employer contributions, are deducti- be unreasonable for the employer to account ble on your return whether or not you itemize for it, the value is not included in your income. In

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The exclusion is limited to the price charged insurance coverage during the year, the amount nonemployee customers multiplied by the fol- included in your income is reported as wages in Worksheet 1. Figuring the lowing percentage. box 1 of Form W-2. Also, it is shown separately Cost of Group­Term Life For a discount on property, your employ- in box 12 with code C. Box 12 also will show the Insurance To Include in er's gross profit percentage (gross profit amount of uncollected social security and Medi- Income divided by gross sales) on all property sold care taxes on the excess coverage, with codes Keep for Your Records during the employer's previous tax year. M and N. You must pay these taxes with your (Ask your employer for this percentage.) income tax return. Include them on line 62, 1. Enter the total amount of For a discount on services, 20%. Form 1040, and follow the instructions for your insurance coverage line 62. For more information, see the Instruc- from your tions for Form 1040. Financial Counseling Fees employer(s) ...... 1. Two or more employers. Your exclusion for Financial counseling fees paid for you by your employer-provided group-term life insurance 2. Limit on exclusion for employer are included in your income and must coverage cannot exceed the cost of $50,000 of employer-provided be reported as part of wages. If the fees are for coverage, whether the insurance is provided by group-term life insurance 50,000 tax or investment counseling, they can be de- a single employer or multiple employers. If two coverage ...... 2. ducted on Schedule A (Form 1040) as a miscel- or more employers provide insurance coverage laneous deduction (subject to the 2%-of-AGI that totals more than $50,000, the amounts re- 3. Subtract line 2 from limit). ported as wages on your Forms W-2 will not be line 1 ...... 3. correct. You must figure how much to include in Qualified retirement planning services paid your income. Reduce the amount you figure by 4. Divide line 3 by $1,000. for you by your employer may be excluded from any amount reported with code C in box 12 of Figure to the nearest your income. For more information, see Retire- your Forms W-2, add the result to the wages re- tenth ...... 4. ment Planning Services, later. ported in box 1, and report the total on your re- turn. 5. Go to Table 1. Using your Group­Term Life Insurance age on the last day of the Figuring the taxable cost. Use the following tax year, find your age In most cases, the cost of up to $50,000 of worksheet to figure the amount to include in group in the left column, your income. group-term life insurance coverage provided to and enter the cost from the you by your employer (or former employer) is If you pay any part of the cost of the insur- column on the right for your not included in your income. However, you ance, your entire payment reduces, dollar for age group ...... 5. must include in income the cost of em- dollar, the amount you otherwise would include ployer-provided insurance that is more than the in your income. However, you cannot reduce 6. Multiply line 4 by cost of $50,000 of coverage reduced by any the amount to include in your income by: amount you pay toward the purchase of the in- Payments for coverage in a different tax line 5 ...... 6. surance. year, Payments for coverage through a cafeteria 7. Enter the number of full For exceptions to this rule, see Entire cost plan, unless the payments are after-tax months of coverage at this excluded, and Entire cost taxed, later. contributions, or cost ...... 7. Payments for coverage not taxed to you If your employer provided more than because of the exceptions discussed later 8. Multiply line 6 by

$50,000 of coverage, the amount included in under Entire cost excluded. line 7 ...... 8. your income is reported as part of your wages in box 1 of your Form W-2. Also, it is shown sepa- 9. Enter the rately in box 12 with code C. premiums you paid per Group­term life insurance. This insurance is month ...... 9. term life insurance protection (insurance for a fixed period of time) that: 10. Enter the number Provides a general death benefit, of months you Is provided to a group of employees, paid the

Is provided under a policy carried by the premiums .....10. employer, and Provides an amount of insurance to each 11. Multiply line 9 by employee based on a formula that pre- line 10 ...... 11. vents individual selection. 12. Subtract line 11 from line 8. Permanent benefits. If your group-term life Include this amount in insurance policy includes permanent benefits, your income as such as a paid-up or cash surrender value, you wages ...... 12. 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. Accidental death benefits. Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life in- surance.

Former employer. If your former employer provided more than $50,000 of group-term life

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Table 1. Cost of $1,000 of (You are not entitled to a deduction for a Group­Term Life Insurance for Worksheet 1. Figuring the charitable contribution for naming a chari- One Month Cost of Group­Term Life table organization as the beneficiary of your policy.) Age Cost Insurance To Include in Under 25 ...... $ .05 Income—Illustrated 4. The plan existed on January 1, 1984, and: Keep for Your Records 25 through 29 ...... 06 a. You retired before January 2, 1984, and were covered by the plan when 30 through 34 ...... 08 1. Enter the total amount of you retired, or 35 through 39 ...... 09 your insurance coverage from your b. You reached age 55 before January 40 through 44 ...... 10 employer(s) ...... 1. 80,000 2, 1984, and were employed by the 45 through 49 ...... 15 2. Limit on exclusion for employer or its predecessor in 1983.

50 through 54 ...... 23 employer-provided 55 through 59 ...... 43 group-term life insurance Entire cost taxed. You are taxed on the entire coverage ...... 2. 50,000 cost of group-term life insurance if either of the 60 through 64 ...... 66 3. Subtract line 2 from following circumstances apply. 65 through 69 ...... 1.27 line 1 ...... 3. 30,000 The insurance is provided by your em- ployer through a qualified employees' trust, 4. Divide line 3 by $1,000. 70 and above ...... 2.06 such as a pension trust or a qualified annu- Figure to the nearest ity plan. tenth ...... 4. 30.0 Example. You are 51 years old and work You are a key employee and your employ- for employers A and B. Both employers provide 5. Go to Table 1. Using your er's plan discriminates in favor of key em- group-term life insurance coverage for you for age on the last day of the tax ployees. the entire year. Your coverage is $35,000 with year, find your age group in employer A and $45,000 with employer B. You the left column, and enter the Meals and Lodging pay premiums of $4.15 a month under the em- cost from the column on the ployer B group plan. You figure the amount to right for your age You do not include in your income the value of include in your income as follows. group ...... 5. .23 meals and lodging provided to you and your 6. Multiply line 4 by family by your employer at no charge if the fol- line 5 ...... 6. 6.90 lowing conditions are met. 7. Enter the number of full 1. The meals are: months of coverage at this cost...... 7. 12 a. Furnished on the business premises of your employer, and 8. Multiply line 6 by line 7 ...... 8. 82.80 b. Furnished for the convenience of your 9. Enter the employer. premiums you paid 2. The lodging is: per month ..... 9. 4.15 a. Furnished on the business premises 10. Enter the number of your employer, of months you paid the b. Furnished for the convenience of your premiums ..... 10. 12 employer, and 11. Multiply line 9 by c. A condition of your employment. (You line 10 ...... 11. 49.80 must accept it in order to be able to 12. Subtract line 11 from line 8. properly perform your duties.) Include this amount in your income as You also do not include in your income the wages ...... 12. 33.00 value of meals or meal money that qualifies as a de minimis fringe benefit. See De Minimis (Mini- The total amount to include in income for the mal) Benefits, earlier. cost of excess group-term life insurance is $33. Neither employer provided over $50,000 insur- Faculty lodging. If you are an employee of an ance coverage, so the wages shown on your educational institution or an academic health Forms W-2 do not include any part of that $33. center and you are provided with lodging that You must add it to the wages shown on your does not meet the three conditions given ear- Forms W-2 and include the total on your return. lier, you still may not have to include the value of the lodging in income. However, the lodging Entire cost excluded. You are not taxed on must be qualified campus lodging, and you the cost of group-term life insurance if any of must pay an adequate rent. the following circumstances apply. Academic health center. This is an organ- 1. You are permanently and totally disabled ization that meets the following conditions. and have ended your employment. Its principal purpose or function is to pro- 2. Your employer is the beneficiary of the vide medical or hospital care or medical policy for the entire period the insurance is education or research. in force during the tax year. It receives payments for graduate medical education under the Social Security Act. 3. A charitable organization to which contri- One of its principal purposes or functions is butions are deductible is the only benefi- to provide and teach basic and clinical ciary of the policy for the entire period the medical science and research using its insurance is in force during the tax year. own faculty.

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Qualified campus lodging. Qualified cam- your income. However, the value of the hotel the business of transporting persons for com- pus lodging is lodging furnished to you, your room is included in your income because you pensation. spouse, or one of your dependents by, or on do not work in the hotel business. behalf of, the institution or center for use as a Qualified parking. This is parking provided to home. The lodging must be located on or near a Retirement Planning Services an employee at or near the employer's place of campus of the educational institution or aca- business. It also includes parking provided on demic health center. If your employer has a qualified retirement plan, or near a location from which the employee qualified retirement planning services provided commutes to work by mass transit, in a com- Adequate rent. The amount of rent you muter highway vehicle, or by carpool. It does pay for the year for qualified campus lodging is to you (and your spouse) by your employer are not included in your income. Qualified services not include parking at or near the employee's considered adequate if it is at least equal to the home. lesser of: include retirement planning advice, information 5% of the appraised value of the lodging, about your employer's retirement plan, and in- formation about how the plan may fit into your Qualified bicycle commuting. This is reim- or bursement based on the number of qualified bi- The average of rentals paid by individuals overall individual retirement income plan. You cannot exclude the value of any tax preparation, cycle commuting months for the year. A quali- (other than employees or students) for fied bicycle commuting month is any month you accounting, legal, or brokerage services provi- comparable lodging held for rent by the ed- use the bicycle regularly for a substantial por- ded by your employer. Also, see Financial ucational institution. tion of the travel between your home and place Counseling Fees, earlier. If the amount you pay is less than the lesser of of employment and you do not receive any of the other qualified transportation fringe benefits. these amounts, you must include the difference Transportation in your income. The reimbursement can be for expenses you in- curred during the year for the purchase of a bi- The lodging must be appraised by an inde- If your employer provides you with a qualified pendent appraiser and the appraisal must be cycle and bicycle improvements, repair, and transportation fringe benefit, it can be excluded storage. reviewed on an annual basis. from your income, up to certain limits. A quali- fied transportation fringe benefit is: Example. Carl Johnson, a sociology pro- Transportation in a commuter highway ve- Tuition Reduction fessor for State University, rents a home from hicle (such as a van) between your home the university that is qualified campus lodging. You can exclude a qualified tuition reduction and work place, The house is appraised at $200,000. The aver- from your income. This is the amount of a re- A transit pass, age rent paid for comparable university lodging duction in tuition: by persons other than employees or students is Qualified parking, or For education (below graduate level) fur- $14,000 a year. Carl pays an annual rent of Qualified bicycle commuting reimburse- nished by an educational institution to an $11,000. Carl does not include in his income ment. employee, former employee who retired or any rental value because the rent he pays became disabled, or his or her spouse and Cash reimbursement by your employer for equals at least 5% of the appraised value of the dependent children. these expenses under a bona fide reimburse- house (5% × $200,000 = $10,000). If Carl paid For education furnished to a graduate stu- ment arrangement is also excludable. However, annual rent of only $8,000, he would have to in- dent at an educational institution if the cash reimbursement for a transit pass is exclud- clude $2,000 in his income ($10,000 − $8,000). graduate student is engaged in teaching or able only if a voucher or similar item that can be research activities for that institution. exchanged only for a transit pass is not readily Representing payment for teaching, re- Moving Expense Reimbursements available for direct distribution to you. search, or other services if you receive the amount under the National Health Service In most cases, if your employer pays for your Exclusion limit. The exclusion for commuter Corps Scholarship Program or the Armed moving expenses (either directly or indirectly) vehicle transportation and transit pass fringe Forces Health Professions Scholarship and the expenses would have been deductible benefits cannot be more than $250 a month. and Financial Assistance program. if you paid them yourself, the value is not inclu- The exclusion for the qualified parking fringe ded in your income. See Pub. 521 for more in- benefit cannot be more than $250 a month. For more information, see Pub. 970. formation. The exclusion for qualified bicycle commut- ing in a calendar year is $20 multiplied by the Working Condition Benefits No­Additional­Cost Services number of qualified bicycle commuting months that year. You cannot exclude from your income If your employer provides you with a product or The value of services you receive from your em- any qualified bicycle commuting reimbursement service and the cost of it would have been al- ployer for free, at cost, or for a reduced price is if you can choose between reimbursement and lowable as a business or depreciation deduc- not included in your income if your employer: compensation that is otherwise includible in tion if you paid for it yourself, the cost is not in- Offers the same service for sale to custom- your income. cluded in your income. ers in the ordinary course of the line of If the benefits have a value that is more than business in which you work, and these limits, the excess must be included in Example. You work as an engineer and Does not have a substantial additional cost your income. your employer provides you with a subscription (including any sales income given up) to to an engineering trade magazine. The cost of provide you with the service (regardless of Commuter highway vehicle. This is a high- the subscription is not included in your income what you paid for the service). way vehicle that seats at least six adults (not in- because the cost would have been allowable to cluding the driver). At least 80% of the vehicle's you as a business deduction if you had paid for In most cases, no-additional-cost services mileage must reasonably be expected to be: the subscription yourself. are excess capacity services, such as airline, For transporting employees between their bus, or train tickets, hotel rooms, and telephone homes and workplace, and Valuation of Fringe Benefits services. On trips during which employees occupy at least half of the vehicle's adult seating ca- If a fringe benefit is included in your income, the Example. You are employed as a flight at- pacity (not including the driver). amount included is generally its value deter- tendant for a company that owns both an airline mined under the general valuation rule or under and a hotel chain. Your employer allows you to Transit pass. This is any pass, token, fare- the special valuation rules. For an exception, take personal flights (if there is an unoccupied card, voucher, or similar item entitling a person see Group-Term Life Insurance, earlier. seat) and stay in any one of their hotels (if there to ride mass transit (whether public or private) is an unoccupied room) at no cost to you. The free or at a reduced rate or to ride in a com- General valuation rule. You must include in value of the personal flight is not included in muter highway vehicle operated by a person in your income the amount by which the fair

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market value of the fringe benefit is more than The commuting rule. 6. Section 501(c)(18)(D) plans. (But see Re- the sum of: The unsafe conditions commuting rule. porting by employer, later.) 1. The amount, if any, you paid for the bene- The employer-operated eating-facility rule. 7. Section 457 plans. fit, plus For more information on these rules, see Qualified automatic contribution arrange­ 2. The amount, if any, specifically excluded Pub. 15-B, Employer's Tax Guide to Fringe ments. Under a qualified automatic contribu- from your income by law. Benefits. tion arrangement, your employer can treat you If you pay fair market value for a fringe benefit, For information on the non-commercial flight as having elected to have a part of your com- no amount is included in your income. and commercial flight valuation rules, see sec- pensation contributed to a section 401(k) plan. tions 1.61-21(g) and 1.61-21(h) of the regula- You are to receive written notice of your rights Fair market value. The fair market value of tions. and obligations under the qualified automatic a fringe benefit is determined by all the facts contribution arrangement. The notice must ex- and circumstances. It is the amount you would plain: have to pay a third party to buy or lease the Retirement Plan Your rights to elect not to have elective benefit. This is determined without regard to: Contributions contributions made, or to have contribu- Your perceived value of the benefit, or tions made at a different percentage, and The amount your employer paid for the Your employer's contributions to a qualified re- How contributions made will be invested in benefit. tirement plan for you are not included in income the absence of any investment decision by at the time contributed. (Your employer can tell you. Employer-provided vehicles. If your em- you whether your retirement plan is qualified.) You must be given a reasonable period of ployer provides a car (or other highway motor However, the cost of life insurance coverage in- time after receipt of the notice and before the vehicle) to you, your personal use of the car is cluded in the plan may have to be included. See first elective contribution is made to make an usually a taxable noncash fringe benefit. Group-Term Life Insurance, earlier, under election with respect to the contributions. Under the general valuation rules, the value Fringe Benefits. of an employer-provided vehicle is the amount Overall limit on deferrals. For 2015, in most you would have to pay a third party to lease the If your employer pays into a nonqualified cases, you should not have deferred more than same or a similar vehicle on the same or com- plan for you, you generally must include the a total of $18,000 of contributions to the plans parable terms in the same geographic area contributions in your income as wages for the listed in (1) through (3), earlier. The specific where you use the vehicle. An example of a tax year in which the contributions are made. plan limits for the plans listed in (4) through (7), comparable lease term is the amount of time However, if your interest in the plan is not trans- earlier, are discussed later. Amounts deferred the vehicle is available for your use, such as a ferable or is subject to a substantial risk of for- under specific plan limits are part of the overall 1-year period. The value cannot be determined feiture (you have a good chance of losing it) at limit on deferrals. by multiplying a cents-per-mile rate times the the time of the contribution, you do not have to Your employer or plan administrator should number of miles driven unless you prove the ve- include the value of your interest in your income apply the proper annual limit when figuring your hicle could have been leased on a until it is transferable or is no longer subject to a plan contributions. However, you are responsi- cents-per-mile basis. substantial risk of forfeiture. ble for monitoring the total you defer to ensure Flights on employer-provided aircraft. For information on distributions from that the deferrals are not more than the overall Under the general valuation rules, if your flight TIP retirement plans, see Pub. 575 (or limit. on an employer-provided piloted aircraft is pri- Pub. 721, Tax Guide to U.S. Civil marily personal and you control the use of the Service Retirement Benefits, if you are a federal Catch­up contributions. You may be allowed aircraft for the flight, the value is the amount it employee or retiree). catch-up contributions (additional elective de- would cost to charter the flight from a third ferrals) if you are age 50 or older by the end of party. your tax year. For more information about If there is more than one employee on the Elective Deferrals catch-up contributions to 403(b) plans, see flight, the cost to charter the aircraft must be chapter 6 of Pub. 571, Tax Sheltered Annuity divided among those employees. The division If you are covered by certain kinds of retirement Plans. must be based on all the facts, including which plans, you can choose to have part of your For more information about additional elec- employee or employees control the use of the compensation contributed by your employer to tive deferrals to: aircraft. a retirement fund, rather than have it paid to SEPs (SARSEPs), see Salary Reduction you. The amount you set aside (called an elec- Simplified Employee Pension in chapter 2 Special valuation rules. You generally can tive deferral) is treated as an employer contribu- of Pub. 560, Retirement Plans for Small use a special valuation rule for a fringe benefit tion to a qualified plan. An elective deferral, Business. only if your employer uses the rule. If your em- other than a designated Roth contribution (dis- SIMPLE plans, see SIMPLE Plans in chap- ployer uses a special valuation rule, you cannot cussed later), is not included in wages subject ter 3 of Pub. 560. use a different special rule to value that benefit. to income tax at the time contributed. However, Section 457 plans, see Limit for deferrals You always can use the general valuation rule it is included in wages subject to social security under section 457 plans, later. discussed earlier, based on facts and circum- and Medicare taxes. stances, even if your employer uses a special Limit for deferrals under SIMPLE plans. If rule. Elective deferrals include elective contribu- you are a participant in a SIMPLE plan, you If you and your employer use a special valu- tions to the following retirement plans. generally should not have deferred more than ation rule, you must include in your income the $12,500 in 2015. Amounts you defer under a 1. Cash or deferred arrangements (section amount your employer determines under the SIMPLE plan count toward the overall limit 401(k) plans). special rule minus the sum of: ($18,000 for 2015) and may affect the amount 2. The Thrift Savings Plan for federal em- you can defer under other elective deferral 1. Any amount you repaid your employer, ployees. plans. plus 3. Salary reduction simplified employee pen- Limit for tax­sheltered annuities. If you are a 2. Any amount specifically excluded from in- sion plans (SARSEP). participant in a tax-sheltered annuity plan come by law. (403(b) plan), the limit on elective deferrals for 4. Savings incentive match plans for employ- 2015 generally is $18,000. However, if you The special valuation rules are the following. ees (SIMPLE plans). The automobile lease rule. have at least 15 years of service with a public 5. Tax-sheltered annuity plans (403(b) school system, a hospital, a home health serv- The vehicle cents-per-mile rule. plans). ice agency, a health and welfare service

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agency, a church, or a convention or associa- c. A salary reduction simplified em- should not have been reduced for contributions tion of churches (or associated organization), ployee pension (SARSEP). you made to a section 501(c)(18)(D) retirement the limit on elective deferrals is increased by the plan. The amount you contributed should be d. A tax-sheltered annuity (section least of the following amounts. identified with code “H” in box 12. You may de- 403(b) plan). duct the amount deferred subject to the limits 1. $3,000, e. A savings incentive match plan for that apply. Include your deduction in the total on 2. $15,000, reduced by the sum of: employees (SIMPLE plan). Form 1040, line 36. Enter the amount and “501(c)(18)(D)” on the dotted line next to a. The additional pre-tax elective defer- f. A section 125 cafeteria plan. line 36. rals made in earlier years because of Instead of using the amounts listed earlier to this rule, plus Designated Roth contributions. These determine your includible compensation, your contributions are elective deferrals but are in- b. The aggregate amount of designated employer can use any of the following amounts. cluded in your wages in box 1 of Form W-2. Roth contributions permitted for prior Your wages as defined for income tax with- Designated Roth contributions to a section tax years because of this rule, or holding purposes. 401(k) plan are reported using code AA in Your wages as reported in box 1 of Form 3. $5,000 times the number of your years of box 12, or, for section 403(b) plans, code BB in W-2. service for the organization, minus the to- box 12. tal elective deferrals made by your em- Your wages that are subject to social se- curity withholding (including elective defer- ployer on your behalf for earlier years. Excess deferrals. If your deferrals exceed the rals). limit, you must notify your plan by the date re- If you qualify for the 15-year rule, your elec- quired by the plan. If the plan permits, the ex- tive deferrals under this limit can be as high as Increased limit. During any, or all, of the cess amount will be distributed to you. If you $21,000 for 2015. last 3 years ending before you reach normal re- participate in more than one plan, you can have For more information, see Pub. 571. tirement age under the plan, your plan may pro- vide that your limit is the lesser of: the excess paid out of any of the plans that per- mit these distributions. You must notify each Limit for deferral under section 501(c)(18) 1. Twice the annual limit ($36,000 for 2015), plan by the date required by that plan of the plans. If you are a participant in a section or amount to be paid from that particular plan. The 501(c)(18) plan (a trust created before June 25, plan then must pay you the amount of the ex- 1959, funded only by employee contributions), 2. The basic annual limit plus the amount of cess, along with any income earned on that you should have deferred no more than the the basic limit not used in prior years (only amount, by April 15 of the following year. lesser of $7,000 or 25% of your compensation. allowed if not using age 50 or over Amounts you defer under a section 501(c)(18) catch-up contributions). You must include the excess deferral in your plan count toward the overall limit ($18,000 in income for the year of the deferral unless you Catch-up contributions. You generally have an excess deferral of a designated Roth 2015) and may affect the amount you can defer can have additional elective deferrals made to under other elective deferral plans. contribution. File Form 1040 to add the excess your governmental section 457 plan if: deferral amount to your wages on line 7. Do not You reached age 50 by the end of the Limit for deferrals under section 457 plans. use Form 1040A or Form 1040EZ to report ex- year, and If you are a participant in a section 457 plan (a cess deferral amounts. No other elective deferrals can be made deferred compensation plan for employees of for you to the plan for the year because of Excess not distributed. If you do not take state or local governments or tax-exempt or- limits or restrictions. out the excess amount, you cannot include it in ganizations), you should have deferred no more the cost of the contract even though you inclu- If you qualify, your limit can be the lesser of your than the lesser of your includible compensation ded it in your income. Therefore, you are taxed or $18,000 in 2015. However, if you are within 3 includible compensation or $18,000, plus twice on the excess deferral left in the years of normal retirement age, you may be al- $6,000. However, if you are within 3 years of re- plan—once when you contribute it, and again lowed an increased limit if the plan allows it. tirement age and your plan provides the in- when you receive it as a distribution. See Increased limit, later. creased limit, discussed earlier, that limit may be higher. Excess distributed to you. If you take out Includible compensation. This is the pay the excess after the year of the deferral and you you received for the year from the employer Designated Roth contributions. Employers receive the corrective distribution by April 15 of who maintained the section 457 plan. In most with section 401(k) and section 403(b) plans the following year, do not include it in income cases, it includes all the following payments. can create qualified Roth contribution programs again in the year you receive it. If you receive it 1. Wages and salaries. so that you may elect to have part or all of your later, you must include it in income in both the elective deferrals to the plan designated as af- year of the deferral and the year you receive it. 2. Fees for professional services. ter-tax Roth contributions. Designated Roth Any income on the excess deferral taken out is 3. The value of any employer-provided quali- contributions are treated as elective deferrals, taxable in the tax year in which you take it out. If fied transportation fringe benefit (defined except that they are included in income. Your you take out part of the excess deferral and the under Transportation, earlier) that is not in- retirement plan must maintain separate ac- income on it, allocate the distribution propor- cluded in your income. counts and recordkeeping for the designated tionately between the excess deferral and the Roth contributions. income. 4. Other amounts received (cash or non- Qualified distributions from a Roth plan are You should receive a Form 1099-R for the cash) for personal services you per- not included in income. In most cases, a distri- year in which the excess deferral is distributed formed, including, but not limited to, the bution made before the end of the 5-tax-year to you. Use the following rules to report a cor- following items. period beginning with the first tax year for which rective distribution shown on Form 1099-R for a. Commissions and tips. you made a designated Roth contribution to the 2015. plan is not a qualified distribution. If the distribution was for a 2015 excess b. Fringe benefits. deferral, your Form 1099-R should have c. Bonuses. Reporting by employer. Your employer gen- the code “8” in box 7. Add the excess de- erally should not include elective deferrals in ferral amount to your wages on your 2015 5. Employer contributions (elective deferrals) your wages in box 1 of Form W-2. Instead, your tax return. to: employer should mark the Retirement plan If the distribution was for a 2015 excess a. The section 457 plan. checkbox in box 13 and show the total amount deferral to a designated Roth account, deferred in box 12. your Form 1099-R should have code “B” in b. Qualified cash or deferred arrange- box 7. Do not add this amount to your wa- ments (section 401(k) plans) that are Section 501(c)(18)(D) contributions. ges on your 2015 return. not included in your income. Wages shown in box 1 of your Form W-2

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If the distribution was for a 2014 excess Excess Annual Additions significant effect on the fair market value of deferral, your Form 1099-R should have the option. the code “P” in box 7. If you did not add the The amount contributed in 2015 to a defined The fair market value of the option privilege excess deferral amount to your wages on contribution plan is generally limited to the can be readily determined. your 2014 tax return, you must file an lesser of 100% of your compensation or The option privilege for an option to buy is the amended return on Form 1040X, Amended $53,000. Under certain circumstances, contri- opportunity to benefit during the option's exer- U.S. Individual Income Tax Return. If you butions that exceed these limits (excess annual cise period from any increase in the value of did not receive the distribution by April 15, additions) may be corrected by a distribution of property subject to the option without risking 2015, you also must add it to your wages your elective deferrals or a return of your af- any capital. For example, if during the exercise on your 2015 tax return. ter-tax contributions and earnings from these period the fair market value of stock subject to If the distribution was for the income contributions. an option is greater than the option's exercise earned on an excess deferral, your Form price, a profit may be realized by exercising the 1099-R should have the code “8” in box 7. A corrective payment of excess annual addi- option and immediately selling the stock at its Add the income amount to your wages on tions consisting of elective deferrals or earnings higher value. The option privilege for an option your 2015 income tax return, regardless of from your after-tax contributions is fully taxable to sell is the opportunity to benefit during the ex- when the excess deferral was made. in the year paid. A corrective payment consist- ercise period from a decrease in the value of Report a loss on a corrective distribution of an ing of your after-tax contributions is not taxable. the property subject to the option. excess deferral in the year the excess amount (reduced by the loss) is distributed to you. In- If you received a corrective payment of ex- If you or a member of your family is an clude the loss as a negative amount on Form cess annual additions, you should receive a ! officer, director, or more-than-10% 1040, line 21 and identify it as “Loss on Excess separate Form 1099-R for the year of the pay- CAUTION owner of an expatriated corporation, Deferral Distribution.” ment with the code “E” in box 7. Report the total you may owe an excise tax on the value of non- payment shown in box 1 of Form 1099-R on statutory options and other stock-based com- Even though a corrective distribution line 16a of Form 1040 or line 12a of Form pensation from that corporation. For more infor- TIP of excess deferrals is reported on 1040A. Report the taxable amount shown in mation on the excise tax, see section 4985. Form 1099-R, it is not otherwise box 2a of Form 1099-R on line 16b of Form treated as a distribution from the plan. It cannot 1040 or line 12b of Form 1040A. Option with readily determinable value. be rolled over into another plan, and it is not If you receive a nonstatutory stock option that subject to the additional tax on early distribu- Even though a corrective distribution has a readily determinable fair market value at tions. of excess annual additions is reported the time it is granted to you, the option is treated on Form 1099-R, it is not otherwise like other property received as compensation. treated as a distribution from the plan. It cannot Excess Contributions See Restricted Property, later, for rules on how be rolled over into another plan, and it is not much income to include and when to include it. subject to the additional tax on early distribu- However, the rule described in that discussion If you are a highly compensated employee, the tions. total of your elective deferrals and other contri- for choosing to include the value of property in butions made for you for any year under a sec- your income for the year of the transfer does not tion 401(k) plan or SARSEP can be, as a per- Stock Options apply to a nonstatutory option. centage of pay, no more than 125% of the Option without readily determinable average deferral percentage (ADP) of all eligi- If you receive an option to buy or sell stock or value. If the fair market value of the option is ble non-highly compensated employees. other property as payment for your services, not readily determinable at the time it is granted you may have income when you receive the op- to you (even if it is determined later), you do not If the total contributed to the plan is more tion (the grant), when you exercise the option have income until you exercise or transfer the than the amount allowed under the ADP test, (use it to buy or sell the stock or other property), option. the excess contributions must be either distrib- uted to you or recharacterized as after-tax em- or when you sell or otherwise dispose of the op- ployee contributions by treating them as distrib- tion or property acquired through exercise of Exercise or transfer of option. When you ex- uted to you and then contributed by you to the the option. The timing, type, and amount of in- ercise a nonstatutory stock option, the amount plan. You must include the excess contributions come inclusion depend on whether you receive to include in your income depends on whether in your income as wages on Form 1040, line 7. a nonstatutory stock option or a statutory stock the option had a readily determinable value. You cannot use Form 1040A or Form 1040EZ option. Your employer can tell you which kind of option you hold. to report excess contribution amounts. Option with readily determinable value. When you exercise a nonstatutory stock option If you receive a corrective distribution of ex- Nonstatutory Stock Options that had a readily determinable value at the time cess contributions (and allocable income), it is the option was granted, you do not have to in- included in your income in the year of the distri- Grant of option. If you are granted a nonstatu- clude any amount in income. bution. The allocable income is the amount of tory stock option, you may have income when gain or loss through the end of the plan year for you receive the option. The amount of income Option without readily determinable which the contribution was made that is alloca- to include and the time to include it depend on value. When you exercise a nonstatutory ble to the excess contributions. You should re- whether the fair market value of the option can stock option that did not have a readily determi- ceive a Form 1099-R for the year the excess be readily determined. The fair market value of nable value at the time the option was granted, contributions are distributed to you. Add the dis- an option can be readily determined if it is ac- the restricted property rules apply to the prop- tribution to your wages for that year. tively traded on an established market. erty received. The amount to include in your in- The fair market value of an option that is not come is the difference between the amount you Even though a corrective distribution traded on an established market can be readily pay for the property and its fair market value of excess contributions is reported on determined only if all of the following conditions when it becomes substantially vested. If it is not Form 1099-R, it is not otherwise exist. substantially vested at the time you exercise treated as a distribution from the plan. It cannot You can transfer the option. this nonstatutory stock option (so that you may be rolled over into another plan, and it is not have to give the stock back), you do not have to You can exercise the option immediately in subject to the additional tax on early distribu- include any amount in income. You include the full. tions. difference in income when the option becomes The option or the property subject to the substantially vested. For more information on option is not subject to any condition or re- restricted property, see Restricted Property, striction (other than a condition to secure later. payment of the purchase price) that has a

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Transfer in arm's-length transaction. If or transferred the option, if it had no readily de- Example. Your employer, M Company, you transfer a nonstatutory stock option without terminable value. granted you an incentive stock option on April a readily determinable value in an arm's-length For options granted on or after January 1, 8, 2013, to buy 100 shares of M Company at $9 transaction to an unrelated person, you must in- 2014, the basis information reported to you on a share, its fair market value at the time. You clude in your income the money or other prop- Form 1099-B will not reflect any amount you in- exercised the option on January 7, 2014, when erty you received for the transfer, as if you had cluded in income upon grant or exercise of the the stock was selling on the open market for exercised the option. option. For options granted before January 1, $14 a share. On January 27, 2015, when the 2014, any basis information reported to you on stock was selling on the open market for $16 a Transfer in non-arm's-length transac- Form 1099-B may or may not reflect any share, your rights to the stock first became tion. If you transfer a nonstatutory stock option amount you included in income upon grant or transferable. You include $700 ($1,600 value without a readily determinable value in a exercise; therefore, the basis may need to be when your rights first became transferable mi- non-arm's-length transaction (for example, a adjusted. nus $900 option price) as an adjustment on gift), the option is not treated as exercised or Form 6251, line 14. closed at that time. You must include in your in- It is your responsibility to make any come, as compensation, any money or property ! appropriate adjustments to the basis If you exercise an ISO during 2015, received. When the transferee exercises the CAUTION information reported on Form 1099-B TIP you should receive Form 3921, Exer- option, you must include in your income, as by completing Form 8949, Sales and Other Dis- cise of an Incentive Stock Option Un- compensation, the excess of the fair market positions of Capital Assets. der Section 422(b), or a statement, from the value of the stock acquired by the transferee corporation for each transfer made during 2015. over the sum of the exercise price paid and any The corporation must send or provide you with amount you included in income at the time you Statutory Stock Options the form by February 1, 2016. Keep this infor- transferred the option. At the time of the exer- mation for your records. cise, the transferee recognizes no income and There are two kinds of statutory stock options. Incentive stock options (ISOs), and has a basis in the stock acquired equal to the Sale of the stock. You have taxable income fair market value of the stock. Options granted under employee stock or a deductible loss when you sell the stock that Any transfer of this kind of option to a rela- purchase plans. you bought by exercising the option. Your in- ted person is treated as a non-arm's-length come or loss is the difference between the transaction. See Regulations section 1.83-7 for For either kind of option, you must be an amount you paid for the stock (the option price) the definition of a related person. employee of the company granting the option, and the amount you receive when you sell it. Recourse note in satisfaction of the ex- or a related company, at all times during the pe- You generally treat this amount as capital gain ercise price of an option. If you are an em- riod beginning on the date the option is granted or loss and report it as explained in the Instruc- ployee, and you issue a recourse note to your and ending 3 months before the date you exer- tions for Schedule D (Form 1040) for the year of employer in satisfaction of the exercise price of cise the option (for an incentive stock option, 1 the sale. an option to acquire your employer's stock, and year before if you are disabled). Also, the option However, you may have ordinary income for your employer and you subsequently agree to must be nontransferable except at death. the year that you sell or otherwise dispose of reduce the stated principal amount of the note, the stock in either of the following situations. you generally recognize compensation income If you do not meet the employment require- You do not satisfy the holding period re- at the time and in the amount of the reduction. ments, or you receive a transferable option, quirement. your option is a nonstatutory stock option. You satisfy the conditions described under Tax form. If you have income from the exer- Option granted at a discount, under Em- cise of nonstatutory stock options, your em- Grant of option. If you receive a statutory ployee stock purchase plan, later. ployer should report the amount to you on Form stock option, do not include any amount in your Your employer or former employer should re- W-2, box 12, code V. The employer should income when the option is granted. port the ordinary income to you as wages in show the spread (that is, the fair market value of box 1 of Form W-2, and you must report this or- Exercise of option. If you exercise a statutory stock over the exercise price of options granted dinary income amount on Form 1040, line 7. If stock option, do not include any amount in in- to you for that stock) from your exercise of the your employer or former employer does not pro- come when you exercise the option. nonstatutory stock options. Your employer vide you with a Form W-2, or if the Form W-2 should include this amount in boxes 1, 3 (up to Alternative minimum tax (AMT). For the does not include the ordinary income in box 1, the social security wage base), and 5. Your em- AMT, you must treat stock acquired through the you still must report the ordinary income as wa- ployer should include this amount in box 14 if it exercise of an ISO as if no special treatment ap- ges on Form 1040, line 7, for the year of the is a railroad employer. plied. This means that, when your rights in the sale or other disposition of the stock. If you are a nonemployee spouse and you stock are transferable or no longer subject to a For options granted on or after January 1, exercise nonstatutory stock options you re- substantial risk of forfeiture, you must include 2014, the basis information reported to you on ceived incident to a divorce, the income is re- as an adjustment in figuring alternative mini- Form 1099-B will not reflect any amount you in- ported to you on Form 1099-MISC, Miscellane- mum taxable income the amount by which the cluded in income upon grant or exercise of the ous Income, in box 3. fair market value of the stock exceeds the op- option. For options granted before January 1, tion price. Enter this adjustment on line 14 of 2014, any basis information reported to you on Sale of the stock. There are no special in- Form 6251, Alternative Minimum Tax—Individu- Form 1099-B may or may not reflect any come rules for the sale of stock acquired als. Increase your AMT basis in any stock you amount you included in income upon grant or through the exercise of a nonstatutory stock op- acquire by exercising the ISO by the amount of exercise; therefore, the basis may need to be tion. Report the sale as explained in the Instruc- the adjustment. However, no adjustment is re- adjusted. tions for Schedule D (Form 1040), Capital quired if you dispose of the stock in the same Gains and Losses, for the year of the sale. You It is your responsibility to make any year you exercise the option. may receive a Form 1099-B, Proceeds From appropriate adjustments to the basis See Restricted Property, later, for more in- Broker and Barter Sale Transactions, reporting information reported on Form 1099-B formation. the sales proceeds. by completing Form 8949, Sales and Other Dis- Your basis in the property you acquire under Your AMT basis in stock acquired positions of Capital Assets. the option is the amount you pay for it plus any through an ISO is likely to differ from amount you included in income upon grant or RECORDS your regular tax basis. Therefore, keep Holding period requirement. You satisfy exercise of the option. adequate records for both the AMT and regular the holding period requirement if you do not sell Your holding period begins as of the date tax so that you can figure your adjusted gain or the stock until the end of the later of the 1-year you acquired the option, if it had a readily deter- loss. period after the stock was transferred to you or minable value, or as of the date you exercised the 2-year period after the option was granted.

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However, you are considered to satisfy the Holding period requirement satisfied. If Holding period requirement not satis- holding period requirement if you sold the stock you sold stock acquired by exercising an option fied. If you do not satisfy the holding period re- to comply with conflict-of-interest requirements. granted under an employee stock purchase quirement, your ordinary income is the amount Your holding period for the property you ac- plan, and you satisfy the holding period require- by which the stock's fair market value when you quire when you exercise an option begins on ment, determine your ordinary income as fol- exercised the option exceeded the option price. the day after you exercise the option. lows. This ordinary income is not limited to your gain Your basis is equal to the option price at the from the sale of the stock. Increase your basis Incentive stock options (ISOs). If you sell time you exercised your option and acquired in the stock by the amount of this ordinary in- stock acquired by exercising an ISO, you need the stock. The timing and amount of pay period come. The difference between your increased to determine if you satisfied the holding period deductions do not affect your basis. basis and the selling price of the stock is a capi- requirement. tal gain or loss. Example. XYZ Company has an employee Holding period requirement satisfied. If stock purchase plan. The option price is the Example. The facts are the same as in the you sell stock acquired by exercising an ISO lower of the stock price at the time the option is previous example, except that you sold the and satisfy the holding period requirement, your granted or at the time the option is exercised. stock only 6 months after you exercised the op- gain or loss from the sale is capital gain or loss. The value of the stock when the option was tion. You did not satisfy the holding period re- Report the sale as explained in the Instructions granted was $25. XYZ deducts $5 from A's pay quirement, so you must report $300 as wages for Schedule D (Form 1040). The basis of your every week for 48 weeks (total = $240 ($5 × and $700 as capital gain, figured as follows: stock is the amount you paid for the stock. 48)). The value of the stock when the option is Holding period requirement not satis- exercised is $20. A receives 12 shares of XYZ Selling price ($30 × 100 shares) ...... $3,000 fied. If you sell stock acquired by exercising stock ($240 ÷ $20). A's holding period for all 12 Purchase price (option price) −2,000 an ISO, do not satisfy the holding period re- shares begins the day after the option is exer- ($20 × 100 shares) ...... quirement, and have a gain from the sale, the cised, even though the money used to pur- Gain ...... $1,000 Amount reported as wages gain is ordinary income up to the amount by chase the shares was deducted from A's pay on [($23 × 100 shares) − $2,000] ...... − 300 which the stock's fair market value when you 48 separate days. A's basis in each share is exercised the option exceeded the option price. $20. Amount reported as capital gain [$3,000 – ($2,000 + $300)] $700 Any excess gain is capital gain. If you have a Option granted at a discount. If, at the loss from the sale, it is a capital loss and you do time the option was granted, the option price not have any ordinary income. If you sold stock in 2015 that you ac- per share was less than 100% (but not less than TIP quired by exercising an option granted Your employer or former employer should 85%) of the fair market value of the share, and report the ordinary income to you as wages in at a discount under an employee stock you dispose of the share after meeting the hold- purchase plan, you should receive Form 3922, box 1 of Form W-2, and you must report this or- ing period requirement, or you die while owning dinary income amount on Form 1040, line 7. If Transfer of Stock Acquired Through an Em- the share, you must include in your income as ployee Stock Purchase Plan Under Section your employer or former employer does not pro- compensation, the lesser of: vide you with a Form W-2, or if the Form W-2 423(c), from the corporation. The corporation The excess of the fair market value of the must send or provide you with the form by Feb- does not include the ordinary income in box 1, share at the time the option was granted you still must report the ordinary income as wa- ruary 1, 2016. Keep this information for your re- over the option price, or cords. ges on Form 1040, line 7, for the year of the The excess of the fair market value of the sale or other disposition of the stock. Report the share at the time of the disposition or death capital gain or loss as explained in the Instruc- over the amount paid for the share under Restricted Property tions for Schedule D (Form 1040). In determin- the option. ing capital gain or loss, your basis is the amount In most cases, if you receive property for your you paid when you exercised the option plus For this purpose, if the option price was not services, you must include its fair market value the amount reported as wages. fixed or determinable at the time the option was granted, the option price is figured as if the op- in your income in the year you receive the prop- Example. Your employer, X Corporation, tion had been exercised at the time it was gran- erty. However, if you receive stock or other granted you an ISO on March 12, 2013, to buy ted. property that has certain restrictions that affect 100 shares of X Corporation stock at $10 a Any excess gain is capital gain. If you have its value, you do not include the value of the share, its fair market value at the time. You ex- a loss from the sale, it is a capital loss, and you property in your income until it has been sub- ercised the option on January 7, 2014, when do not have any ordinary income. stantially vested. (You can choose to include the stock was selling on the open market for the value of the property in your income in the $12 a share. On January 27, 2015, you sold the Example. Your employer, Y Corporation, year it is transferred to you, as discussed later, stock for $15 a share. Although you held the granted you an option under its employee stock rather than the year it is substantially vested.) purchase plan to buy 100 shares of stock of Y stock for more than a year, less than 2 years Until the property becomes substantially Corporation for $20 a share at a time when the had passed from the time you were granted the vested, it is owned by the person who makes stock had a value of $22 a share. Eighteen option. In 2015, you must report the difference the transfer to you, usually your employer. How- months later, when the value of the stock was between the option price ($10) and the value of ever, any income from the property, or the right $23 a share, you exercised the option, and 14 the stock when you exercised the option ($12) to use the property, is included in your income months after that you sold your stock for $30 a as wages. The rest of your gain is capital gain, as additional compensation in the year you re- share. In the year of sale, you must report as figured as follows: ceive the income or have the right to use the wages the difference between the option price property. ($20) and the value at the time the option was Selling price ($15 × 100 shares) ...... $ 1,500 granted ($22). The rest of your gain ($8 per Purchase price ($10 × 100 shares) ...... −1,000 When the property becomes substantially share) is capital gain, figured as follows: Gain ...... $ 500 vested, you must include its fair market value, Amount reported as wages minus any amount you paid for it, in your in- [($12 × 100 shares) − $1,000] ...... − 200 Selling price ($30 × 100 shares) ...... $ 3,000 come for that year. Your holding period for this Purchase price (option price) property begins when the property becomes Amount reported as capital gain $ 300 ($20 × 100 shares) ...... −2,000 substantially vested. Gain ...... $ 1,000 Employee stock purchase plan. If you sold Amount reported as wages Example. Your employer, the RST Corpo- [($22 × 100 shares) − $2,000] ...... − 200 stock acquired by exercising an option granted ration, sells you 100 shares of its stock at $10 a under an employee stock purchase plan, you Amount reported as capital gain $ 800 share. At the time of the sale the fair market need to determine if you satisfied the holding value of the stock is $100 a share. Under the period requirement. terms of the sale, the stock is under a

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substantial risk of forfeiture (you have a good amount you paid for the property minus any property that is not substantially vested, treat chance of losing it) for a 5-year period. Your amount you realized on the forfeiture. the new property as if it were substituted for the stock is not substantially vested when it is trans- exchanged property. You cannot make this choice for a ferred, so you do not include any amount in The sale or other disposition of a nonstatu- nonstatutory stock option. your income in the year you buy it. At the end of tory stock option to a related person is not con- the 5-year period, the fair market value of the sidered an arm's-length transaction. See Regu- stock is $200 a share. You must include How to make the choice. You make the lations section 1.83-7 for the definition of a $19,000 in your income [100 shares × ($200 fair choice by filing a written statement with the In- related person. market value − $10 you paid)]. Dividends paid ternal Revenue Service Center where you file If you sell the property in a transaction that is by the RST Corporation on your 100 shares of your return. You must file this statement no later not at arm's length, include in your income as stock are taxable to you as additional compen- than 30 days after the date the property was compensation for the year of sale the total of sation during the period the stock can be forfei- transferred. Mail your statement to the address any money you received and the fair market ted. listed for your state under “Are not including a value of any substantially vested property you check or money order...” given in Where Do received on the sale. In addition, you will have Substantially vested. Property is substantially You File in the Instructions for Form 1040 and to report income when the original property be- vested when: the Instructions for Form 1040A. You must give comes substantially vested, as if you still held it. It is transferable, or a copy of this statement to the person for whom Report as compensation its fair market value It is not subject to a substantial risk of for- you performed the services and, if someone minus the total of the amount you paid for the feiture. (You do not have a good chance of other than you received the property, to that property and the amount included in your in- losing it.) person. come from the earlier sale. You must sign the statement and indicate on Transferable property. Property is trans- it that you are making the choice under section Example. In 2012, you paid your employer ferable if you can sell, assign, or pledge your in- 83(b) of the Internal Revenue Code. The state- $50 for a share of stock that had a fair market terest in the property to any person (other than ment must contain all of the following informa- value of $100 and was subject to forfeiture until the transferor), and if the person receiving your tion. 2015. In 2014, you sold the stock to your interest in the property is not required to give up Your name, address, and taxpayer identifi- spouse for $10 in a transaction not at arm's the property, or its value, if the substantial risk cation number. length. You had compensation of $10 from this of forfeiture occurs. A description of each property for which transaction. In 2015, when the stock had a fair market value of $120, it became substantially Substantial risk of forfeiture. Generally, you are making the choice. The date or dates on which the property vested. For 2015, you must report additional a substantial risk of forfeiture exists only if rights compensation of $60, figured as follows: in property that are transferred are conditioned, was transferred and the tax year for which directly or indirectly, on the future performance you are making the choice. Fair market value of stock at time of (or refraining from performance) of substantial The nature of any restrictions on the prop- erty. substantial vesting ...... $120 services by any person, or on the occurrence of Minus: Amount paid for stock ...... $50 The fair market value at the time of transfer a condition related to a purpose of the transfer if Minus: Compensation previously the possibility of forfeiture is substantial. (ignoring restrictions except those that will included in income from sale to never lapse) of each property for which spouse ...... 10 −60 Example. The Spin Corporation transfers you are making the choice. Additional income $60 to you as compensation for services 100 shares Any amount that you paid for the property. of its corporate stock for $100 a share. Under A statement that you have provided copies Inherited property not substantially vested. the terms of the transfer, you must resell the to the appropriate persons. If you inherit property not substantially vested at stock to the corporation at $100 a share if you the time of the decedent's death, any income leave your job for any reason within 3 years Dividends received on restricted stock. you receive from the property is considered in- from the date of transfer. You must perform Dividends you receive on restricted stock are come in respect of a decedent and is taxed ac- substantial services over a period of time and treated as compensation and not as dividend cording to the rules for restricted property re- you must resell the stock to the corporation at income. Your employer should include these ceived for services. For information about $100 a share (regardless of its value) if you do payments on your Form W-2. If they also are re- income in respect of a decedent, see Pub. 559. not perform the services, so your rights to the ported on a Form 1099-DIV, you should list stock are subject to a substantial risk of forfei- them on Schedule B (Form 1040A or 1040), In- ture. terest and Ordinary Dividends, with a statement Special Rules for that you have included them as wages. Do not Choosing to include in income for year of include them in the total dividends received. Certain Employees transfer. You can choose to include the value Stock you chose to include in your in- of restricted property at the time of transfer (mi- This part of the publication deals with special come. Dividends you receive on restricted nus any amount you paid for the property) in rules for people in certain types of employment: stock you chose to include in your income in the your income for the year it is transferred. If you members of the clergy, members of religious or- year transferred are treated the same as any make this choice, the substantial vesting rules ders, people working for foreign employers, other dividends. You should receive a Form do not apply and, generally, any later apprecia- military personnel, and volunteers. tion in value is not included in your compensa- 1099-DIV showing these dividends. Do not in- tion when the property becomes substantially clude the dividends in your wages on your re- vested. Your basis for figuring gain or loss when turn. Report them as dividends. Clergy you sell the property is the amount you paid for it plus the amount you included in income as Sale of property not substantially vested. If you are a member of the clergy, you must in- compensation. These rules apply to the sale or other disposi- clude in your income offerings and fees you re- tion of property that you did not choose to in- ceive for marriages, baptisms, funerals, If you make this choice, you cannot re- clude in your income in the year transferred and masses, etc., in addition to your salary. If the of- ! voke it without the consent of the Inter- that is not substantially vested. fering is made to the religious institution, it is not CAUTION nal Revenue Service. Consent will be If you sell or otherwise dispose of the prop- taxable to you. given only if you were under a mistake of fact as erty in an arm's-length transaction, include in If you are a member of a religious organiza- to the underlying transaction. your income as compensation for the year of tion and you give your outside earnings to the sale the amount realized minus the amount you organization, you still must include the earnings If you forfeit the property after you have in- paid for the property. If you exchange the prop- in your income. However, you may be entitled cluded its value in income, your loss is the erty in an arm's-length transaction for other to a charitable contribution deduction for the

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amount paid to the organization. See Pub. 526, by the order unless they meet both of the fol- Employees of international organizations or Charitable Contributions. Also, see Members of lowing requirements. foreign governments. Your compensation for Religious Orders, later. They are the kind of services that are ordi- official services to an international organization narily the duties of members of the order. is exempt from federal income tax if you are not Pension. A pension or retirement pay for a They are part of the duties that you must a citizen of the United States or you are a citi- member of the clergy usually is treated as any exercise for, or on behalf of, the religious zen of the Philippines (whether or not you are a other pension or annuity. It must be reported on order as its agent. citizen of the United States). lines 16a and 16b of Form 1040 or on lines 12a If you are an employee of a third party, the serv- Your compensation for official services to a and 12b of Form 1040A. ices you perform for the third party will not be foreign government is exempt from federal in- considered directed or required of you by the come tax if all of the following are true. Housing order. Amounts you receive for these services You are not a citizen of the United States are included in your income, even if you have or you are a citizen of the Philippines Special rules for housing apply to members of taken a vow of poverty. (whether or not you are a citizen of the Uni- the clergy. Under these rules, you do not in- ted States). clude in your income the rental value of a home Example 1. Mark Brown is a member of a Your work is like the work done by employ- (including utilities) or a designated housing al- religious order and has taken a vow of poverty. ees of the United States in foreign coun- lowance provided to you as part of your pay. He renounces all claims to his earnings and tries. However, the exclusion cannot be more than turns over his earnings to the order. The foreign government gives an equal ex- the reasonable pay for your service. If you pay Mark is a schoolteacher. He was instructed emption to employees of the United States for the utilities, you can exclude any allowance by the superiors of the order to get a job with a in its country. designated for utility cost, up to your actual private tax-exempt school. Mark became an Waiver of alien status. If you are an alien cost. The home or allowance must be provided employee of the school, and, at his request, the who works for a foreign government or interna- as compensation for your services as an or- school made the salary payments directly to the tional organization and you file a waiver under dained, licensed, or commissioned minister. order. section 247(b) of the Immigration and National- However, you must include the rental value of Because Mark is an employee of the school, ity Act to keep your immigrant status, any salary the home or the housing allowance as earnings he is performing services for the school rather you receive after the date you file the waiver is from self-employment on Schedule SE (Form than as an agent of the order. The wages Mark not exempt under this rule. However, it may be 1040), Self-Employment Tax, if you are subject earns working for the school are included in his exempt under a treaty or agreement. See Pub. to the self-employment tax. For more informa- income. 519, U.S. Tax Guide for Aliens, for more infor- tion, see Pub. 517, Social Security and Other mation about treaties. Information for Members of the Clergy and Reli- Example 2. Gene Dennis is a member of a gious Workers. religious order who, as a condition of member- Nonwage income. This exemption applies ship, has taken vows of poverty and obedience. only to employees' wages, salaries, and fees. Members of Religious All claims to his earnings are renounced. Gene Pensions and other income, such as investment Orders received permission from the order to establish income, do not qualify for this exemption. a private practice as a psychologist and coun- Employment abroad. For information on the If you are a member of a religious order who sels members of religious orders as well as nonmembers. Although the order reviews tax treatment of income earned abroad, see has taken a vow of poverty, how you treat earn- Pub. 54. ings that you renounce and turn over to the or- Gene's budget annually, Gene controls not only der depends on whether your services are per- the details of his practice but also the means by formed for the order. which his work as a psychologist is accom- Military plished. Services performed for the order. If you are Gene's private practice as a psychologist Payments you receive as a member of a military performing the services as an agent of the order does not make him an agent of the religious or- service generally are taxed as wages except for in the exercise of duties required by the order, der. The psychological services provided by retirement pay, which is taxed as a pension. Al- do not include in your income the amounts Gene are not the type of services that are provi- lowances generally are not taxed. For more in- turned over to the order. ded by the order. The income Gene earns as a formation on the tax treatment of military allow- If your order directs you to perform services psychologist is earned in his individual capacity. ances and benefits, see Pub. 3, Armed Forces' for another agency of the supervising church or Gene must include in his income the earnings Tax Guide. an associated institution, you are considered to from his private practice. be performing the services as an agent of the Differential wage payments. Any payments order. Any wages you earn as an agent of an Foreign Employer made to you by an employer during the time order that you turn over to the order are not in- you are performing service in the uniformed cluded in your income. services are treated as compensation. These Special rules apply if you work for a foreign em- wages are subject to income tax withholding ployer. Example. You are a member of a church and are reported on Form W-2. See the discus- order and have taken a vow of poverty. You re- sion under Miscellaneous Compensation, ear- U.S. citizen. If you are a U.S. citizen who lier. nounce any claims to your earnings and turn works in the United States for a foreign govern- over to the order any salaries or wages you ment, an international organization, a foreign earn. You are a registered nurse, so your order Military retirement pay. If your retirement pay embassy, or any foreign employer, you must in- assigns you to work in a hospital that is an as- is based on age or length of service, it is taxable clude your salary in your income. sociated institution of the church. However, you and must be included in your income as a pen- remain under the general direction and control Social security and Medicare taxes. You sion on lines 16a and 16b of Form 1040 or on of the order. You are considered to be an agent are exempt from social security and Medicare lines 12a and 12b of Form 1040A. Do not in- of the order and any wages you earn at the hos- employee taxes if you are employed in the Uni- clude in your income the amount of any reduc- pital that you turn over to your order are not in- ted States by an international organization or a tion in retirement or retainer pay to provide a cluded in your income. foreign government. However, you must pay survivor annuity for your spouse or children un- self-employment tax on your earnings from der the Retired Serviceman's Family Protection Services performed outside the order. If services performed in the United States, even Plan or the Survivor Benefit Plan. you are directed to work outside the order, your though you are not self-employed. This rule For a more detailed discussion of survivor services are not an exercise of duties required also applies if you are an employee of a qualify- annuities, see Pub. 575. ing wholly owned instrumentality of a foreign government.

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Disability. If you are retired on disability, Living allowances designated by the Direc- Rents From Personal see Military and Government Disability Pen- tor of the Peace Corps as basic compen- sions under Sickness and Injury Benefits, later. sation. These are allowances for personal Property items such as domestic help, laundry and Qualified reservist distribution (QRD). If you clothing maintenance, entertainment and If you rent out personal property, such as equip- received a QRD of all or part of the balance in recreation, transportation, and other mis- ment or vehicles, how you report your income your health flexible spending account because cellaneous expenses. and expenses is in most cases determined by: you are a reservist and you have been ordered Leave allowances. Whether or not the rental activity is a busi- ness, and or called to active duty for a period of 180 days Readjustment allowances or termination or more, the QRD is treated as wages and is re- Whether or not the rental activity is con- payments. These are considered received ducted for profit. portable on Form W-2. by you when credited to your account. In most cases, if your primary purpose is in- Veterans' benefits. Do not include in your in- Example. Gary Carpenter, a Peace Corps come or profit and you are involved in the rental come any veterans' benefits paid under any volunteer, gets $175 a month as a readjustment activity with continuity and regularity, your rental law, regulation, or administrative practice ad- allowance during his period of service, to be activity is a business. See Pub. 535, Business ministered by the Department of Veterans Af- paid to him in a lump sum at the end of his tour Expenses, for details on deducting expenses fairs (VA). The following amounts paid to veter- of duty. Although the allowance is not available for both business and not-for-profit activities. ans or their families are not taxable. to him until the end of his service, Gary must in- Education, training, and subsistence allow- clude it in his income on a monthly basis as it is Reporting business income and expenses. ances. credited to his account. If you are in the business of renting personal Disability compensation and pension pay- property, report your income and expenses on ments for disabilities paid either to veter- Volunteers in Service to America (VISTA). If Schedule C or Schedule C-EZ (Form 1040). ans or their families. you are a VISTA volunteer, you must include The form instructions have information on how Grants for homes designed for wheelchair meal and lodging allowances paid to you in to complete them. living. your income as wages. Grants for motor vehicles for veterans who Reporting nonbusiness income. If you are lost their sight or the use of their limbs. National Senior Service Corps programs. not in the business of renting personal property, Veterans' insurance proceeds and divi- Do not include in your income amounts you re- report your rental income on Form 1040, dends paid either to veterans or their bene- ceive for supportive services or reimburse- line 21. List the type and amount of the income ficiaries, including the proceeds of a veter- ments for out-of-pocket expenses from the fol- on the dotted line next to line 21. an's endowment policy paid before death. lowing programs. Interest on insurance dividends left on de- Retired Senior Volunteer Program (RSVP). Reporting nonbusiness expenses. If you rent personal property for profit, include your posit with the VA. Foster Grandparent Program. Benefits under a dependent-care assis- rental expenses in the total amount you enter tance program. Senior Companion Program. on Form 1040, line 36. Also, enter the amount The death gratuity paid to a survivor of a and “PPR” on the dotted line next to line 36. member of the Armed Forces who died af- Service Corps of Retired Executives If you do not rent personal property for profit, ter September 10, 2001. (SCORE). If you receive amounts for suppor- your deductions are limited and you cannot re- Payments made under the compensated tive services or reimbursements for port a loss to offset other income. See Activity work therapy program. out-of-pocket expenses from SCORE, do not not for profit under Other Income, later. Any bonus payment by a state or political include these amounts in gross income. subdivision because of service in a combat Royalties zone. Volunteer tax counseling. Do not include in your income any reimbursements you receive Note. If, in a previous year, you received a for transportation, meals, and other expenses Royalties from copyrights, patents, and oil, gas, bonus payment by a state or political subdivi- you have in training for, or actually providing, and mineral properties are taxable as ordinary sion because of service in a combat zone that volunteer federal income tax counseling for the income. you included in your income, you can file a elderly (TCE). claim for refund of the taxes on that income. In most cases you report royalties on You can deduct as a charitable contribution Use Form 1040X to file the claim. File a sepa- Schedule E (Form 1040), Supplemental Income your unreimbursed out-of-pocket expenses in rate form for each tax year involved. In most ca- and Loss. However, if you hold an operating oil, taking part in the volunteer income tax assis- ses, you must file your claim within 3 years after gas, or mineral interest or are in business as a tance (VITA) program. the date you filed your original return or within 2 self-employed writer, inventor, artist, etc., report years after the date you paid the tax, whichever your income and expenses on Schedule C or is later. See the Instructions for Form 1040X for Schedule C-EZ (Form 1040). information on filing that form. Business and Copyrights and patents. Royalties from Investment Income copyrights on literary, musical, or artistic works, Volunteers and similar property, or from patents on inven- This section provides information on the treat- tions, are amounts paid to you for the right to The tax treatment of amounts you receive as a ment of income from certain rents and royalties, use your work over a specified period of time. volunteer is covered in the following discus- and from interests in partnerships and S corpo- Royalties generally are based on the number of sions. rations. units sold, such as the number of books, tickets to a performance, or machines sold. Peace Corps. Living allowances you receive Note. You may be subject to the Net Invest- as a Peace Corps volunteer or volunteer leader ment Income Tax (NIIT). The NIIT is a 3.8% tax Oil, gas, and minerals. Royalty income from for housing, utilities, household supplies, food, on the lesser of net investment income or the oil, gas, and mineral properties is the amount and clothing are exempt from tax. excess of your modified adjusted gross income you receive when natural resources are extrac- (MAGI) over a threshold amount. For details, ted from your property. The royalties are based Taxable allowances. The following allow- see Form 8960, and its instructions. on units, such as barrels, tons, etc., and are ances must be included in your income and re- Income from sales at auctions, includ- paid to you by a person or company who leases ported as wages. the property from you. Allowances paid to your spouse and minor ! ing online auctions, may be business children while you are a volunteer leader CAUTION income. For more information, see Depletion. If you are the owner of an eco- training in the United States. Pub. 334. nomic interest in mineral deposits or oil and gas

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wells, you can recover your investment through ship Income. This shows the result of the part- Shareholder's return. Your distributive share the depletion allowance. For information on this nership's operations for its tax year and the of the items of income, losses, deductions, or subject, see chapter 9 of Pub. 535. items that must be passed through to the part- credits of the S corporation must be shown sep- ners. arately on your Form 1040. The character of Coal and iron ore. Under certain circum- these items generally is the same as if you had stances, you can treat amounts you receive Schedule K-1 (Form 1065). You should realized or incurred them personally. from the disposal of coal and iron ore as pay- receive from each partnership in which you are ments from the sale of a capital asset, rather a member a copy of Schedule K-1 (Form 1065), In many cases, Schedule K-1 (Form than as royalty income. For information about Partner's Share of Income, Deductions, Credits, 1120S) will tell you where to report an gain or loss from the sale of coal and iron ore, etc., showing your share of income, deductions, item of income on your individual re- see Pub. 544, chapter 2. credits, and tax preference items of the partner- turn. ship for the tax year. Keep Schedule K-1 for Sale of property interest. If you sell your your records. Do not attach it to your Form Distributions. In most cases, S corporation complete interest in oil, gas, or mineral rights, 1040, unless you are specifically required to do distributions are a nontaxable return of your ba- the amount you receive is considered payment so. sis in the corporation stock. However, in certain for the sale of section 1231 property, not royalty cases, part of the distributions may be taxable income. Under certain circumstances, the sale Partner's return. You generally must report as a dividend, or as a long-term or short-term is subject to capital gain or loss treatment as partnership items on your individual return the capital gain, or as both. The corporation's distri- explained in the Instructions for Schedule D same way as they are reported on the partner- butions may be in the form of cash or property. (Form 1040). For more information on selling ship return. That is, if the partnership had a cap- section 1231 property, see chapter 3 of Pub. ital gain, you report your share as explained in More information. For more information, see 544. the Instructions for Schedule D (Form 1040). the Instructions for Form 1120S. If you retain a royalty, an overriding royalty, You report your share of partnership ordinary or a net profit interest in a mineral property for income on Schedule E (Form 1040). the life of the property, you have made a lease Sickness and 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 TIP 1065) will tell you where to report an Injury Benefits ordinary income subject to a depletion allow- item of income on your individual re- ance. turn. In most cases, you must report as income any Part of future production sold. If you own amount you receive for personal injury or sick- mineral property but sell part of the future pro- Qualified joint venture. If you and your ness through an accident or health plan that is duction, in most cases you treat the money you spouse each materially participate as the only paid for by your employer. If both you and your receive from the buyer at the time of the sale as members of a jointly owned and operated busi- employer pay for the plan, only the amount you a loan from the buyer. Do not include it in your ness, and you file a joint return for the tax year, receive that is due to your employer's payments income or take depletion based on it. you can make a joint election to be treated as a is reported as income. However, certain pay- When production begins, you include all the qualified joint venture instead of a partnership. ments may not be taxable to you. For informa- proceeds in your income, deduct all the produc- To make this election, you must divide all items tion on nontaxable payments, see Military and tion expenses, and deduct depletion from that of income, gain, loss, deduction, and credit at- Government Disability Pensions and Other amount to arrive at your taxable income from tributable to the business between you and your Sickness and Injury Benefits, later in this dis- the property. spouse in accordance with your respective in- cussion. terests in the venture. For further information on Do not report as income any amounts Partnership Income how to make the election and which sched- paid to reimburse you for medical ex- ule(s) to file, see the instructions for your indi- penses you incurred after the plan was vidual tax return. A partnership generally is not a taxable entity. established. The income, gains, losses, deductions, and credits of a partnership are passed through to S Corporation Income Cost paid by you. If you pay the entire cost of the partners based on each partner's distribu- an accident or health plan, do not include any tive share of these items. For more information, In most cases, an S corporation does not pay amounts you receive from the plan for personal see Pub. 541. tax on its income. Instead, the income, losses, injury or sickness as income on your tax return. deductions, and credits of the corporation are If your plan reimbursed you for medical expen- Partner's distributive share. Your distributive passed through to the shareholders based on ses you deducted in an earlier year, you may share of partnership income, gains, losses, de- each shareholder's pro rata share. You must re- have to include some, or all, of the reimburse- ductions, or credits generally is based on the port your share of these items on your return. In ment in your income. See Recoveries under partnership agreement. You must report your most cases, the items passed through to you Miscellaneous Income, later. distributive share of these items on your return will increase or decrease the basis of your S whether or not they actually are distributed to corporation stock as appropriate. Cafeteria plans. In most cases, if you are cov- you. However, your distributive share of the ered by an accident or health insurance plan partnership losses is limited to the adjusted ba- S corporation return. An S corporation must through a cafeteria plan, and the amount of the sis of your partnership interest at the end of the file a return on Form 1120S, U.S. Income Tax insurance premiums was not included in your partnership year in which the losses took place. Return for an S Corporation. This shows the re- income, you are not considered to have paid the premiums and you must include any bene- Partnership agreement. The partnership sults of the corporation's operations for its tax fits you receive in your income. If the amount of agreement usually covers the distribution of year and the items of income, losses, deduc- the premiums was included in your income, you profits, losses, and other items. However, if the tions, or credits that affect the shareholders' in- are considered to have paid the premiums and agreement does not state how a specific item of dividual income tax returns. any benefits you receive are not taxable. gain or loss will be shared, or the allocation sta- Schedule K-1 (Form 1120S). You should ted in the agreement does not have substantial receive a copy of Schedule K-1 (Form 1120S) economic effect, your distributive share is fig- from any S corporation in which you are a Disability Pensions ured according to your interest in the partner- shareholder. Schedule K-1 shows your share of ship. If you retired on disability, you must include in income, losses, deductions, and credits for the income any disability pension you receive under tax year. Keep Schedule K-1 for your records. Partnership return. Although a partnership a plan that is paid for by your employer. You Do not attach it to your Form 1040, unless you generally pays no tax, it must file an information must report your taxable disability payments as are specifically required to do so. return on Form 1065, U.S. Return of Partner- wages on line 7 of Form 1040 or Form 1040A

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until you reach minimum retirement age. Mini- Military and Government each Form 1040X a copy of the official VA De- mum retirement age generally is the age at Disability Pensions termination letter granting the retroactive bene- which you can first receive a pension or annuity fit. The letter must show the amount withheld if you are not disabled. Certain military and government disability pen- and the effective date of the benefit. sions are not taxable. If you receive a lump-sum disability sever- You may be entitled to a tax credit if ance payment and are later awarded VA disa- you were permanently and totally disa- TIP Service­connected disability. You may be bility benefits, exclude 100% of the severance bled when you retired. For information able to exclude from income amounts you re- benefit from your income. However, you must on this credit, see Pub. 524, Credit for the Eld- ceive as a pension, annuity, or similar allow- include in your income any lump-sum readjust- erly or the Disabled. ance for personal injury or sickness resulting ment or other nondisability severance payment from active service in one of the following gov- you received on release from active duty, even Beginning on the day after you reach mini- ernment services. if you are later given a retroactive disability rat- mum retirement age, payments you receive are The armed forces of any country. ing by the VA. taxable as a pension or annuity. Report the pay- ments on lines 16a and 16b of Form 1040 or on The National Oceanic and Atmospheric Special statute of limitations. In most ca- lines 12a and 12b of Form 1040A. For more in- Administration. ses, under the statute of limitations a claim for formation on pensions and annuities, see Pub. The Public Health Service. credit or refund must be filed within 3 years 575. The Foreign Service. from the time a return was filed. However, if you receive a retroactive service-connected disabil- Terrorist attacks. Do not include in your in- Conditions for exclusion. Do not include ity rating determination, the statute of limitations come disability payments you receive for inju- the disability payments in your income if any of is extended by a 1-year period beginning on the ries incurred as a direct result of terrorist at- the following conditions apply. date of the determination. This 1-year extended tacks directed against the United States (or its period applies to claims for credit or refund filed allies), whether outside or within the United 1. You were entitled to receive a disability payment before September 25, 1975. after June 17, 2008, and does not apply to any States. However, you must include in your in- tax year that began more than 5 years before come any amounts that you received that you 2. You were a member of a listed govern- the date of the determination. would have received in retirement had you not ment service or its reserve component, or become disabled as a result of a terrorist attack. were under a binding written commitment Example. You retired in 2009 and receive a to become a member, on September 24, Contact the company or agency mak- pension based on your years of service. On Au- 1975. ing these payments if it incorrectly re- gust 3, 2015, you receive a determination of service-connected disability retroactive to 2009. ports your payments as taxable in- 3. You receive the disability payments for a Generally, you could claim a refund for the come to the IRS on Form W-2, Wage and Tax combat-related injury. This is a personal taxes paid on your pension for 2012, 2013, and Statement, or on Form 1099-R, Distributions injury or sickness that: from Pensions, Annuities, Retirement or 2014. However, under the special limitation pe- a. Results directly from armed conflict, Profit-Sharing Plans, IRAs, Insurance Con- riod, you can also file a claim for 2011 as long as you file the claim by August 3, 2016. You tracts, etc., to request that it re-issue the form to b. Takes place while you are engaged in cannot file a claim for 2009 and 2010 because report some or all of these payments as nontax- extra-hazardous service, able income in box 12 (under code J) on Form those tax years began more than 5 years before W-2 or in box 1 but not in box 2a on Form c. Takes place under conditions simulat- the determination. 1099-R. If income taxes are being incorrectly ing war, including training exercises withheld from these payments, you may also such as maneuvers, or Terrorist attack or military action. Do not in- clude in your income disability payments you submit Form W-4, Employee's Withholding Al- d. Is caused by an instrumentality of war. lowance Certificate, to the company or agency receive for injuries resulting directly from a ter- to stop the withholding of income taxes from 4. You would be entitled to receive disability rorist or military action. However, you must in- payments reported on Form W-2 or you may compensation from the Department of Vet- clude in your income any amounts that you re- submit Form W-4P, Withholding Certificate for erans Affairs (VA) if you filed an applica- ceived that you would have received in Pension or Annuity Payments, to stop the with- tion for it. Your exclusion under this condi- retirement had you not become disabled as a holding of income taxes from payments repor- tion is equal to the amount you would be result of a terrorist or military action. Disability ted on Form 1099-R. entitled to receive from the VA. payments you receive for injuries not incurred as a direct result of a terrorist or military action Disability payments you receive for injuries Pension based on years of service. If you or for illnesses or diseases not resulting from an not incurred as a direct result of a terrorist at- receive a disability pension based on years of injury incurred as a direct result of a terrorist or tack or for illnesses or diseases not resulting service, in most cases you must include it in military action may be excludable from income from an injury incurred as a direct result of a ter- your income. However, if the pension qualifies for other reasons. See Pub. 907, Tax Highlights rorist attack cannot be excluded from your in- for the exclusion for a service-connected disa- for Persons with Disabilities. come under this provision but may be excluda- bility (discussed earlier), do not include in in- A terrorist action is one that is directed ble for other reasons. See Pub. 907, Tax come the part of your pension that you would against the United States or any of its allies (in- Highlights for Persons with Disabilities. have received if the pension had been based cluding a multinational force in which the United on a percentage of disability. You must include States is participating). A military action is one Retirement and profit­sharing plans. If you the rest of your pension in your income. that involves the armed forces of the United States and is a result of actual or threatened vi- receive payments from a retirement or Retroactive VA determination. If you re- profit-sharing plan that does not provide for dis- olence or aggression against the United States tire from the armed services based on years of ability retirement, do not treat the payments as or any of its allies, but does not include training service and are later given a retroactive serv- a disability pension. The payments must be re- exercises. ice-connected disability rating by the VA, your ported as a pension or annuity. retirement pay for the retroactive period is ex- cluded from income up to the amount of VA dis- Accrued leave payment. If you retire on disa- Long­Term Care ability benefits you would have been entitled to bility, any lump-sum payment you receive for Insurance Contracts receive. You can claim a refund of any tax paid accrued annual leave is a salary payment. The on the excludable amount (subject to the stat- payment is not a disability payment. Include it in In most cases, long-term care insurance con- ute of limitations) by filing an amended return your income in the tax year you receive it. tracts are treated as accident and health insur- on Form 1040X for each previous year during ance contracts. Amounts you receive from them the retroactive period. You must include with (other than policyholder dividends or premium

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refunds) are excludable in most cases from in- The dollar amount for the period ($330 per cessed is taxable and must be included in your come as amounts received for personal injury day for any period in 2015). income as wages. or sickness. To claim an exclusion for payments See Section C of Form 8853 and its instructions made on a per diem or other periodic basis un- If part of the payments you receive un- for more information. der a long-term care insurance contract, you der FECA reduces your social security must file Form 8853 with your return. or equivalent railroad retirement bene- Workers' Compensation fits received, that part is considered social se- A long-term care insurance contract is an in- curity (or equivalent railroad retirement) benefits surance contract that only provides coverage and may be taxable. See Pub. 554 for more in- Amounts you receive as workers' compensation for qualified long-term care services. The con- formation. for an occupational sickness or injury are fully tract must: exempt from tax if they are paid under a work- Be guaranteed renewable, You can deduct the amount you spend to ers' compensation act or a statute in the nature buy back sick leave for an earlier year to be eli- Not provide for a cash surrender value or of a workers' compensation act. The exemption other money that can be paid, assigned, gible for nontaxable FECA benefits for that pe- also applies to your survivors. The exemption, riod. It is a miscellaneous deduction subject to pledged, or borrowed, however, does not apply to retirement plan ben- Provide that refunds, other than refunds on the 2%-of-AGI limit on Schedule A (Form 1040). efits you receive based on your age, length of If you buy back sick leave in the same year you the death of the insured or complete sur- service, or prior contributions to the plan, even if render or cancellation of the contract, and used it, the amount reduces your taxable sick you retired because of an occupational sick- leave pay. Do not deduct it separately. dividends under the contract may be used ness or injury. only to reduce future premiums or increase future benefits, and If part of your workers' compensation Qualified Indian health care benefit. For In most cases, not pay or reimburse ex- reduces your social security or equiva- benefits and coverage provided after March 23, ! 2010, the value of any qualified Indian health penses incurred for services or items that CAUTION lent railroad retirement benefits re- would be reimbursed under Medicare, ex- ceived, that part is considered social security care benefit is not taxable. These benefits in- clude any health service or benefits provided by cept where Medicare is a secondary payer (or equivalent railroad retirement) benefits and the Indian Health Service, amounts to reim- or the contract makes per diem or other may be taxable. See Pub. 554 for more informa- burse medical care expenses provided by an periodic payments without regard to ex- tion. Indian tribe, coverage under accident or health penses. insurance, and any other medical care provided Return to work. If you return to work after Qualified long­term care services. Qualified by an Indian tribe. qualifying for workers' compensation, salary long-term care services are: payments you receive for performing light du- Other compensation. Many other amounts Necessary diagnostic, preventive, thera- ties are taxable as wages. you receive as compensation for sickness or in- peutic, curing, treating, mitigating, rehabili- jury are not taxable. These include the following tative services, and maintenance and per- Disability pension. If your disability pension is amounts. sonal care services, and paid under a statute that provides benefits only Compensatory damages you receive for Required by a chronically ill individual and to employees with service-connected disabili- physical injury or physical sickness, provided pursuant to a plan of care prescri- ties, part of it may be workers' compensation. whether paid in a lump sum or in periodic bed by a licensed health care practitioner. That part is exempt from tax. The rest of your payments. See Court awards and dam- pension, based on years of service, is taxable Chronically ill individual. A chronically ill indi- ages under Other Income, later. as pension or annuity income. If you die, the vidual is one who has been certified by a li- Benefits you receive under an accident or part of your survivors' benefit that is a continua- censed health care practitioner within the previ- health insurance policy on which either you tion of the workers' compensation is exempt ous 12 months as one of the following. paid the premiums or your employer paid from tax. An individual who, for at least 90 days, is the premiums but you had to include them unable to perform at least two activities of in your income. daily living without substantial assistance Other Sickness Disability benefits you receive for loss of due to a loss of functional capacity. Activi- and Injury Benefits income or earning capacity as a result of ties of daily living are eating, toileting, injuries under a no-fault car insurance pol- transferring, bathing, dressing, and conti- icy. nence. In addition to disability pensions and annuities, Compensation you receive for permanent loss or loss of use of a part or function of An individual who requires substantial su- you may receive other payments for sickness or your body, or for your permanent disfigure- pervision to be protected from threats to injury. ment. This compensation must be based health and safety due to severe cognitive Railroad sick pay. Payments you receive as only on the injury and not on the period of impairment. sick pay under the Railroad Unemployment In- your absence from work. These benefits Limit on exclusion. The exclusion for pay- surance Act are taxable and you must include are not taxable even if your employer pays ments made on a per diem or other periodic ba- them in your income. However, do not include for the accident and health plan that pro- sis under a long-term care insurance contract is them in your income if they are for an on-the-job vides these benefits. subject to a limit. The limit applies to the total of injury. Reimbursement for medical care. A reim- these payments and any accelerated death bursement for medical care generally is not tax- benefits made on a per diem or other periodic Black lung benefit payments. These pay- able. However, it may reduce your medical ex- basis under a life insurance contract because ments are similar to workers' compensation and pense deduction. If you receive reimbursement the insured is chronically ill. (For more informa- are not taxable in most cases. for an expense you deducted in an earlier year, tion on accelerated death benefits, see Life In- see Recoveries, later. surance Proceeds under Miscellaneous In- Federal Employees' Compensation Act come, later.) (FECA). Payments received under this Act for If you receive an “advance reimbursement” personal injury or sickness, including payments or “loan” for future medical expenses from your Under this limit, the excludable amount for to beneficiaries in case of death, are not taxa- employer without regard to whether you suf- any period is figured by subtracting any reim- ble. However, you are taxed on amounts you fered a personal injury or sickness or incurred bursement received (through insurance or oth- receive under this Act as continuation of pay for medical expenses, that amount is included in erwise) for the cost of qualified long-term care up to 45 days while a claim is being decided. your income, whether or not you incur unin- services during the period from the larger of the Report this income on line 7 of Form 1040 or sured medical expenses during the year. following amounts. Form 1040A or on line 1 of Form 1040EZ. Also, The cost of qualified long-term care serv- pay for sick leave while a claim is being pro- ices during the period.

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Reimbursements received under your em- Example 4. You own a small apartment If you elected to defer and ratably include in- ployer's plan for expenses incurred before the building. In return for 6 months rent-free use of come from the cancellation of business debt plan was established are included in income. an apartment, an artist gives you a work of art arising from the reacquisition of certain busi- Amounts you receive under a reimburse- she created. You must report as rental income ness debt in 2009 or 2010, report the appropri- ment plan that provides for the payment of un- on Schedule E (Form 1040) the fair market ate portion of the deferred debt in gross income used reimbursement amounts in cash or other value of the artwork, and the artist must report on your return. For information on this election, benefits are included in your income. For de- as income on Schedule C or Schedule C-EZ see Revenue Procedure 2009-37 available at tails, see Pub. 969. (Form 1040) the fair rental value of the apart- www.irs.gov/irb/2009-36_IRB/ar07.html. ment. Form 1099­C. If a Federal Government Miscellaneous Income Form 1099­B from barter exchange. If you agency, financial institution, or credit union can- exchanged property or services through a bar- cels or forgives a debt you owe of $600 or This section discusses various types of income. ter exchange, Form 1099-B, or a similar state- more, you may receive a Form 1099-C, Cancel- You may have taxable income from certain ment from the barter exchange should be sent lation of Debt. Form 1099-C, box 2 shows the transactions even if no money changes hands. to you by February 16, 2016. It should show the amount of debt either actually or deemed dis- For example, you may have taxable income if value of cash, property, services, credits, or charged. If you do not agree with the amount re- you lend money at a below-market interest rate scrip you received from exchanges during ported in box 2, contact your creditor. or have a debt you owe canceled. 2015. The IRS also will receive a copy of Form 1099-B. Interest included in canceled debt. If any interest is forgiven and included in the amount Bartering Backup withholding. In most cases the in- of canceled debt in box 2, the amount of inter- come you receive from bartering is not subject est also will be shown in box 3. Whether or not Bartering is an exchange of property or serv- to regular income tax withholding. However, you must include the interest portion of the can- ices. You must include in your income, at the backup withholding will apply in certain circum- celed debt in your income depends on whether time received, the fair market value of property stances to ensure that income tax is collected the interest would be deductible if you paid it. or services you receive in bartering. If you ex- on this income. See Deductible debt under Exceptions, later. change services with another person and you Under backup withholding, the barter ex- If the interest would not be deductible (such both have agreed ahead of time on the value of change must withhold, as income tax, 28% of as interest on a personal loan), include in your the services, that value will be accepted as fair the income if: income the amount from Form 1099-C, box 2. If market value unless the value can be shown to You do not give the barter exchange your the interest would be deductible (such as on a be otherwise. taxpayer identification number (generally a business loan), include in your income the net Generally, you report this income on Sched- social security number or an employer amount of the canceled debt (the amount ule C or Schedule C-EZ (Form 1040). However, identification number), or shown in box 2 less the interest amount shown if the barter involves an exchange of something The IRS notifies the barter exchange that in box 3). other than services, such as in Example 4, later, you gave it an incorrect identification num- Discounted mortgage loan. If your financial you may have to use another form or schedule ber. instead. institution offers a discount for the early pay- If you join a barter exchange, you must certify ment of your mortgage loan, the amount of the Example 1. You are a self-employed attor- under penalties of perjury that your taxpayer discount is canceled debt. You must include the ney who performs legal services for a client, a identification number is correct and that you are canceled amount in your income. small corporation. The corporation gives you not subject to backup withholding. If you do not shares of its stock as payment for your serv- make this certification, backup withholding may Mortgage relief upon sale or other disposi­ ices. You must include the fair market value of begin immediately. The barter exchange will tion. If you are personally liable for a mortgage the shares in your income on Schedule C or give you a Form W-9, Request for Taxpayer (recourse debt), and you are relieved of the Schedule C-EZ (Form 1040) in the year you re- Identification Number and Certification, or a mortgage when you dispose of the property, ceive them. similar form, for you to make this certification. you may realize gain or loss up to the fair mar- The barter exchange will withhold tax only up to ket value of the property. To the extent the Example 2. You are a self-employed ac- the amount of any cash paid to you or depos- mortgage discharge exceeds the fair market countant. You and a house painter are mem- ited in your account and any scrip or credit is- value of the property, it is income from dis- bers of a barter club. Members contact each sued to you (and converted to cash). charge of indebtedness unless it qualifies for exclusion under Excluded debt, later. Report other directly and bargain for the value of the If tax is withheld from your barter in- any income from discharge of indebtedness on services to be performed. In return for account- come, the barter exchange will report TIP nonbusiness debt that does not qualify for ex- ing services you provided, the house painter the amount of tax withheld on Form painted your home. You must report as your in- clusion as other income on Form 1040, line 21. 1099-B, or similar statement. come on Schedule C or Schedule C-EZ (Form You may be able to exclude part of the 1040) the fair market value of the house paint- mortgage relief on your principal resi- ing services you received. The house painter Canceled Debts dence. See Excluded debt, later. must include in income the fair market value of the accounting services you provided. In most cases, if a debt you owe is canceled or If you are not personally liable for a mort- Example 3. You are self-employed and a forgiven, other than as a gift or bequest, you gage (nonrecourse debt), and you are relieved member of a barter club. The club uses credit must include the canceled amount in your in- of the mortgage when you dispose of the prop- units as a means of exchange. It adds credit come. You have no income from the canceled erty (such as through foreclosure), that relief is units to your account for goods or services you debt if it is intended as a gift to you. A debt in- included in the amount you realize. You may provide to members, which you can use to pur- cludes any indebtedness for which you are lia- have a taxable gain if the amount you realize chase goods or services offered by other mem- ble or which attaches to property you hold. exceeds your adjusted basis in the property. bers of the barter club. The club subtracts credit Report any gain on nonbusiness property as a units from your account when you receive If the debt is a nonbusiness debt, report the capital gain. goods or services from other members. You canceled amount on Form 1040, line 21. If it is a See Pub. 4681 for more information. must include in your income the value of the business debt, report the amount on Sched- credit units that are added to your account, ule C or Schedule C-EZ (Form 1040) (or on Stockholder debt. If you are a stockholder in even though you may not actually receive Schedule F (Form 1040), Profit or Loss From a corporation and the corporation cancels or goods or services from other members until a Farming, if the debt is farm debt and you are a forgives your debt to it, the canceled debt is a later tax year. farmer). constructive distribution that is generally

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dividend income to you. For more information, organized and operated exclusively for one or residence. QPRI cannot be more than the cost see Pub. 542, Corporations. more of the following purposes. of your principal residence plus improvements. If you are a stockholder in a corporation and Charitable. You must reduce the basis of your principal you cancel a debt owed to you by the corpora- Educational. residence by the amount excluded from gross tion, you generally do not realize income. This income. To claim the exclusion, you must file Fostering national or international amateur is because the canceled debt is considered as Form 982, Reduction of Tax Attributes Due to sports competition (but only if none of the a contribution to the capital of the corporation Discharge of Indebtedness (and Section 1082 organization's activities involve providing equal to the amount of debt principal that you Basis Adjustment), with your tax return. athletic facilities or equipment). canceled. Literary. Principal residence. Your principal resi- Repayment of canceled debt. If you included Preventing cruelty to children or animals. dence is the home where you ordinarily live most of the time. You can have only one princi- a canceled amount in your income and later pay Religious. the debt, you may be able to file a claim for re- pal residence at any one time. Scientific. fund for the year the amount was included in in- Amount eligible for exclusion. The maxi- Testing for public safety. come. You can file a claim on Form 1040X if the mum amount you can treat as QPRI is $2 mil- statute of limitations for filing a claim is still lion ($1 million if married filing separately). You Exception. You do have income if your stu- open. The statute of limitations generally does cannot exclude debt canceled because of serv- dent loan was made by an educational institu- not end until 3 years after the due date of your ices performed for the lender or on account of tion and is canceled because of services you original return. any other factor not directly related to a decline performed for the institution or other organiza- in the value of your residence or to your finan- tion that provided the funds. Exceptions cial condition. Education loan repayment assistance. Limitation. If only part of a loan is QPRI, There are several exceptions to the inclusion of Education loan repayments made to you by the the exclusion applies only to the extent the can- canceled debt in income. These are explained National Health Service Corps Loan Repay- celed amount is more than the amount of the next. ment Program (NHSC Loan Repayment Pro- loan immediately before the cancellation that is gram), a state education loan repayment pro- not QPRI. Student loans. Certain student loans contain gram eligible for funds under the Public Health a provision that all or part of the debt incurred to Service Act, or any other state loan repayment Example. Your principal residence is se- attend the qualified educational institution will or loan forgiveness program that is intended to cured by a debt of $1 million, of which $800,000 be canceled if you work for a certain period of provide for the increased availability of health is QPRI. Your residence is sold for $700,000 time in certain professions for any of a broad services in underserved or health professional and $300,000 of debt is canceled. Only class of employers. shortage areas are not taxable. $100,000 of the canceled debt may be exclu- You do not have income if your student loan ded from income (the $300,000 that was dis- is canceled after you agreed to this provision Deductible debt. You do not have income charged minus the $200,000 of nonqualified and then performed the services required. To from the cancellation of a debt if your payment debt). qualify, the loan must have been made by: of the debt would be deductible. This exception applies only if you use the cash method of ac- 1. The Federal Government, a state or local counting. For more information, see chapter 5 government, or an instrumentality, agency, Host or Hostess of Pub. 334. or subdivision thereof, If you host a party or event at which sales are 2. A tax-exempt public benefit corporation Price reduced after purchase. In most ca- made, any gift or gratuity you receive for giving that has assumed control of a state, ses, if the seller reduces the amount of debt you the event is a payment for helping a direct seller county, or municipal hospital, and whose owe for property you purchased, you do not make sales. You must report this item as in- employees are considered public employ- have income from the reduction. The reduction come at its fair market value. ees under state law, or of the debt is treated as a purchase price ad- justment and reduces your basis in the prop- Your out-of-pocket party expenses are sub- 3. An educational institution: erty. ject to the 50% limit for meal and entertainment a. Under an agreement with an entity de- expenses. These expenses are deductible as scribed in (1) or (2) that provided the Excluded debt. Do not include a canceled miscellaneous itemized deductions subject to funds to the institution to make the debt in your gross income in the following situa- the 2%-of-AGI limit on Schedule A (Form 1040), loan, or tions. but only up to the amount of income you receive The debt is canceled in a bankruptcy case for giving the party. b. As part of a program of the institution under Title 11 of the U.S. Code. See Pub. For more information about the 50% limit for designed to encourage students to 908, Bankruptcy Tax Guide. meal and entertainment expenses, see 50% serve in occupations or areas with un- The debt is canceled when you are insol- Limit in Pub. 463. met needs and under which the serv- vent. However, you cannot exclude any ices provided are for or under the di- amount of canceled debt that is more than rection of a governmental unit or a the amount by which you are insolvent. Life Insurance Proceeds tax-exempt section 501(c)(3) organi- See Pub. 908. zation (defined later). The debt is qualified farm debt and is can- Life insurance proceeds paid to you because of A loan to refinance a qualified student loan celed by a qualified person. See chapter 3 the death of the insured person are not taxable also will qualify if it was made by an educational of Pub. 225, Farmer's Tax Guide. unless the policy was turned over to you for a institution or a tax-exempt section 501(a) organ- The debt is qualified real property business price. This is true even if the proceeds were ization under its program designed as descri- debt. See chapter 5 of Pub. 334. paid under an accident or health insurance pol- bed in (3)(b) earlier. The cancellation is intended as a gift. icy or an endowment contract. However, inter- est income received as a result of life insurance An educational institution is an organization The debt is qualified principal residence in- proceeds may be taxable. with a regular faculty and curriculum and a reg- debtedness, discussed next. ularly enrolled body of students in attendance at Qualified principal residence indebted- Proceeds not received in installments. If the place where the educational activities are ness (QPRI). This is debt secured by your death benefits are paid to you in a lump sum or carried on. principal residence that you took out to buy, other than at regular intervals, include in your A section 501(c)(3) organization is any cor- build, or substantially improve your principal income only the benefits that are more than the poration, community chest, fund, or foundation amount payable to you at the time of the in- sured person's death. If the benefit payable at

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death is not specified, you include in your in- Interest option on insurance. If an insurance Endowment proceeds that you choose to re- come the benefit payments that are more than company pays you interest only on proceeds ceive in installments instead of a lump-sum pay- the present value of the payments at the time of from life insurance left on deposit, the interest ment at the maturity of the policy are taxed as death. you are paid is taxable. an annuity. This is explained in Pub. 575. For If your spouse died before October 23, this treatment to apply, you must choose to re- Proceeds received in installments. If you re- 1986, and you chose to receive only the interest ceive the proceeds in installments before re- ceive life insurance proceeds in installments, from your insurance proceeds, the $1,000 inter- ceiving any part of the lump sum. This election you can exclude part of each installment from est exclusion for a surviving spouse does not must be made within 60 days after the your income. apply. If you later decide to receive the pro- lump-sum payment first becomes payable to To determine the excluded part, divide the ceeds from the policy in installments, you can you. amount held by the insurance company (gener- take the interest exclusion from the time you be- ally the total lump sum payable at the death of gin to receive the installments. Accelerated Death Benefits the insured person) by the number of install- ments to be paid. Include anything over this ex- Surrender of policy for cash. If you surren- Certain amounts paid as accelerated death cluded part in your income as interest. der a life insurance policy for cash, you must in- benefits under a life insurance contract or viati- clude in income any proceeds that are more cal settlement before the insured's death are Example. The face amount of the policy is than the cost of the life insurance policy. In most excluded from income if the insured is termi- $75,000 and, as beneficiary, you choose to re- cases, your cost (or investment in the contract) nally or chronically ill. ceive 120 monthly installments of $1,000 each. is the total of premiums that you paid for the life The excluded part of each installment is $625 insurance policy, less any refunded premiums, Viatical settlement. This is the sale or assign- ($75,000 ÷ 120), or $7,500 for an entire year. rebates, dividends, or unrepaid loans that were ment of any part of the death benefit under a life The rest of each payment, $375 a month (or not included in your income. insurance contract to a viatical settlement pro- $4,500 for an entire year), is interest income to You should receive a Form 1099-R showing vider. A viatical settlement provider is a person you. the total proceeds and the taxable part. Report who regularly engages in the business of buy- Installments for life. If, as the beneficiary these amounts on lines 16a and 16b of Form ing or taking assignment of life insurance con- tracts on the lives of insured individuals who are under an insurance contract, you are entitled to 1040 or on lines 12a and 12b of Form 1040A. terminally or chronically ill and who meets the receive the proceeds in installments for the rest For information on when the proceeds requirements of section 101(g)(2)(B) of the In- of your life without a refund or period-certain TIP are excluded from income, see Accel- ternal Revenue Code. guarantee, you figure the excluded part of each erated Death Benefits, later. installment by dividing the amount held by the Exclusion for terminal illness. Accelerated insurance company by your life expectancy. If death benefits are fully excludable if the insured there is a refund or period-certain guarantee, Split­dollar life insurance. In most cases, a is a terminally ill individual. This is a person who the amount held by the insurance company for split-dollar life insurance arrangement is an ar- has been certified by a physician as having an this purpose is reduced by the actuarial value of rangement between an owner and a non-owner illness or physical condition that can reasonably the guarantee. of a life insurance contract under which either party to the arrangement pays all or part of the be expected to result in death within 24 months Surviving spouse. If your spouse died be- premiums, and one of the parties paying the from the date of the certification. fore October 23, 1986, and insurance proceeds premiums is entitled to recover all or part of paid to you because of the death of your those premiums from the proceeds of the con- Exclusion for chronic illness. If the insured spouse are received in installments, you can tract. There are two mutually exclusive regimes is a chronically ill individual who is not terminally exclude up to $1,000 a year of the interest in- to tax split-dollar life insurance arrangements. ill, accelerated death benefits paid on the basis cluded in the installments. If you remarry, you of costs incurred for qualified long-term care 1. Under the economic benefit regime, the can continue to take the exclusion. services are fully excludable. Accelerated death owner of the life insurance contract is benefits paid on a per diem or other periodic Employer­owned life insurance contract. If treated as providing current life insurance basis are excludable up to a limit. This limit ap- you are the policyholder of an employer-owned protection and other taxable economic plies to the total of the accelerated death bene- life insurance contract, you must include in in- benefits to the non-owner of the contract. fits and any periodic payments received from come any life insurance proceeds received that 2. Under the loan regime, the non-owner of long-term care insurance contracts. For infor- are more than the premiums and any other the life insurance contract is treated as mation on the limit and the definitions of chroni- amounts you paid on the policy. You are subject loaning premium payments to the owner of cally ill individual, qualified long-term care serv- to this rule if you have a trade or business, you the contract. ices, and long-term care insurance contracts, own a life insurance contract on the life of your see Long-Term Care Insurance Contracts un- employee, and you (or a related person) are a Only one of these regimes applies to any one der Sickness and Injury Benefits, earlier. beneficiary under the contract. policy. For more information, see sections However, you may exclude the full amount 1.61-22 and 1.7872-15 of the regulations. Exception. The exclusion does not apply to of the life insurance proceeds if the following any amount paid to a person (other than the in- apply. Endowment Contract Proceeds sured) who has an insurable interest in the life of the insured because the insured: 1. Before the policy is issued, you provide An endowment contract is a policy under which Is a director, officer, or employee of the written notice about the insurance to the you are paid a specified amount of money on a person, or employee and the employee provides writ- certain date unless you die before that date, in Has a financial interest in the person's ten consent to be insured. which case, the money is paid to your designa- business. 2. Either: ted beneficiary. Endowment proceeds paid in a lump-sum to you at maturity are taxable only if Form 8853. To claim an exclusion for acceler- a. The employee was your employee the proceeds are more than the cost (invest- ated death benefits made on a per diem or within the 12-month period before ment in the contract) of the policy. To determine other periodic basis, you must file Form 8853 death, or, at the time the contract was your cost, subtract any amount that you previ- with your return. You do not have to file Form issued, was a director or highly com- ously received under the contract and excluded 8853 to exclude accelerated death benefits pensated employee, or from your income from the total premiums (or paid on the basis of actual expenses incurred. b. The amount is paid to the family or other consideration) paid for the contract. In- designated beneficiary of the em- clude the part of the lump-sum payment that is ployee. more than your cost in your income.

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Recoveries Mortgage interest refund. If you received a use 25% of the refund to figure if you must in- refund or credit in 2015 of mortgage interest clude any portion of the refund in your income. A recovery is a return of an amount you deduc- paid in an earlier year, the amount should be Registered domestic partners (RDPs) domi­ ted or took a credit for in an earlier year. The shown in box 3 of your Form 1098, Mortgage In- ciled in community property states. For the most common recoveries are refunds, reim- terest Statement. Do not subtract the refund rules that apply to RDPs who are domiciled in bursements, and rebates of itemized deduc- amount from the interest you paid in 2015. You community property states, see Pub. 555, Com- tions. You also may have recoveries of may have to include it in your income under the munity Property, and Form 8958, Allocation of non-itemized deductions (such as payments on rules explained in the following discussions. Tax Amounts Between Certain Individuals in previously deducted bad debts) and recoveries Interest on recovery. Interest on any of the Community Property States. of items for which you previously claimed a tax amounts you recover must be reported as inter- credit. est income in the year received. For example, Deductions not itemized. If you did not item- ize deductions for the year for which you re- Tax benefit rule. You must include a recovery report any interest you received on state or lo- in your income in the year you receive it up to cal income tax refunds on Form 1040, line 8a or ceived the recovery of an expense that was de- the amount by which the deduction or credit you Form 1040NR, line 9a. ductible only if you itemized, do not include any took for the recovered amount reduced your tax of the recovery amount in your income. in the earlier year. For this purpose, any in- Recovery and expense in same year. If the Example. You claimed the standard deduc- crease to an amount carried over to the current refund or other recovery and the expense occur tion on your 2014 federal income tax return. In year that resulted from the deduction or credit is in the same year, the recovery reduces the de- 2015 you received a refund of your 2014 state considered to have reduced your tax in the ear- duction or credit and is not reported as income. income tax. Do not report any of the refund as lier year. Recovery for 2 or more years. If you receive income because you did not itemize deductions Federal income tax refund. Refunds of fed- a refund or other recovery that is for amounts for 2014. eral income taxes are not included in your in- you paid in 2 or more separate years, you must come because they are never allowed as a de- allocate, on a pro rata basis, the recovered Itemized Deduction Recoveries duction from income. amount between the years in which you paid it. This allocation is necessary to determine the The following discussion explains how to deter- State tax refund. If you received a state or lo- amount of recovery from any earlier years and mine the amount to include in your income from cal income tax refund (or credit or offset) in to determine the amount, if any, of your allowa- a recovery of an amount deducted in an earlier 2015, you generally must include it in income if ble deduction for this item for the current year. year as an itemized deduction. However, you you deducted the tax in an earlier year. The generally do not need to use this discussion if payer should send Form 1099-G, Certain Gov- Example. You paid 2014 estimated state you file Form 1040 and the recovery is for state ernment Payments, to you by February 1, 2016. income tax of $4,000 in four equal payments. or local income taxes paid in 2014. Instead, use The IRS also will receive a copy of the Form You made your fourth payment in January the worksheet in the 2015 Form 1040 instruc- 1099-G. If you file Form 1040, use the work- 2015. You had no state income tax withheld tions for line 10 to figure the amount (if any) to sheet in the 2015 Form 1040 instructions for during 2014. In 2015, you received a $400 tax include in your income. line 10 to figure the amount (if any) to include in refund based on your 2014 state income tax re- turn. You claimed itemized deductions each your income. See Itemized Deduction Recover- You cannot use the Form 1040 worksheet year on Schedule A (Form 1040). ies, later, for when you must use Worksheet 2, and must use this discussion if you are a non- You must allocate the $400 refund between later in this publication. resident alien (discussed later) or any of the fol- 2014 and 2015, the years in which you paid the If you could choose to deduct for a tax year lowing statements are true. tax on which the refund is based. You paid 75% either: ($3,000 ÷ $4,000) of the estimated tax in 2014, State and local income taxes, or 1. You received a refund in 2015 that is for a so 75% of the $400 refund, or $300, is for tax year other than 2014. State and local general sales taxes, then amounts you paid in 2014 and is a recovery 2. You received a refund other than an in- item. If all of the $300 is a taxable recovery the maximum refund that you may have to in- come tax refund, such as a general sales item, you will include $300 on Form 1040, clude in income is limited to the excess of the tax or real property tax refund, in 2015 of line 10, for 2015, and attach a copy of your tax you chose to deduct for that year over the an amount deducted or credit claimed in computation showing why that amount is less tax you did not choose to deduct for that year. an earlier year. than the amount shown on the Form 1099-G Example 1. For 2014 you can choose an you received from the state. 3. The amount on your 2014 Form 1040, $11,000 state income tax deduction or a The balance ($100) of the $400 refund is for line 42 was more than the amount on your $10,000 state general sales tax deduction. You your January 2015 estimated tax payment. 2014 Form 1040, line 41. choose to deduct the state income tax. In 2015 When you figure your deduction for state and 4. You had taxable income on your 2014 you receive a $2,500 state income tax refund. local income taxes paid during 2015, you will Form 1040, line 43, but no tax on your The maximum refund that you may have to in- reduce the $1,000 paid in January by $100. Form 1040, line 44, because of the 0% tax clude in income is $1,000, since you could have Your deduction for state and local income taxes rate on net capital gain and qualified divi- deducted $10,000 in state general sales tax. paid during 2015 will include the January net dends in certain situations. See Capital amount of $900 ($1,000 − $100), plus any esti- gains, later. Example 2. For 2014 you can choose an mated state income taxes paid in 2015 for $11,500 state general sales tax deduction 2015, and any state income tax withheld during 5. Your 2014 state and local income tax re- based on actual expenses or an $11,200 state 2015. fund is more than your 2014 state and lo- income tax deduction. You choose to deduct cal income tax deduction minus the the general sales tax deduction. In 2015 you re- Joint state or local income tax return. If you amount you could have deducted as your turn an item you had purchased and receive a filed a joint state or local income tax return in an 2014 state and local general sales taxes. $500 sales tax refund. In 2015 you also receive earlier year and you are not filing a joint Form a $1,500 state income tax refund. The maxi- 1040 with the same person for 2015, any refund 6. You made your last payment of 2014 esti- mum refund that you may have to include in in- of a deduction claimed on that state or local in- mated state or local income tax in 2015. come is $500, since it is less than the excess of come tax return must be allocated to the person 7. You owed alternative minimum tax in the tax deducted ($11,500) over the tax you did that paid the expense. If both persons paid a 2014. not choose to deduct ($11,200 − $1,500 = portion of the expense, allocate the refund $9,700). Since you did not choose to deduct the based on your individual portion. For example, 8. You could not use the full amount of cred- state income tax, you do not include the state if you paid 25% of the expense, then you would its you were entitled to in 2014 because income tax refund in income. the total credits were more than the

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amount shown on your 2014 Form 1040, deductions were limited, see Itemized de- Allocating the included part. If you are line 47. ductions limited, later.) not required to include all of your recoveries in your income, and you have both a state income 9. You could be claimed as a dependent by 5. You had no unused tax credits. (If you had tax refund and other itemized deduction recov- someone else in 2014. unused tax credits, see Unused tax cred- eries, you must allocate the taxable recoveries its, later.) 10. You received a refund because of a between the state income tax refund you report jointly-filed state or local income tax re- 6. You were not subject to alternative mini- on Form 1040, line 10 (Form 1040NR, line 11), turn, but you are not filing a joint 2015 mum tax. (If you were subject to alterna- and the amount you report as other income on Form 1040 with the same person. tive minimum tax, see Subject to alterna- Form 1040, line 21 (Form 1040NR, line 21). If tive minimum tax, later.) you do not use Worksheet 2, make the alloca- If you also recovered an amount de- tion as follows. ! ducted as a non-itemized deduction, If any of the earlier statements is not true, CAUTION figure the amount of that recovery to see Total recovery not included in income, later. 1. Divide your state income tax refund by the include in your income and add it to your adjus- total of all your itemized deduction recov- State tax refund. In addition to the previ- ted gross income before applying the rules ex- eries. ous six items, you must include in your income plained here. See Non-Itemized Deduction Re- the full amount of a refund of state or local in- 2. Multiply the amount of taxable recoveries coveries, later. come tax or general sales tax if the excess of by the percentage in (1). This is the the tax you deducted over the tax you did not amount you report as a state income tax Nonresident aliens. If you are a nonresident deduct is more than the refund of the tax deduc- refund. alien and file Form 1040NR or 1040NR-EZ, you ted. 3. Subtract the result in (2) above from the cannot claim the standard deduction. If you re- If the refund is more than the excess, see amount of taxable recoveries. This is the cover an itemized deduction that you claimed in Total recovery not included in income, later. amount you report as other income. an earlier year, you generally must include the full amount of the recovery in your income in the Where to report. Enter your state or local Example. In 2015 you recovered $2,500 of year you receive it. However, if you had no tax- income tax refund on Form 1040, line 10, and your 2014 itemized deductions claimed on able income in that earlier year (see Negative the total of all other recoveries as other income Schedule A (Form 1040), but the recoveries taxable income, later), you should complete on Form 1040, line 21. You cannot use Form you must include in your 2015 income are only Worksheet 2 to determine the amount you must 1040A or Form 1040EZ. $1,500. Of the $2,500 you recovered, $500 was include in income. If any other statement under If you file Form 1040NR, enter your state or due to your state income tax refund. Your state Total recovery included in income is not true, local income tax refund on line 11 and the total income tax was more than your state general see the discussion referenced in the statement of all other recoveries on line 21. If you file Form sales tax by $600. The amount you report as a to determine the amount to include in income. 1040NR-EZ, enter your state or local income tax refund on line 4. state tax refund on Form 1040, line 10, is $300 [($500 ÷ $2,500) × $1,500]. The balance of the Capital gains. If you determined your tax in Example. For 2014, you filed a joint return taxable recoveries, $1,200, is reported as other the earlier year by using the Schedule D Tax on Form 1040. Your taxable income was income on Form 1040, line 21. Worksheet, or the Qualified Dividends and Cap- $60,000 and you were not entitled to any tax ital Gain Tax Worksheet, and you receive a re- credits. Your standard deduction was $12,400, Standard deduction limit. You generally are fund in 2015 of a deduction claimed in that year, and you had itemized deductions of $14,000. In allowed to claim the standard deduction if you you will have to recompute your tax for the ear- 2015, you received the following recoveries for do not itemize your deductions. Only your item- lier year to determine if the recovery must be in- amounts deducted on your 2014 return: ized deductions that are more than your stand- cluded in your income. If inclusion of the recov- ard deduction are subject to the recovery rule ery does not change your total tax, you do not (unless you are required to itemize your deduc- include the recovery in income. However, if Medical expenses ...... $200 tions). If your total deductions on the earlier your total tax increases by any amount, you State and local income tax refund ...... 400 Refund of mortgage interest ...... 325 year return were not more than your income for must include the recovery in your income up to Total recoveries ...... $925 that year, include in your income this year the the amount of the deduction that reduced your lesser of: tax in the earlier year. None of the recoveries were more than the Your recoveries, or Total recovery included in income. If you re- deductions taken for 2014. The difference be- The amount by which your itemized deduc- cover any itemized deduction that you claimed tween the state and local income tax you de- tions exceeded the standard deduction. in an earlier year, you generally must include ducted and your local general sales tax you Standard deduction for earlier years. To the full amount of the recovery in your income in could have deducted was more than $400. Your total recoveries are less than the determine if amounts recovered in the current the year you receive it. This rule applies if, for amount by which your itemized deductions ex- year must be included in your income, you must the earlier year, all of the following statements ceeded the standard deduction ($14,000 − know the standard deduction for your filing sta- are true. $12,400 = $1,600), so you must include your to- tus for the year the deduction was claimed. 1. Your itemized deductions exceeded the tal recoveries in your income for 2015. Report Look in the instructions for your tax return from standard deduction by at least the amount the state and local income tax refund of $400 prior years to locate the standard deduction for of the recovery. (If your itemized deduc- on Form 1040, line 10, and the balance of your the filing status for that prior year. If you filed tions did not exceed the standard deduc- recoveries, $525, on Form 1040, line 21. Form 1040NR or 1040NR-EZ, you could not tion by at least the amount of the recovery, claim the standard deduction. see Standard deduction limit, later.) Total recovery not included in income. If one or more of the six statements listed in the Example. You filed a joint return on Form 2. You had taxable income. (If you had no preceding discussion is not true, you may be 1040 for 2014 with taxable income of $45,000. taxable income, see Negative taxable in- able to exclude at least part of the recovery Your itemized deductions were $12,650. The come, later.) from your income. See the discussion refer- standard deduction that you could have claimed 3. Your deduction for the item recovered enced in the statement. You may be able to use was $12,400. In 2015, you recovered $2,100 of equals or exceeds the amount recovered. Worksheet 2, later, to determine the part of your your 2014 itemized deductions. None of the re- (If your deduction was less than the recovery to include in your income. You also coveries were more than the actual deductions amount recovered, see Recovery limited can use Worksheet 2 to determine the part of a for 2014. Include $250 of the recoveries in your to deduction, later.) state tax refund (discussed earlier) to include in 2015 income. This is the smaller of your recov- income. eries ($2,100) or the amount by which your 4. Your itemized deductions were not subject itemized deductions were more than the stand- to the limit on itemized deductions. (If your ard deduction ($12,650 − $12,400 = $250).

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Negative taxable income. If your taxable in- Note. If you were required to itemize increases by any amount, you received a tax come for the prior year (Worksheet 2, line 10) your deductions in the earlier year, use benefit from the deduction and you must in- was a negative amount, the recovery you must step 1(b) and not step 1(a). clude the recovery in your income up to the include in income is reduced by that amount. amount of the deduction that reduced your tax 2. Subtract the amount in step 1 from the You have a negative taxable income for 2014 if in the earlier year. amount of itemized deductions actually al- your: lowed in the earlier year after applying the Form 1040, line 42 was more than line 41, limit on itemized deductions. Non­Itemized Deduction Form 1040NR, line 40 was more than Recoveries line 39, or The result of step 2 is the amount of the recov- Form 1040NR-EZ, line 13 was more than ery to include in your income for the year you This section discusses recovery of deductions line 12. receive the recovery. If your taxable income for other than itemized deductions. the earlier year was a negative amount, reduce Example. The facts are the same as in the your recovery by the negative amount. Total recovery included in income. If you re- previous example except line 42 was $200 If you had unused tax credits in the earlier cover an amount that you deducted in an earlier more than line 41 on your 2014 Form 1040 giv- year, see Unused tax credits, later. year when you were figuring your adjusted ing you a negative taxable income of $200. You For more information on this computation, gross income, you generally must include the must include $50 in your 2015 income, rather see Revenue Ruling 93-75. This ruling is in Cu- full amount of the recovery in your income in the than $250. mulative Bulletin 1993-2. year received.

Recovery limited to deduction. You do not Unused tax credits. If you recover an item de- Total recovery not included in income. If include in your income any amount of your re- ducted in an earlier year in which you had un- any part of the deduction you took for the recov- covery that is more than the amount you deduc- used tax credits, you must refigure the earlier ered amount did not reduce your tax, you may ted in the earlier year. The amount you include year's tax to determine if you must include the be able to exclude at least part of the recovery in your income is limited to the smaller of: recovery in your income. To do this, add the from your income. You must include the recov- The amount deducted, or amount of the recovery to your earlier year's ery in your income only up to the amount of the deduction that reduced your tax in the year of The amount recovered. taxable income and refigure the tax and the credits on the recomputed amount. If the re- the deduction. (See Tax benefit rule, earlier.) computed tax, after application of the credits, is Example. For 2014, you paid $1,700 for more than the actual tax in the earlier year, in- Negative taxable income. If your taxable in- medical expenses. Because of the limit on de- clude the recovery in your income up to the come for the prior year was a negative amount, ducting medical expenses, you deducted only amount of the deduction that reduced the tax in the recovery you must include in income is re- $200 as an itemized deduction. In 2015, you re- the earlier year. For this purpose, any increase duced by that amount. You have a negative tax- ceived a $500 reimbursement from your medi- to a credit carried over to the current year that able income for 2014 if your: cal insurance for your 2014 expenses. The only resulted from deducting the recovered amount Form 1040, line 42 was more than line 41, amount of the $500 reimbursement that must in the earlier year is considered to have re- Form 1040NR, line 40 was more than be included in your income for 2015 is $200 - duced your tax in the earlier year. If the recov- line 39, or the amount actually deducted. ery is for an itemized deduction claimed in a Form 1040NR-EZ, line 13 was more than line 12. Itemized deductions limited. If the amount year in which the deductions were limited, see you recovered was deducted in a year in which Itemized deductions limited, earlier. If you had a net operating loss (NOL) in a prior your itemized deductions were limited, you If your tax, after application of the credits, year, you will have to adjust your taxable in- must include it in income up to the difference does not change, you did not have a tax benefit come for any NOL carryover. See Pub. 536 for between the amount of itemized deductions ac- from the deduction. Do not include the recovery more information. tually allowed that year and the amount you in your income. would have been allowed (the greater of your Unused tax credits. If you recover an item de- itemized deductions or your standard deduc- Example. In 2011, Jean Black filed as head ducted in an earlier year in which you had un- tion) if you had figured your deductions using of household and itemized her deductions on used tax credits, you must refigure the earlier only the net amount of the recovery item. Schedule A (Form 1040). Her taxable income year's tax to determine if you must include the was $5,260 and her tax was $528. She claimed For example, your itemized deductions were recovery in your income. To do this, add the a child care credit of $1,200. The credit reduced reduced for 2014 if your adjusted gross income amount of the recovery to your earlier year's her tax to zero and she had an unused tax was over the following amount: $305,050 in the taxable income and refigure the tax and the credit of $672 ($1,200 − $528). In 2012, Jean case of a joint return or a surviving spouse, credits on the recomputed amount. If the re- recovered $1,000 of her itemized deductions. $279,650 in the case of a head of household, computed tax, after application of the credits, is She reduces her 2011 itemized deductions by $254,200 in the case of an individual who is not more than the actual tax in the earlier year, in- $1,000 and recomputes that year's tax on taxa- married and who is not a surviving spouse or clude the recovery in your income up to the ble income of $6,260. However, the child care head of household, and $152,525 in the case of amount of the deduction that reduced the tax in credit exceeds the recomputed tax of $628. a married individual filing a separate return. the earlier year. For this purpose, any increase Jean's tax liability for 2011 is not changed by re- to a credit carried over to the current year that To determine the part of the recovery you ducing her deductions by the recovery. She did resulted from deducting the recovered amount must include in income, follow the two steps be- not have a tax benefit from the recovered de- in the earlier year is considered to have re- low. duction and does not include any of the recov- duced your tax in the earlier year. 1. Figure the greater of: ery in her income for 2012. If your tax, after application of the credits, does not change, you did not have a tax benefit a. The standard deduction for the earlier Subject to alternative minimum tax. If you year, or from the deduction. Do not include the recovery were subject to the alternative minimum tax in in your income. b. The amount of itemized deductions the year of the deduction, you will have to re- you would have been allowed for the compute your tax for the earlier year to deter- Capital gains. If you determined your tax in earlier year (after taking into account mine if the recovery must be included in your in- the earlier year by using the Schedule D Tax the limit on itemized deductions) if you come. This will require a recomputation of your Worksheet, or the Qualified Dividends and Cap- had figured them using only the net regular tax, as shown in the preceding example, ital Gain Tax Worksheet, and you receive a re- amount of the recovery item. The net and a recomputation of your alternative mini- fund in 2015 of a deduction claimed in that year, amount is the amount you actually mum tax. If inclusion of the recovery does not you will have to recompute your tax for the ear- paid reduced by the recovery amount. change your total tax, you do not include the re- lier year to determine if the recovery must be in- covery in your income. However, if your total tax cluded in your income. If inclusion of the

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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 2015 tax return, see Itemized Deduction Recoveries. If you recovered amounts from more than one year, such as a state income tax refund from 2014 and a casualty loss reimbursement from 2013, 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 alternative minimum tax or your tax credits reduced your tax to zero, see Unused tax credits and Subject to alternative minimum tax 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.

1. State/local income tax refund or credit1 ...... 1. 2. Enter the total of all other Schedule A refunds or reimbursements (excluding the amount you entered on line 1)2 ...... 2. 3. Add lines 1 and 2 ...... 3. 4. Itemized deductions for the prior year. For 2014, Form 1040, Schedule A, line 29 Form 1040NR, Schedule A, line 15 Form 1040NR-EZ, line 11 ...... 4. 5. Enter any amount previously refunded to you (do not enter an amount from line 1 or line 2) ...... 5. 6. Subtract line 5 from line 4 ...... 6. 7. Standard deduction for the prior year. 3 If you filed Form 1040NR or 1040NR-EZ, enter -0- ...... 7. 8. Subtract line 7 from line 6. If the result is zero or less, stop here. The amounts on lines 1 and 2 are not taxable ...... 8. 9. Enter the smaller of line 3 or line 8 ...... 9. 10. Taxable income for prior year4 (2014 Form 1040, line 43; 2014 Form 1040NR, line 41; 2014 Form 1040NR-EZ, line 14) ...... 10. 11. Amount to include in income for 2015: 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 1 on Form 1040, line 10; Form 1040NR, line 11; Form 1040NR-EZ, line 4. Enter the amount from line 2 on Form 1040, line 21; Form 1040NR, line 21.

If line 11 is less than line 3 and either line 1 or line 2 is zero— If there is an amount on line 1, enter the amount from line 11 on Form 1040, line 10; Form 1040NR, line 11; Form 1040NR-EZ, line 4. If there is an amount on line 2, enter the amount from line 11 on Form 1040, line 21; Form 1040NR, line 21.

If line 11 is less than line 3, and there are amounts on both lines 1 and 2, complete the following worksheet. A. Divide the amount on line 1 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 Form 1040, line 10; Form 1040NR, line 11 ...... B. C.Subtract the amount on line B from the amount on line 11. Enter the result here and on Form 1040, line 21; Form 1040NR, line 21 ...... C.

1 Do not enter more than the amount deducted for the prior year. Do not 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 Do not 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 do not 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 www.irs.gov for prior year standard deduction. 4 If taxable income is a negative amount, enter that amount in brackets. Do not 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, Net Operating Losses for Individuals, Estates, and Trusts. 5 For example, $700 + ($400) = $300.

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recovery does not change your total tax, you do tion you receive. You should receive a Form Supplemental unemployment benefits. not include the recovery in income. However, if 1099-G showing in box 1 the total unemploy- Benefits received from an employer-financed your total tax increases by any amount, you ment compensation paid to you. In most cases, fund (to which the employees did not contrib- must include the recovery in your income up to you enter unemployment compensation on ute) are not unemployment compensation. the amount of the deduction that reduced your line 19 of Form 1040, line 13 of Form 1040A, or They are taxable as wages and are subject to tax in the earlier year. line 3 of Form 1040EZ. withholding for income tax. They may be sub- ject to social security and Medicare taxes. For Types of unemployment compensation. Amounts Recovered for Credits more information, see Supplemental Unemploy- Unemployment compensation generally in- ment Benefits in section 5 of Pub. 15-A, Em- cludes any amount received under an unem- If you received a recovery in 2015 for an item ployer's Supplemental Tax Guide. Report these ployment compensation law of the United for which you claimed a tax credit in an earlier payments on line 7 of Form 1040 or Form States or of a state. It includes the following year, you must increase your 2015 tax by the 1040A or on line 1 of Form 1040EZ. benefits. amount of the recovery, up to the amount by Benefits paid by a state or the District of Repayment of benefits. You may have to which the credit reduced your tax in the earlier Columbia from the Federal Unemployment repay some of your supplemental unemploy- year. You had a recovery if there was a down- Trust Fund. ment benefits to qualify for trade readjustment ward price adjustment or similar adjustment on State unemployment insurance benefits. allowances under the Trade Act of 1974. If you the item for which you claimed a credit. repay supplemental unemployment benefits in Railroad unemployment compensation the same year you receive them, reduce the to- benefits. This rule does not apply to the investment tal benefits by the amount you repay. If you re- Disability payments from a government credit or the foreign tax credit. Recoveries of pay the benefits in a later year, you must in- program paid as a substitute for unemploy- these credits are covered by other provisions of clude the full amount of the benefits in your ment compensation. (Amounts received as the law. See Pub. 514, Foreign Tax Credit for income for the year you received them. workers' compensation for injuries or ill- Individuals, or Form 4255, Recapture of Invest- Deduct the repayment in the later year as an ness are not unemployment compensa- ment Credit, for details. adjustment to gross income on Form 1040. tion. See Workers' Compensation under (You cannot use Form 1040A or Form 1040EZ.) Sickness and Injury Benefits, earlier.) Include the repayment on Form 1040, line 36, Survivor Benefits Trade readjustment allowances under the and enter “Sub-Pay TRA” and the amount on Trade Act of 1974. the dotted line next to line 36. If the amount you In most cases, payments made by or for an em- Unemployment assistance under the Dis- repay in a later year is more than $3,000, you ployer because of an employee's death must be aster Relief and Emergency Assistance may be able to take a credit against your tax for included in income. The following discussions Act of 1974. the later year instead of deducting the amount explain the tax treatment of certain payments Unemployment assistance under the Air- repaid. For information on this, see Repay- made to survivors. For additional information, line Deregulation Act of 1978 Program. ments, later. see Pub. 559. Governmental program. If you contribute Private unemployment fund. Unemployment Lump­sum payments. Lump-sum payments to a governmental unemployment compensa- benefit payments from a private (nonunion) you receive from a decedent's employer as the tion program and your contributions are not de- fund to which you voluntarily contribute are tax- surviving spouse or beneficiary may be accrued ductible, amounts you receive under the pro- able only if the amounts you receive are more salary payments; distributions from employee gram are not included as unemployment than your total payments into the fund. Report profit-sharing, pension, annuity, or stock bonus compensation until you recover your contribu- the taxable amount on Form 1040, line 21. plans; or other items that should be treated sep- tions. If you deducted all of your contributions to the program, the entire amount you receive un- arately for tax purposes. The tax treatment of Payments by a union. Benefits paid to you as der the program is included in your income. these lump-sum payments depends on the type an unemployed member of a union from regular of payment. Repayment of unemployment compen- union dues are included in your income on Salary or wages. Salary or wages re- sation. If you repaid in 2015 unemployment Form 1040, line 21. However, if you contribute ceived after the death of the employee are usu- compensation you received in 2015, subtract to a special union fund and your payments to ally ordinary income to you. the amount you repaid from the total amount the fund are not deductible, the unemployment you received and enter the difference on line 19 benefits you receive from the fund are includible Qualified employee retirement plans. of Form 1040, line 13 of Form 1040A, or line 3 in your income only to the extent they are more Lump-sum distributions from qualified em- of Form 1040EZ. On the dotted line next to your than your contributions. ployee retirement plans are subject to special entry, enter “Repaid” and the amount you re- tax treatment. For information on these distribu- paid. If you repaid unemployment compensa- Guaranteed annual wage. Payments you re- tions, see Pub. 575 (or Pub. 721, if you are the tion in 2015 that you included in your income in ceive from your employer during periods of un- survivor of a federal employee or retiree). an earlier year, you can deduct the amount re- employment, under a union agreement that paid on Schedule A (Form 1040), line 23, if you guarantees you full pay during the year, are tax- Public safety officer killed in the line of itemize deductions. If the amount is more than able as wages. Include them on line 7 of Form duty. If you are a survivor of a public safety of- $3,000, see Repayments, later. 1040 or Form 1040A or on line 1 of Form ficer who was killed in the line of duty, you may 1040EZ. be able to exclude from income certain Tax withholding. You can choose to have amounts you receive. For this purpose, the term federal income tax withheld from your unem- State employees. Payments similar to a public safety officer includes law enforcement ployment compensation. To make this choice, state's unemployment compensation may be officers, firefighters, chaplains, and rescue complete Form W-4V, Voluntary Withholding made by the state to its employees who are not squad and ambulance crew members. For Request, and give it to the paying office. Tax covered by the state's unemployment compen- more information, see Pub. 559. will be withheld at 10% of your payment. sation law. Although the payments are fully tax- able, do not report them as unemployment If you do not choose to have tax with- Unemployment Benefits compensation. Report these payments on Form ! held from your unemployment com- 1040, line 21. CAUTION pensation, you may be liable for esti- The tax treatment of unemployment benefits mated tax. If you do not pay enough tax, either you receive depends on the type of program through withholding or estimated tax, or a com- paying the benefits. bination of both, you may have to pay a penalty. For more information, see Pub. 505, Tax With- Unemployment compensation. You must in- holding and Estimated Tax. clude in income all unemployment compensa-

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Welfare and Other qualified disaster relief payment. A qualified dis- An Emergency Homeowners' Loan Pro- aster relief payment is an amount paid to you: gram (EHLP) administered by the Depart- Public Assistance Benefits ment of Housing and Urban Development 1. To reimburse or pay reasonable and nec- (HUD) or a state. Do not include in your income governmental essary personal, family, living, or funeral benefit payments from a public welfare fund expenses that result from a qualified dis- The payments are not included in gross income based upon need, such as payments due to aster; and are not taxable. blindness. Payments from a state fund for the 2. To reimburse or pay reasonable and nec- Mortgage assistance payments under sec­ victims of crime should not be included in the essary expenses incurred for the repair or tion 235 of the National Housing Act. Pay- victims' incomes if they are in the nature of wel- rehabilitation of your home or repair or re- ments made under section 235 of the National fare payments. Do not deduct medical expen- placement of its contents to the extent it is Housing Act for mortgage assistance are not in- ses that are reimbursed by such a fund. You due to a qualified disaster; cluded in the homeowner's income. Interest must include in your income any welfare pay- paid for the homeowner under the mortgage as- ments that are compensation for services or 3. By a person engaged in the furnishing or sistance program cannot be deducted. that are obtained fraudulently. sale of transportation as a common carrier because of the death or personal physical Replacement housing payments. Replace- Work­training program. Payments you re- injuries incurred as a result of a qualified ment housing payments made under the Uni- ceive from a state welfare agency for taking part disaster; or form Relocation Assistance and Real Property in a work-training program are not included in 4. By a federal, state, or local government, or Acquisition Policies Act for Federal and Feder- your income, as long as the payments (exclu- agency or instrumentality in connection ally Assisted Programs are not includible in sive of extra allowances for transportation or with a qualified disaster in order to pro- gross income, but are includible in the basis of other costs) do not total more than the public mote the general welfare. the newly acquired property. welfare benefits you would have received other- wise. If the payments are more than the welfare You can exclude this amount only to the extent Relocation payments and home rehabilita­ benefits you would have received, the entire any expense it pays for is not paid for by insur- tion grants. A relocation payment under sec- amount must be included in your income as wa- ance or otherwise. The exclusion does not ap- tion 105(a)(11) of the Housing and Community ges. ply if you were a participant or conspirator in a Development Act made by a local jurisdiction to terrorist action or a representative of one. Reemployment Trade Adjustment Assis- a displaced individual moving from a flood-dam- A qualified disaster is: aged residence to another residence is not in- tance (RTAA) payments. Payments you re- A disaster which results from a terrorist or ceive from a state agency under the Reemploy- cludible in gross income. Home rehabilitation military action; grants received by low-income homeowners in ment Trade Adjustment Assistance (RTAA) A federally declared disaster; or must be included in your income. The state a defined area under the same act are also not must send you Form 1099-G to advise you of A disaster which results from an accident includible in gross income. the amount you should include in income. The involving a common carrier, or from any amount should be reported on Form 1040, other event, which is determined to be Indian financing grants. Nonreimbursable line 21 or Form 1040NR, line 21. catastrophic by the Secretary of the Treas- grants under Title IV of the Indian Financing Act ury or his or her delegate. of 1974 to Indians to expand profit-making In- dian-owned economic enterprises on or near Persons with disabilities. If you have a disa- For amounts paid under item (4), a disaster reservations are not includible in gross income. bility, you must include in income compensation is qualified if it is determined by an applicable you receive for services you perform unless the federal, state, or local authority to warrant assis- Indian general welfare benefit. Gross in- compensation is otherwise excluded. However, tance from the federal, state, or local govern- come does not include the value of any Indian you do not include in income the value of ment, agency, or instrumentality. goods, services, and cash that you receive, not general welfare benefit. “Indian general welfare in return for your services, but for your training Disaster mitigation payments. You also benefit” includes any payment made or services and rehabilitation because you have a disability. can exclude from income any amount you re- provided to or on behalf of a member of an In- Excludable amounts include payments for ceive that is a qualified disaster mitigation pay- dian tribe (or any spouse or dependent of that transportation and attendant care, such as in- ment. Qualified disaster mitigation payments member) under an Indian tribal government terpreter services for the deaf, reader services are commonly paid to you in the period immedi- program, but only if: for the blind, and services to help individuals ately following damage to property as a result of 1. the program is administered under speci- with an intellectual disability do their work. a natural disaster. However, disaster mitigation fied guidelines and does not discriminate payments are used to mitigate (reduce the se- in favor of members of the governing body Disaster relief grants. Do not include verity of) potential damage from future natural of the tribe, and post-disaster grants received under the Disas- disasters. They are paid to you through state ter Relief and Emergency Assistance Act in and local governments based on the provisions 2. the benefits provided under the program your income if the grant payments are made to of the Robert T. Stafford Disaster Relief and (A) are available to any tribal member who help you meet necessary expenses or serious Emergency Assistance Act or the National meets guidelines, (B) are for the promo- needs for medical, dental, housing, personal Flood Insurance Act. tion of general welfare, (C) are not lavish property, transportation, or funeral expenses. You cannot increase the basis or adjusted or extravagant, and (D) are not compensa- Do not deduct casualty losses or medical ex- basis of your property for improvements made tion for services. penses that are specifically reimbursed by with nontaxable disaster mitigation payments. Any items of cultural significance, reim- these disaster relief grants. If you have deduc- bursement of costs, or cash honorarium for par- Home Affordable Modification Program ted a casualty loss for the loss of your personal ticipation in cultural or ceremonial activities for (HAMP). If you benefit from Pay-for-Perform- residence and you later receive a disaster relief the transmission of tribal culture are not treated ance Success Payments under HAMP, the pay- grant for the loss of the same residence, you as compensation for services. may have to include part or all of the grant in ments are not taxable. your taxable income. See Recoveries, earlier. Note. The above exclusion was enacted by the Hardest Hit Fund and Emergency Home­ Unemployment assistance payments under the Tribal General Welfare Exclusion Act of 2014, Act are taxable unemployment compensation. owners' Loan Program. If you receive or ben- September 26, 2014. The exclusion applies to See Unemployment compensation under Un- efit from payments made under: tax years for which the period of limitation on re- employment Benefits, earlier. A State Housing Finance agency (State fund or credit under section 6511 has not ex- HFA) Hardest Hit Fund program in which pired (generally, within 3 years from the time the Disaster relief payments. You can exclude program payments can be used to pay return was filed or 2 years from the time the tax from income any amount you receive that is a mortgage interest, or was paid, whichever expires later). Additionally,

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a claim for the above exclusion will be allowed if include in your income. Pub. 915 also has work- Alaska Permanent Fund dividend. If you re- made within 1 year of the enactment of the ex- sheets you can use. However, you must use the ceived a payment from Alaska's mineral income clusion. worksheets in Pub. 915 if any of the following fund (Alaska Permanent Fund dividend), report situations apply. it as income on line 21 of Form 1040, line 13 of Note. The enactment of the above exclusion You received a lump-sum benefit payment Form 1040A, or line 3 of Form 1040EZ. The generally codifies the exclusion afforded under during the year that is for one or more ear- state of Alaska sends each recipient a docu- Revenue Procedure 2014-35, June 4, 2014. lier years. ment that shows the amount of the payment See Revenue Procedure 2014-35 for more de- You exclude employer-provided adoption with the check. The amount also is reported to tails. benefits or interest from qualified U.S. sav- the IRS. ings bonds. Medicare. Medicare benefits received under You take the foreign earned income exclu- Alimony. Include in your income on Form Title XVIII of the Social Security Act are not in- sion, the foreign housing exclusion or de- 1040, line 11, any alimony payments you re- cludible in the gross income of the individuals duction, the exclusion of income from ceive. Amounts you receive for child support for whom they are paid. This includes basic American Samoa, or the exclusion of in- are not income to you. For complete informa- (part A (Hospital Insurance Benefits for the come from Puerto Rico by bona fide resi- tion, see Pub. 504, Divorced or Separated Indi- Aged)) and supplementary (part B (Supplemen- dents of Puerto Rico. viduals. tary Medical Insurance Benefits for the Aged)). Benefits may affect your IRA deduction. Below­market loans. A below-market loan is Social Security Benefits (including You must use the special worksheets in Appen- a loan on which no interest is charged or on lump­sum payments attributable to prior dix B of Publications 590-A and 590-B to figure which the interest is charged at a rate below the years), Supplemental Security Income Ben­ your taxable benefits and your IRA deduction if applicable federal rate. If you make a be- efits, and Lump­Sum Death Benefits. The all of the following conditions apply. low-market gift or demand loan, you must in- Social Security Administration (SSA) provides You receive social security or equivalent clude the forgone interest (at the federal rate) benefits such as old-age benefits, benefits to railroad retirement benefits. as interest income on your return. These loans disabled workers, and benefits to spouses and You have taxable compensation. are considered a transaction in which you, the dependents. These benefits may be subject to You contribute to your IRA. lender, are treated as having made: federal income tax depending on your filing sta- You or your spouse is covered by a retire- A loan to the borrower in exchange for a tus and other income. See Pub. 915, Social Se- ment plan at work. note that requires the payment of interest curity and Equivalent Railroad Retirement Ben- at the applicable federal rate, and efits, for more information. An individual How to report. If any of your benefits are An additional payment to the borrower, originally denied benefits, but later approved, taxable, you must use either Form 1040 or which the borrower transfers back to you may receive a lump-sum payment for the period Form 1040A to report the taxable part. You can- as interest. when benefits were denied (which may be prior not use Form 1040EZ. Report your net benefits Depending on the transaction, the additional years). See Pub. 915 for information on how to (as shown on your Forms SSA-1099 and payment to the borrower is treated as a: make a lump-sum election, which may reduce RRB-1099) on line 20a of Form 1040 or line 14a Gift, your tax liability. There are also other types of of Form 1040A. Report the taxable part on benefits paid by the SSA. However, Supple- line 20b of Form 1040 or on line 14b of Form Dividend, mental Security Income (SSI) benefits and 1040A. Contribution to capital, lump-sum death benefits (one-time payment to Payment of compensation, or spouse and children of deceased) are not sub- Nutrition Program for the Elderly. Food ben- ject to federal income tax. For more information efits you receive under the Nutrition Program for Another type of payment. the Elderly are not taxable. If you prepare and on these benefits, go to The borrower may have to report this payment serve free meals for the program, include in www.socialsecurity.gov. as income, depending on its classification. your income as wages the cash pay you re- For more information on below-market Form SSA-1099. If you received social se- ceive, even if you are also eligible for food ben- loans, see chapter 1 of Pub. 550. curity benefits during the year, you will receive efits. Form SSA-1099, Social Security Benefit State- Bribes. If you receive a bribe, include it in your ment. An IRS Notice 703 will be enclosed with Payments to reduce cost of winter energy. income. your Form SSA-1099. This notice includes a Payments made by a state to qualified people worksheet you can use to figure whether any of to reduce their cost of winter energy use are not Campaign contributions. These contribu- your benefits are taxable. taxable. For an explanation of the information found tions are not income to a candidate unless they on your Form SSA-1099, see Pub. 915. are diverted to his or her personal use. To be Other Income exempt from tax, the contributions must be Form RRB-1099. If you received equiva- spent for campaign purposes or kept in a fund lent railroad retirement or special guaranty ben- The following brief discussions are arranged in for use in future campaigns. However, interest efits during the year, you will receive Form alphabetical order. Other income items briefly earned on bank deposits, dividends received RRB-1099, Payments by the Railroad Retire- discussed below are referenced to publications on contributed securities, and net gains realized ment Board. which provide more information. on sales of contributed securities are taxable For an explanation of the information found and must be reported on Form 1120-POL, U.S. on your Form RRB-1099, see Pub. 915. Activity not for profit. You must include on Income Tax Return for Certain Political Organi- zations. Excess campaign funds transferred to Joint return. If you are married and file a your return income from an activity from which an office account must be included in the office- joint return, you and your spouse must combine you do not expect to make a profit. An example holder's income on Form 1040, line 21, in the your incomes and your social security and of this type of activity is a hobby or a farm you year transferred. equivalent railroad retirement benefits when fig- operate mostly for recreation and pleasure. En- uring whether any of your combined benefits ter this income on Form 1040, line 21. Deduc- Canceled sales contract. If you sell property are taxable. Even if your spouse did not receive tions for expenses related to the activity are (such as land or a residence) under a contract, any benefits, you must add your spouse's in- limited. They cannot total more than the income but the contract is canceled and you return the come to yours when figuring if any of your bene- you report and can be taken only if you itemize buyer's money in the same tax year as the origi- fits are taxable. deductions on Schedule A (Form 1040). See Not-for-Profit Activities in chapter 1 of Pub. 535 nal sale, you have no income from the sale. If Taxable amount. Use the worksheet in the for information on whether an activity is consid- the contract is canceled and you return the buy- Form 1040 or Form 1040A instruction package ered carried on for a profit. er's money in a later tax year, you must include to determine the amount of your benefits to your gain in your income for the year of the sale.

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When you return the money and take back the 4. Amounts received in settlement of pension taxable to you. These plans make the minimum property in the later year, you treat the transac- rights (if you did not contribute to the plan). monthly payment on your credit card account if tion as a purchase that gives you a new basis in you cannot make the payment due to injury, ill- 5. Damages for: the property equal to the funds you return to the ness, disability, or unemployment. Report on buyer. a. Patent or copyright infringement, Form 1040, line 21, the amount of benefits you Special rules apply to the reacquisition of received during the year that is more than the b. Breach of contract, or real property where a secured indebtedness amount of the premiums you paid during the (mortgage) to the original seller is involved. For c. Interference with business operations. year. further information, see Repossession in Pub. 6. Back pay and damages for emotional dis- 537, Installment Sales. Down payment assistance. If you purchase tress received to satisfy a claim under Title a home and receive assistance from a nonprofit VII of the Civil Rights Act of 1964. Car pools. Do not include in your income corporation to make the down payment, that as- amounts you receive from the passengers for 7. Attorney fees and costs (including contin- sistance is not included in your income. If the driving a car in a car pool to and from work. gent fees) where the underlying recovery corporation qualifies as a tax-exempt charitable These amounts are considered reimbursement is included in gross income. organization, the assistance is treated as a gift for your expenses. However, this rule does not and is included in your basis of the house. If the apply if you have developed car pool arrange- Do not include in your income compensa- corporation does not qualify, the assistance is ments into a profit-making business of trans- tory damages for personal physical injury or treated as a rebate or reduction of the purchase porting workers for hire. physical sickness (whether received in a lump price and is not included in your basis. sum or installments). Cash rebates. A cash rebate you receive from Employment agency fees. If you get a job Emotional distress. Emotional distress it- a dealer or manufacturer of an item you buy is through an employment agency, and the fee is self is not a physical injury or physical sickness, not income, but you must reduce your basis by paid by your employer, the fee is not includible but damages you receive for emotional distress the amount of the rebate. in your income if you are not liable for it. How- due to a physical injury or sickness are treated ever, if you pay it and your employer reimburses as received for the physical injury or sickness. Example. You buy a new car for $24,000 you for it, it is includible in your income. Do not include them in your income. cash and receive a $2,000 rebate check from If the emotional distress is due to a personal the manufacturer. The $2,000 is not income to Energy conservation subsidies. You can ex- injury that is not due to a physical injury or sick- you. Your basis in the car is $22,000. This is the clude from gross income any subsidy provided, ness (for example, unlawful discrimination or in- basis on which you figure gain or loss if you sell either directly or indirectly, by public utilities for jury to reputation), you must include the dam- the car and depreciation if you use it for busi- the purchase or installation of an energy con- ages in your income, except for any damages ness. servation measure for a dwelling unit. you receive for medical care due to that emo- Casualty insurance and other reimburse­ tional distress. Emotional distress includes Energy conservation measure. This in- ments. You generally should not report these physical symptoms that result from emotional cludes installations or modifications that are pri- reimbursements on your return unless you are distress, such as headaches, insomnia, and marily designed to reduce consumption of elec- figuring gain or loss from the casualty or theft. stomach disorders. tricity or natural gas, or improve the management of energy demand. See Pub. 547. Deduction for costs involved in unlawful discrimination suits. You may be able to de- Dwelling unit. This includes a house, Charitable gift annuities. If you are the bene- duct attorney fees and court costs paid to re- apartment, condominium, mobile home, boat, ficiary of a charitable gift annuity, you must in- cover a judgment or settlement for a claim of or similar property. If a building or structure con- clude the yearly annuity or fixed percentage unlawful discrimination under various provisions tains both dwelling and other units, any subsidy payment in your income. of federal, state, and local law listed in Internal must be properly allocated. The payer will report the types of income Revenue Code section 62(e), a claim against you received on Form 1099-R. Report the gross the United States government, or a claim under Estate and trust income. An estate or trust, distribution from box 1 on Form 1040, line 16a, section 1862(b)(3)(A) of the Social Security Act. unlike a partnership, may have to pay federal in- or on Form 1040A, line 12a, and the part taxed You can claim this deduction as an adjustment come tax. If you are a beneficiary of an estate or as ordinary income (box 2a minus box 3) on to income on Form 1040, line 36. The following trust, you may be taxed on your share of its in- Form 1040, line 16b, or on Form 1040A, rules apply. come distributed or required to be distributed to line 12b. Report the portion taxed as capital The attorney fees and court costs may be you. However, there is never a double tax. Es- gain as explained in the Instructions for Sched- paid by you or on your behalf in connection tates and trusts file their returns on Form 1041, ule D (Form 1040). with the claim for unlawful discrimination, U.S. Income Tax Return for Estates and Trusts, the claim against the United States govern- and your share of the income is reported to you Child support payments. You should not re- ment, or the claim under section 1862(b) on Schedule K-1 (Form 1041). port these payments on your return. See Pub. (3)(A) of the Social Security Act. 504 for more information. Current income required to be distrib- The deduction you are claiming cannot be uted. If you are the beneficiary of an estate or more than the amount of the judgment or Court awards and damages. To determine if trust that must distribute all of its current in- settlement you are including in income for settlement amounts you receive by compromise come, you must report your share of the distrib- the tax year. or judgment must be included in your income, utable net income, whether or not you actually The judgment or settlement to which your you must consider the item that the settlement received it. replaces. The character of the income as ordi- attorney fees and court costs apply must nary income or capital gain depends on the na- occur after October 22, 2004. Current income not required to be dis- tributed. If you are the beneficiary of an estate ture of the underlying claim. Include the follow- Pre-existing agreement. If you receive or trust and the fiduciary has the choice of ing as ordinary income. damages under a written binding agreement, whether to distribute all or part of the current in- court decree, or mediation award that was in ef- 1. Interest on any award. come, you must report: fect (or issued on or before) September 13, All income that is required to be distributed 2. Compensation for lost wages or lost profits 1995, do not include in income any of those to you, whether or not it is actually distrib- in most cases. damages received on account of personal inju- uted, plus ries or sickness. 3. Punitive damages, in most cases. It does All other amounts actually paid or credited not matter if they relate to a physical injury to you, or physical sickness. Credit card insurance. In most cases, if you receive benefits under a credit card disability or up to the amount of your share of distributable unemployment insurance plan, the benefits are net income.

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How to report. Treat each item of income Legal expenses. You may be able to de- friend's or relative's estate), report these fees the same way that the estate or trust would treat duct attorney fees and court costs paid in con- on Form 1040, line 21. If you are in the trade or it. For example, if a trust's dividend income is nection with the civil action. Depending on the business of being an executor, report these distributed to you, you report the distribution as facts and circumstances, these expenses are fees as self-employment income on Schedule C dividend income on your return. The same rule either claimed on Schedule A (Form 1040) or or Schedule C-EZ (Form 1040). The fee is not applies to distributions of tax-exempt interest Form 1040NR (Schedule A), or deducted in fig- includible in income if it is waived. and capital gains. uring the income you report on Form 1040, The fiduciary of the estate or trust must tell line 21, or Form 1040NR, line 21. If the qualified Manager of trade or business for bank- you the type of items making up your share of settlement income was received in connection ruptcy estate. Include in your income all pay- the estate or trust income and any credits you with your trade or business (other than as an ments received from your bankruptcy estate for are allowed on your individual income tax re- employee), you can reduce the taxable amount managing or operating a trade or business that turn. of qualified settlement income by these expen- you operated before you filed for bankruptcy. ses. In all other situations, you can only claim Report this income on Form 1040, line 21. Losses. Losses of estates and trusts gen- these expenses as a miscellaneous itemized erally are not deductible by the beneficiaries. Notary public. Report payments for these deduction subject to the 2%-of-adjus- services on Schedule C or Schedule C-EZ Grantor trust. Income earned by a grantor ted-gross-income limit on Schedule A (Form (Form 1040). These payments are not subject trust is taxable to the grantor, not the benefi- 1040), line 23, or Schedule A (Form 1040NR), to self-employment tax. See the separate in- ciary, if the grantor keeps certain control over line 9. For example, an employee or the surviv- structions for Schedule SE (Form 1040) for de- the trust. (The grantor is the one who transfer- ing spouse or beneficiary of a deceased plaintiff tails. red property to the trust.) This rule applies if the would claim the expenses as a miscellaneous property (or income from the property) put into itemized deduction subject to the 2% limit. See Election precinct official. You should re- the trust will or may revert (be returned) to the Statement, next. ceive a Form W-2 showing payments for serv- grantor or the grantor's spouse. ices performed as an election official or election Statement. If you report on Form 1040, worker. Report these payments on line 7 of Generally, a trust is a grantor trust if the line 21, or Form 1040NR, line 21, qualified set- grantor has a reversionary interest valued (at Form 1040 or Form 1040A or on line 1 of Form tlement income that is less than the gross 1040EZ. the date of transfer) at more than 5% of the amount shown on the Form 1099-MISC, you value of the transferred property. must attach a statement to your tax return. The Food program payments to daycare provid­ statement must identify and show the gross Expenses paid by another. If your personal ers. If you operate a daycare service and re- amount of the qualified settlement income, the expenses are paid for by another person, such ceive payments under the Child and Adult Care reductions for the amount contributed to an eli- as a corporation, the payment may be taxable Food Program administered by the Department gible retirement plan or allowable as legal ex- to you depending upon your relationship with of Agriculture that are not for your services, the penses not reported as a miscellaneous item- that person and the nature of the payment. But payments are not included in your income in ized deduction, and the net amount. if the payment makes up for a loss caused by most cases. However, you must include in your income any part of the payments you do not that person, and only restores you to the posi- Income averaging. For purposes of the in- use to provide food to individuals eligible for tion you were in before the loss, the payment is come averaging rules that apply to an individual help under the program. not includible in your income. engaged in a farming or fishing business, quali- fied settlement income is treated as attributable Foreign currency transactions. If you have a Exxon Valdez settlement income. Include in to a fishing business for the tax year in which it gain on a personal foreign currency transaction your income on Form 1040, line 21, or Form is received. See Schedule J (Form 1040), In- because of changes in exchange rates, you do 1040NR, line 21, any qualified settlement in- come Averaging for Farmers and Fishermen, not have to include that gain in your income un- come you receive as a qualified taxpayer. See and its instructions for more information. less it is more than $200. If the gain is more Statement, later. Qualified settlement income is than $200, report it as a capital gain. any interest and punitive damage awards that Fees for services. Include all fees for your are: services in your income. Examples of these Foster care providers. Generally, payment Otherwise includible in taxable income, fees are amounts you receive for services you you receive from a state, political subdivision, or and perform as: a qualified foster care placement agency for Received in connection with the civil action A corporate director, caring for a qualified foster individual in your In re Exxon Valdez, No. 89-095-CV (HRH) An executor, administrator, or personal home is excluded from your income. However, (Consolidated) (D. Alaska). representative of an estate, you must include in your income payment to the You are a qualified taxpayer if you were a A manager of a trade or business you op- extent it is received for the care of more than 5 plaintiff in the civil action mentioned earlier or erated before declaring Chapter 11 bank- qualified foster individuals age 19 years or you were a beneficiary of the estate of your ruptcy, older. spouse or a close relative who was such a A notary public, or A qualified foster individual is a person who: plaintiff and from whom you acquired the right An election precinct official. to receive qualified settlement income. 1. Is living in a foster family home, and The income can be received as a lump sum If you are not an employee and the 2. Was placed there by: or as periodic payments. You will receive a TIP fees for your services from a single a. An agency of a state or one of its polit- Form 1099-MISC showing the gross amount of payer in the course of the payer's ical subdivisions, or the settlement income paid to you in the tax trade or business total $600 or more for the year. year, the payer should send you Form b. A qualified foster care placement 1099-MISC. agency. Contributions to eligible retirement plan. If you are a qualified taxpayer, you can contrib- Corporate director. Corporate director Difficulty-of-care payments. These are ute all or part of your qualified settlement in- fees are self-employment income. Report these payments that are designated by the payer as come, up to $100,000, to an eligible retirement payments on Schedule C or Schedule C-EZ compensation for providing the additional care plan, including an IRA. Contributions to eligible (Form 1040). that is required for physically, mentally, or emo- retirement plans, other than a Roth IRA or a tionally handicapped qualified foster individuals. designated Roth contribution, reduce the quali- Personal representatives. All personal A state must determine that the additional com- fied settlement income that you must include in representatives must include in their gross in- pensation is needed, and the care for which the income. See Statement, later. For more infor- come fees paid to them from an estate. If you payments are made must be provided in the mation on these contributions, see Publications are not in the trade or business of being an ex- foster care provider's home in which the quali- 560, 575, and 590-A. ecutor (for instance, you are the executor of a fied foster individual was placed.

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Certain Medicaid waiver payments are installments. If you sell future lottery payments More information. For the most recent treated as difficulty-of-care payments when re- for a lump sum, you must report the amount you guidance, go to IRS.gov and enter “Gulf Oil ceived by an individual care provider for caring receive from the sale as ordinary income (Form Spill” in the search box. for an eligible individual (whether related or un- 1040, line 21) in the year you receive it. related) living in the provider's home. See No- Historic preservation grants. Do not include Form W-2G. You may have received a tice 2014-7 available at www.irs.gov/irb/ in your income any payment you receive under Form W-2G, Certain Gambling Winnings, show- 2014–4_IRB/ar06.html and related questions the National Historic Preservation Act to pre- ing the amount of your gambling winnings and and answers available at www.irs.gov/ serve a historically significant property. any tax taken out of them. Include the amount Individuals/Certain-Medicaid-Waiver- from box 1 on Form 1040, line 21. Include the Payments-May-Be-Excludable-From-Income Hobby losses. Losses from a hobby are not amount shown in box 4 on Form 1040, line 64, for more information. deductible from other income. A hobby is an ac- as federal income tax withheld. You must include in your income diffi- tivity from which you do not expect to make a culty-of-care payments to the extent they are re- profit. See Activity not for profit, earlier, under Gifts and inheritances. In most cases, prop- ceived for more than: Other Income. erty you receive as a gift, bequest, or inheri- 10 qualified foster individuals under age tance is not included in your income. However, If you collect stamps, coins, or other 19, or if property you receive this way later produces items as a hobby for recreation and 5 qualified foster individuals age 19 or ! income such as interest, dividends, or rents, CAUTION pleasure, and you sell any of the older. that income is taxable to you. If property is items, your gain is taxable as a capital gain. Maintaining space in home. If you are given to a trust and the income from it is paid, However, if you sell items from your collection paid to maintain space in your home for emer- credited, or distributed to you, that income is at a loss, you cannot deduct the loss. gency foster care, you must include the pay- also taxable to you. If the gift, bequest, or inheri- ment in your income. tance is the income from the property, that in- Holocaust victims restitution. Restitution come is taxable to you. payments you receive as a Holocaust victim (or Reporting taxable payments. If you re- the heir of a Holocaust victim) and interest ceive payments that you must include in your Inherited pension or IRA. If you inherited earned on the payments are not taxable. Ex- income and you are in business as a foster-care a pension or an individual retirement arrange- cludable interest is earned by escrow accounts provider, report the payments on Schedule C or ment (IRA), you may have to include part of the or settlement funds established for holding Schedule C-EZ (Form 1040). See Pub. 587, inherited amount in your income. See Survivors funds prior to the settlement. You also do not in- Business Use of Your Home, to help you deter- and Beneficiaries in Pub. 575, if you inherited a clude the restitution payments and interest the mine the amount you can deduct for the use of pension. See What If You Inherit an IRA? in funds earned prior to disbursement in any com- your home. Publications 590-A and 590-B, if you inherited an IRA. putations in which you ordinarily would add ex- cludable income to your adjusted gross income, Found property. If you find and keep property Expected inheritance. If you sell an inter- such as the computation to determine the taxa- that does not belong to you that has been lost est in an expected inheritance from a living per- ble part of social security benefits. If the pay- or abandoned (treasure trove), it is taxable to son, include the entire amount you receive in ments are made in property, your basis in the you at its fair market value in the first year it is gross income on Form 1040, line 21. property is its fair market value when you re- your undisputed possession. ceive it. Bequest for services. If you receive cash Free tour. If you received a free tour from a or other property as a bequest for services you Excludable restitution payments are pay- travel agency for organizing a group of tourists, performed while the decedent was alive, the ments or distributions made by any country or you must include its value in your income. Re- value is taxable compensation. any other entity because of persecution of an port the fair market value of the tour on Form individual on the basis of race, religion, physical or mental disability, or sexual orientation by 1040, line 21, if you are not in the trade or busi- Gulf oil spill. If you received payments for lost Nazi Germany, any other Axis regime, or any ness of organizing tours. You cannot deduct wages or income, property damage, or physical other Nazi-controlled or Nazi-allied country, your expenses in serving as the voluntary injury due to the Gulf oil spill, the payment may whether the payments are made under a law or leader of the group at the group's request. If you be taxable. as a result of a legal action. They include com- organize tours as a trade or business, report the Lost wages or income. Payments you re- pensation or reparation for property losses re- tour's value on Schedule C or Schedule C-EZ ceived for lost wages, lost business income, or sulting from Nazi persecution, including pro- (Form 1040). lost profits are taxable. ceeds under insurance policies issued before and during World War II by European insurance Gambling winnings. You must include your Property damage. Payments you received companies. gambling winnings in your income on Form for property damage are not taxable if the pay- 1040, line 21. If you itemize your deductions on ments are not more than your adjusted basis in Illegal activities. Income from illegal activities, Schedule A (Form 1040), you can deduct gam- the property. If the payments are more than such as money from dealing illegal drugs, must bling losses you had during the year, but only your adjusted basis, you will realize a gain. If be included in your income on Form 1040, up to the amount of your winnings. If you are in the damage was due to an involuntary conver- line 21, or on Schedule C or Schedule C-EZ the trade or business of gambling, use Sched- sion, you may defer the tax on the gain if you (Form 1040) if from your self-employment activ- ule C. purchase qualified replacement property. See ity. Pub. 544. Lotteries and raffles. Winnings from lot- If the payments (including insurance pro- Indian fishing rights. If you are a member of a teries and raffles are gambling winnings. In ad- ceeds) you received, or expect to receive, are qualified Indian tribe that has fishing rights se- dition to cash winnings, you must include in less than your adjusted basis, you may be able cured by treaty, executive order, or an Act of your income the fair market value of bonds, to claim a casualty deduction. See Pub. 547. cars, houses, and other noncash prizes. How- Congress as of March 17, 1988, do not include ever, the difference between the fair market Physical injury. Payments you received in your income amounts you receive from activi- value and the cost of an oil and gas lease ob- for personal physical injuries or physical sick- ties related to those fishing rights. The income tained from the government through a lottery is ness are not taxable. This includes payments is not subject to income tax, self-employment not includible in income. for emotional distress that is attributable to per- tax, or employment taxes. sonal physical injuries or physical sickness. Installment payments. Generally, if you Payments for emotional distress that is not at- Indian money account litigation settlement. win a state lottery prize payable in installments, tributable to personal physical injuries or physi- Amounts received by an individual Indian as a you must include in your gross income the an- cal sickness are taxable. lump sum or periodic payment pursuant to the nual payments and any amounts you receive Class Action Settlement Agreement dated De- designated as interest on the unpaid cember 7, 2009, are not included in gross

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income. This amount will not be used to figure “Jury Pay” and the amount on the dotted line Pulitzer, Nobel, and similar prizes. If you adjusted gross income (AGI) or modified AGI in next to line 36. were awarded a prize in recognition of accom- applying any Internal Revenue Code provision plishments in religious, charitable, scientific, ar- that takes into account excludable income. Kickbacks. You must include kickbacks, side tistic, educational, literary, or civic fields, you commissions, push money, or similar payments generally must include the value of the prize in Interest on frozen deposits. In general, you you receive in your income on Form 1040, your income. However, you do not include this exclude from your income the amount of inter- line 21, or on Schedule C or Schedule C-EZ prize in your income if you meet all of the follow- est earned on a frozen deposit. A deposit is fro- (Form 1040) if from your self-employment activ- ing requirements. zen if, at the end of the calendar year, you can- ity. 1. You were selected without any action on not withdraw any part of the deposit because: your part to enter the contest or proceed- The financial institution is bankrupt or in- Example. You sell cars and help arrange ing. solvent, or car insurance for buyers. Insurance brokers pay The state where the institution is located back part of their commissions to you for refer- 2. You are not required to perform substan- has placed limits on withdrawals because ring customers to them. You must include the tial future services as a condition for re- other financial institutions in the state are kickbacks in your income. ceiving the prize or award. bankrupt or insolvent. Manufacturer incentive payments. You must 3. The prize or award is transferred by the Excludable amount. The amount of inter- include as other income on Form 1040, line 21 payer directly to a governmental unit or est you exclude from income for the year is the (or Schedule C or Schedule C-EZ (Form 1040) tax-exempt charitable organization as des- interest that was credited on the frozen deposit if you are self-employed) incentive payments ignated by you. The following conditions for that tax year minus the sum of: from a manufacturer that you receive as a apply to the transfer. 1. The net amount withdrawn from the de- salesperson. This is true whether you receive a. You cannot use the prize or award be- the payment directly from the manufacturer or posit during that year, and fore it is transferred. through your employer. 2. The amount that could have been with- b. You should provide the designation drawn at the end of that tax year (not re- Example. You sell cars for an automobile before the prize or award is presented duced by any penalty for premature with- dealership and receive incentive payments from to prevent a disqualifying use. The drawals of a time deposit). the automobile manufacturer every time you sell designation should contain: a particular model of car. You report the incen- i. The purpose of the designation The excluded part of the interest is included in tive payments on Form 1040, line 21. your income in the tax year it becomes with- by making a reference to section drawable. 74(b)(3) of the Internal Revenue Medical savings accounts (Archer MSAs Code, and Medicare Advantage MSAs). In most ca- Interest on qualified savings bonds. You ses, you do not include in income amounts you ii. A description of the prize or may be able to exclude from income the interest withdraw from your Archer MSA or Medicare award, from qualified U.S. savings bonds you redeem if Advantage MSA if you use the money to pay for iii. The name and address of the or- you pay qualified higher educational expenses qualified medical expenses. Generally, qualified in the same year. Qualified higher educational ganization to receive the prize or medical expenses are those you can deduct on award, expenses are those you pay for tuition and re- Schedule A (Form 1040). For more information quired fees at an eligible educational institution about Archer MSAs or Medicare Advantage iv. Your name, address, and tax- for you, your spouse, or your dependent. A MSAs, see Pub. 969. payer identification number, and qualified U.S. savings bond is a series EE bond v. Your signature and the date issued after 1989 or a series I bond. The bond Moving expense reimbursements. You gen- signed. must have been issued to you when you were erally should not report these benefits on your 24 years of age or older. For more information return. See Pub. 521 for more information. c. In the case of an unexpected presen- on this exclusion, see Education Savings Bond tation, you must return the prize or Program in chapter 1 of Pub. 550 and in chap- Prizes and awards. If you win a prize in a award before using it (or spending, ter 10 of Pub. 970. lucky number drawing, television or radio quiz depositing, investing it, etc., in the program, beauty contest, or other event, you case of money) and then prepare the Interest on state and local government obli­ must include it in your income. For example, if statement as described in (b). gations. This interest is usually exempt from you win a $50 prize in a photography contest, d. After the transfer, you should receive federal tax. However, you must show the you must report this income on Form 1040, from the payer a written response amount of any tax-exempt interest on your fed- line 21. If you refuse to accept a prize, do not in- stating when and to whom the desig- eral income tax return. For more information, clude its value in your income. nated amounts were transferred. see State or Local Government Obligations in Prizes and awards in goods or services chapter 1 of Pub. 550. must be included in your income at their fair These rules do not apply to scholarship or market value. fellowship awards. See Scholarships and fel- Job interview expenses. If a prospective em- lowships, later. ployer asks you to appear for an interview and Employee awards or bonuses. Cash either pays you an allowance or reimburses you awards or bonuses given to you by your em- Qualified tuition program (QTP). A qualified for your transportation and other travel expen- ployer for good work or suggestions generally tuition program (also known as a 529 program) ses, the amount you receive is not taxable in must be included in your income as wages. is a program set up to allow you to either prepay most cases. You include in income only the However, certain noncash employee achieve- or contribute to an account established for pay- amount you receive that is more than your ac- ment awards can be excluded from income. ing a student's qualified higher education ex- tual expenses. See Bonuses and awards under Miscellaneous penses at an eligible educational institution. A Compensation, earlier. program can be established and maintained by Jury duty. Jury duty pay you receive must be Prize points. If you are a salesperson and a state, an agency or instrumentality of a state, included in your income on Form 1040, line 21. receive prize points redeemable for merchan- or an eligible educational institution. If you must give the pay to your employer be- dise, that are awarded by a distributor or manu- The part of a distribution representing the cause your employer continues to pay your sal- facturer to employees of dealers, you must in- amount paid or contributed to a QTP is not in- ary while you serve on the jury, you can deduct clude their fair market value in your income. The cluded in income. This is a return of the invest- the amount turned over to your employer as an prize points are taxable in the year they are paid ment in the program. adjustment to income. Enter the amount you re- or made available to you, rather than in the year In most cases, the beneficiary does not in- pay your employer on Form 1040, line 36. Enter you redeem them for merchandise. clude in income any earnings distributed from a

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QTP if the total distribution is less than or equal The Armed Forces Health Professions you are reimbursed for lost salary, you must in- to adjusted qualified higher education expen- Scholarship and Financial Assistance clude that reimbursement in your income. ses. See Pub. 970 for more information. Program. Utility rebates. If you are a customer of an For information about the rules that apply to Railroad retirement annuities. The following electric utility company and you participate in a tax-free qualified tuition reduction provided to types of payments are treated as pension or an- the utility's energy conservation program, you employees and their families by an educational nuity income and are taxable under the rules may receive on your monthly electric bill either: institution, see Pub. 970. explained in Pub. 575. A reduction in the purchase price of elec- Tier 1 railroad retirement benefits that are VA payments. Allowances paid by the De- tricity furnished to you (rate reduction), or more than the social security equivalent partment of Veterans Affairs are not included in A nonrefundable credit against the pur- benefit. your income. These allowances are not consid- chase price of the electricity. Tier 2 benefits. ered scholarship or fellowship grants. The amount of the rate reduction or nonrefund- Vested dual benefits. able credit is not included in your income. Prizes. Scholarship prizes won in a contest are not scholarships or fellowships if you do not Whistleblower's award. If you receive a whis- Rewards. If you receive a reward for providing have to use the prizes for educational purpo- tleblower's award from the Internal Revenue information, include it in your income. ses. You must include these amounts in your in- Service, you must include it in your income. Any come on Form 1040, line 21, whether or not you deduction allowed for attorney fees and court Sale of home. You may be able to exclude use the amounts for educational purposes. from income all or part of any gain from the sale costs paid by you, or on your behalf, in connec- tion with the award are deducted as an adjust- or exchange of your main home. See Pub. 523. Smallpox vaccine injuries. If you are an eligi- ment to income, but cannot be more than the ble individual who receives benefits under the Sale of personal items. If you sold an item amount included in income for the tax year. Smallpox Emergency Personnel Protection Act you owned for personal use, such as a car, re- of 2003 for a covered injury resulting from a frigerator, furniture, stereo, jewelry, or silver- covered countermeasure, you can exclude the ware, your gain is taxable as a capital gain. Re- payment from your income (to the extent it is Repayments port it as explained in the Instructions for not allowed as a medical and dental expense Schedule D (Form 1040). You cannot deduct a deduction on Schedule A (Form 1040)). Eligible If you had to repay an amount that you included loss. individuals include health care workers, emer- in your income in an earlier year, you may be However, if you sold an item you held for in- gency personnel, and first responders in a able to deduct the amount repaid from your in- vestment, such as gold or silver bullion, coins, smallpox emergency, who have received a come for the year in which you repaid it. Or, if or gems, any gain is taxable as a capital gain smallpox vaccination. the amount you repaid is more than $3,000, you and any loss is deductible as a capital loss. may be able to take a credit against your tax for the year in which you repaid it. In most cases, Example. You sold a painting on an online Stolen property. If you steal property, you you can claim a deduction or credit only if the auction website for $100. You bought the paint- must report its fair market value in your income repayment qualifies as an expense or loss in- ing for $20 at a garage sale years ago. Report in the year you steal it unless in the same year, curred in your trade or business or in a for-profit your $80 gain as a capital gain as explained in you return it to its rightful owner. transaction. the Instructions for Schedule D (Form 1040). Transporting school children. Do not in- Type of deduction. The type of deduction you Scholarships and fellowships. A candidate clude in your income a school board mileage al- are allowed in the year of repayment depends for a degree can exclude amounts received as lowance for taking children to and from school if on the type of income you included in the earlier a qualified scholarship or fellowship. A qualified you are not in the business of taking children to year. In most cases, you deduct the repayment scholarship or fellowship is any amount you re- school. You cannot deduct expenses for provid- on the same form or schedule on which you ceive that is for: ing this transportation. previously reported it as income. For example, Tuition and fees required to enroll at or at- if you reported it as self-employment income, tend an eligible educational institution, or Union benefits and dues. Amounts deducted deduct it as a business expense on Schedule C Course related expenses, such as fees, from your pay for union dues, assessments, or Schedule C-EZ (Form 1040) or Schedule F books, and equipment that are required for contributions, or other payments to a union can- (Form 1040). If you reported it as a capital gain, courses at the eligible educational institu- not be excluded from your income. deduct it as a capital loss as explained in the In- tion. These items must be required of all You may be able to deduct some of these structions for Schedule D (Form 1040). If you students in your course of instruction. payments as a miscellaneous deduction sub- reported it as wages, unemployment compen- ject to the 2%-of-AGI limit if they are related to Amounts used for room and board do not qual- sation, or other nonbusiness income, deduct it your job and if you itemize deductions on ify for the exclusion. See Pub. 970 for more in- as a miscellaneous itemized deduction on Schedule A (Form 1040). For more information, formation on qualified scholarships and fellow- Schedule A (Form 1040), and see the instruc- see Pub. 529, Miscellaneous Deductions. ship grants. tions there. If you repaid social security or equivalent Payment for services. Generally, you can- Strike and lockout benefits. Benefits paid railroad retirement benefits, see Pub. 915. not exclude from your gross income the part of to you by a union as strike or lockout benefits, any scholarship or fellowship that represents including both cash and the fair market value of Repayment of $3,000 or less. If the amount payment for teaching, research, or other serv- other property, usually are included in your in- you repaid was $3,000 or less, deduct it from ices required as a condition for receiving the come as compensation. You can exclude these your income in the year you repaid it. scholarship. This applies even if all candidates benefits from your income only when the facts for a degree must perform the services to re- clearly show that the union intended them as gifts to you. Repayment over $3,000. If the amount you ceive the degree. repaid was more than $3,000, you can deduct Exceptions. You do not have to include in Reimbursed union convention expen- the repayment (as explained earlier under Type income the part of any scholarship or fellowship ses. If you are a delegate of your local union of deduction.). However, you can choose in- that represents payment for teaching, research, chapter and you attend the annual convention stead to take a tax credit for the year of repay- or other services if you receive the amount un- of the international union, do not include in your ment if you included the income under a claim der: income amounts you receive from the interna- of right. This means that at the time you inclu- The National Health Services Corps Schol- tional union to reimburse you for expenses of ded the income, it appeared that you had an un- arship Program, or traveling away from home to attend the conven- restricted right to it. If you qualify for this choice, tion. You cannot deduct the reimbursed expen- ses, even if you are reimbursed in a later year. If

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figure your tax under both methods and com- curity, Medicare, or tier 1 RRTA taxes were 1-800-906-9887 to find the nearest Volun- pare the results. Use the method (deduction or paid, ask your employer to refund the excess teer Income Tax Assistance or Tax Coun- credit) that results in less tax. amount to you. If the employer refuses to refund seling for the Elderly (TCE) location for free the taxes, ask for a statement indicating the tax preparation. When determining whether the amount of the overcollection to support your Enter “TCE” in the search box, download amount you repaid was more or less ! claim. File a claim for refund using Form 843, the free IRS2Go app, or call CAUTION than $3,000, consider the total amount Claim for Refund and Request for Abatement. 1-888-227-7669 to find the nearest Tax being repaid on the return. Each instance of re- Counseling for the Elderly location for free payment is not considered separately. Repaid wages subject to Additional Medi­ tax preparation. care Tax. Employers cannot make an adjust- Method 1. Figure your tax for the year of The Volunteer Income Tax Assistance ment or file a claim for refund for Additional (VITA) program offers free tax help to people repayment claiming a deduction for the repaid Medicare Tax withholding when there is a re- amount. who generally make $54,000 or less, persons payment of wages received by an employee in with disabilities, the elderly, and limited-Eng- Method 2. Figure your tax for the year of a prior year because the employee determines lish-speaking taxpayers who need help prepar- repayment claiming a credit for the repaid liability for Additional Medicare Tax on the em- ing their own tax returns. The Tax Counseling amount. Follow these steps. ployee's income tax return for the prior year. If for the Elderly (TCE) program offers free tax you had to repay an amount that you included in help for all taxpayers, particularly those who are 1. Figure your tax for the year of repayment your wages or compensation in an earlier year, without deducting the repaid amount. 60 years of age and older. TCE volunteers spe- and on which Additional Medicare Tax was cialize in answering questions about pensions 2. Refigure your tax from the earlier year paid, you may be able to recover the Additional and retirement-related issues unique to seniors. without including in income the amount Medicare Tax paid on the amount. To recover you repaid in the year of repayment. Additional Medicare Tax on the repaid wages or Getting answers to your tax law compensation, you must file Form 1040X, questions. On IRS.gov get answers 3. Subtract the tax in (2) from the tax shown Amended U.S. Individual Income Tax Return, to your tax questions anytime, any- on your return for the earlier year. This is for the prior year in which the wages or com- where. the credit. pensation were originally received. See the In- Go to www.irs.gov/Help- &-Resources for a 4. Subtract the answer in (3) from the tax for structions for Form 1040X. variety of tools that will help you with your the year of repayment figured without the taxes. deduction (step 1). Repayment rules do not apply. This discus- Enter “ITA” in the search box on IRS.gov sion does not apply to: for the Interactive Tax Assistant, a tool that If method 1 results in less tax, deduct the Deductions for bad debts; will ask you questions on a number of tax amount repaid. If method 2 results in less tax, law topics and provide answers. You can Deductions for theft losses due to criminal claim the credit figured in (3) above on Form print the entire interview and the final re- fraud or embezzlement in a transaction en- 1040. (If the year of repayment is 2015, and you sponse. tered into for profit; are taking the credit, enter the credit on Form Enter “Pub 17” in the search box on Deductions from sales to customers, such 1040, line 73, and see the instructions there.) IRS.gov to get Pub. 17, Your Federal In- as returns and allowances, and similar come Tax for Individuals, which features items; or Example. For 2012 you filed a return and details on tax-saving opportunities, 2015 Deductions for legal and other expenses of reported your income on the cash method. In tax changes, and thousands of interactive contesting the repayment. 2013 you repaid $5,000 included in your 2012 links to help you find answers to your ques- income under a claim of right. Your filing status tions. Year of deduction (or credit). If you use the in 2013 and 2012 is single. Your income and tax Additionally, you may be able to access cash method, you can take the deduction (or for both years are as follows: tax law information in your electronic filing credit, if applicable) for the tax year in which software. 2012 you actually make the repayment. If you use With Income Without Income any other accounting method, you can deduct Taxable the repayment or claim a credit for it only for the Tax forms and publications. You can down- Income $15,000 $10,000 tax year in which it is a proper deduction under load or print all of the forms and publications your accounting method. For example, if you you may need on www.irs.gov/formspubs. Oth- Tax $ 1,819 $ 1,069 use an accrual method, you are entitled to the erwise, you can go to www.irs.gov/orderforms 2013 deduction or credit in the tax year in which the to place an order and have forms mailed to you. You should receive your order within 10 busi- Without Deduction With Deduction obligation for the repayment accrues. ness days. Taxable Income $49,950 $44,950 How To Get Tax Help Direct deposit. The fastest way to receive a Tax $ 8,416 $ 7,166 tax refund is by combining direct deposit and IRS e-file. Direct deposit securely and electroni- If you have questions about a tax issue, need Your tax under method 1 is $7,166. Your tax cally transfers your refund directly into your fi- help preparing your tax return, or want to down- under method 2 is $7,666, figured as follows: nancial account. Eight in 10 taxpayers use di- load free publications, forms, or instructions, go rect deposit to receive their refund. The majority to IRS.gov and find resources that can help you Tax previously determined for 2012 ...... $1,819 of refunds are received within 21 days or less. Less: Tax as refigured ...... − 1,069 right away. Decrease in 2012 tax $ 750 Getting a transcript or copy of a return. Preparing and filing your tax return. Find Go to IRS.gov and click on “Get Transcript Regular tax liability for 2013 ...... $8,416 free options to prepare and file your return on of Your Tax Records” under “Tools.” Less: Decrease in 2012 tax ...... − 750 IRS.gov or in your local community if you qual- Call the transcript toll-free line at Refigured tax for 2013 $7,666 ify. 1-800-908-9946. Go to IRS.gov and click on the Filing tab to Mail Form 4506-T or Form 4506T-EZ (both You pay less tax using method 1, so you should see your options. available on IRS.gov). take a deduction for the repayment in 2013. Enter “Free File” in the search box to see whether you can use brand-name software Repaid wages subject to social security to prepare and e-file your federal tax return and Medicare taxes. If you had to repay an for free. amount that you included in your wages or com- Enter “VITA” in the search box, download pensation in an earlier year on which social se- the free IRS2Go app, or call

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Using online tools to help prepare your re­ What if I can’t pay now? Click on the “Pay Revenue Service that helps taxpayers and pro- turn. Go to IRS.gov and click on the Tools bar Your Tax Bill” icon on IRS.gov for more informa- tects taxpayer rights. Our job is to ensure that to use these and other self-service options. tion about these additional options. every taxpayer is treated fairly and that you The Earned Income Tax Credit Assistant Apply for an online payment agreement to know and understand your rights under the determines if you are eligible for the EIC. meet your tax obligation in monthly install- Taxpayer Bill of Rights. The Online EIN Application helps you get ments if you cannot pay your taxes in full an employer identification number. today. Once you complete the online proc- What Can the Taxpayer Advocate The IRS Withholding Calculator estimates ess, you will receive immediate notification Service Do For You? the amount you should have withheld from of whether your agreement has been ap- your paycheck for federal income tax pur- proved. We can help you resolve problems that you poses. An offer in compromise allows you to settle can’t resolve with the IRS. And our service is The Electronic Filing PIN Request helps to your tax debt for less than the full amount free. If you qualify for our assistance, you will be verify your identity when you do not have you owe. Use the Offer in Compromise assigned to one advocate who will work with your prior year AGI or prior year self-selec- Pre-Qualifier to confirm your eligibility. you throughout the process and will do every- ted PIN available. thing possible to resolve your issue. TAS can The First Time Homebuyer Credit Account Checking the status of an amended return. help you if: Look-up tool provides information on your Go to IRS.gov and click on the Tools tab and Your problem is causing financial difficulty repayments and account balance. then Where’s My Amended Return? for you, your family, or your business, You face (or your business is facing) an For help with the alternative minimum tax, Understanding an IRS notice or letter. Enter go to IRS.gov/AMT. immediate threat of adverse action, or “Understanding your notice” in the search box You’ve tried repeatedly to contact the IRS on IRS.gov to find additional information about Understanding identity theft issues. but no one has responded, or the IRS your IRS notice or letter. Go to www.irs.gov/uac/Identity-Protection hasn’t responded by the date promised. for information and videos. Visiting the IRS. Locate the nearest Taxpayer If your SSN has been lost or stolen or you Assistance Center using the Office Locator tool How Can You Reach Us? suspect you are a victim of tax-related on IRS.gov. Enter “office locator” in the search identity theft, visit www.irs.gov/identitytheft box. Or choose the “Contact Us” option on the We have offices in every state, the District of to learn what steps you should take. IRS2Go app and search Local Offices. Before Columbia, and Puerto Rico. Your local advo- you visit, use the Locator tool to check hours cate’s number is in your local directory and at Checking on the status of a refund. and services available. www.taxpayeradvocate.irs.gov. You can also Go to www.irs.gov/refunds. call us at 1-877-777-4778. Download the free IRS2Go app to your Watching IRS videos. The IRS Video portal smart phone and use it to check your re- www.irsvideos.gov contains video and audio How Can You Learn About Your fund status. presentations for individuals, small businesses, Taxpayer Rights? Call the automated refund hotline at and tax professionals. You’ll find video clips of 1-800-829-1954. tax topics, archived versions of panel discus- The Taxpayer Bill of Rights describes ten basic sions and Webinars, and audio archives of tax rights that all taxpayers have when dealing with Making a tax payment. The IRS uses the lat- practitioner phone forums. the IRS. Our Tax Toolkit at est encryption technology so electronic pay- www.taxpayeradvocate.irs.gov can help you ments are safe and secure. You can make elec- Getting tax information in other languages. understand what these rights mean to you and tronic payments online, by phone, or from a For taxpayers whose native language is not how they apply. These are your rights. Know mobile device. Paying electronically is quick, English, we have the following resources availa- them. Use them. easy, and faster than mailing in a check or ble. money order. Go to www.irs.gov/payments to 1. Taxpayers can find information on IRS.gov How Else Does the Taxpayer make a payment using any of the following op- in the following languages. tions. Advocate Service Help Taxpayers? IRS Direct Pay (for individual taxpayers a. Spanish. TAS works to resolve large-scale problems that who have a checking or savings account). b. Chinese. affect many taxpayers. If you know of one of Debit or credit card (approved payment these broad issues, please report it to us at processors online or by phone). c. Vietnamese. www.irs.gov/sams. Electronic Funds Withdrawal (available d. Korean. during e-file). Electronic Federal Tax Payment Sys­ e. Russian. Low Income Taxpayer tem (best option for businesses; enroll- 2. The IRS Taxpayer Assistance Centers Clinics ment required). provide over-the-phone interpreter service Check or money order. in over 170 languages, and the service is Low Income Taxpayer Clinics (LITCs) serve in- IRS2Go provides access to mobile-friendly available free to taxpayers. dividuals whose income is below a certain level payment options like IRS Direct Pay, offer- and need to resolve tax problems such as au- ing you a free, secure way to pay directly dits, appeals, and tax collection disputes. Some from your bank account. You can also The Taxpayer Advocate clinics can provide information about taxpayer make debit or credit card payments Service Is Here To Help You rights and responsibilities in different languages through an approved payment processor. What is the Taxpayer Advocate for individuals who speak English as a second Simply download IRS2Go from Google Service? language. To find a clinic near you, visit Play, the Apple App Store, or the Amazon www.irs.gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List. Appstore, and make your payments any- The Taxpayer Advocate Service (TAS) is an in- time, anywhere. dependent organization within the Internal

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.

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Compensation: Dividends: 1231 property sale 17 B Employee 3 Restricted stock 14 401(k) plans 9 Babysitting 3 Miscellaneous 3 Divorced taxpayers: Excess contributions 11 Back pay, award for 3 Unemployment 27 Stock options exercised incident 403(b) plans 9 Backup withholding: Workers' 19 to divorce 12 Limit for 9 Barter exchange Compensatory damages 19, 30 Down payment assistance 30 457 plans 9 transactions 20 Constructive receipt of income 2 Limit for deferrals under 10 Bankruptcy 3 Copyrights: 501(c)(18)(D) plans 9 Canceled debt not deemed to be Infringement damages 30 E Contributions 10 income 21 Royalties 16 Educational assistance: 501(c)(3) organizations 21 Barter income 20 Corporate directors 31 Employer-provided 5 529 program 33 Below­market loans 29 Cost­of­living allowances 3 Scholarships and fellowships 34 83(b) election 14 Bequest for services 32 Court awards 30 Educational institutions: Bicycle 8 (See also Damages from lawsuits) Faculty lodging 7 Fringe benefit 8 Credit card Insurance 30 Elderly persons: A Bitcoin 2, 4 Credits: Nutrition Program for the Academic health centers: Black lung benefit payments 19 Recoveries, refiguring of unused Elderly 29 Meals and lodging when Bonuses 3, 33 credits 25 Tax Counseling for the teaching and research Breach of contract: Currency transactions, Elderly 16 organization 7 Damages as income 30 foreign 31 Election precinct officials 31 Accelerated death benefits 22 Bribes 29 Elective deferrals 9 Accidental death benefits 6 Business expenses: Catch-up contributions 9, 10 Accident insurance 5 Reimbursements 3 D Excess annual additions 11 Accrual method taxpayers 2 Business income 16, 17 Damages from lawsuits 30 Excess contributions 11 Accrued leave payment: Back pay awards 3 Excess deferrals 10 At time of retirement or Breach of contract 30 Increased limit for last 3 years resignation 4 C Compensatory damages 19, 30 prior to retirement age 10 Disability retirement 18 Cafeteria plans 17 Emotional distress under Title Limit on 9 Activity not for profit 29 Campaign contributions 29 VII, Civil Rights Act of Reporting by employer 10 Additional Medicare Tax 2 Campus lodging 8 1964 30 Emergency Homeowners' Loan Adoption: Cancellation of debt 20 Punitive damages 30 Program 28 Employer assistance 5 Cancellation of sales Daycare providers 3 Emotional distress damages 30 Advance commissions 3 contracts 29 (See also Childcare providers) Employee achievement Aircraft 9 Capital gains: Food program payments to 31 awards 3 Airlines: Recoveries 24, 25 Death benefits 21 Employee awards or bonuses 33 No-additional-cost services 8 Capital gains or losses: (See also Life insurance) Employee compensation 3–14 Valuation of flights on Employee stock option plans Accelerated 22 Fringe benefits 4–9 employer-provided aircraft 9 (ESOPs) 13 Debts: Restricted property 13, 14 Alaska Permanent Fund Incentive stock options Canceled 20 Retirement plan contributions 9 dividend 29 (ISOs) 13 Excluded debt 21 Stock options 11–13 Aliens: Sale of personal property 34 Nonrecourse debts 20 Employee discounts 5 Nonresident 24 Car (See Vehicle, Recourse 20 Employee stock purchase Alien status, waiver of 15 employer-provided) Stockholder's 20 plans 12, 13 Alimony 29 Car pools 30 Deduction: Employer, foreign 15 Alternative minimum tax (AMT): Cash or deferred arrangements Costs of discrimination suits 30 Employer­owned life Recoveries, refiguring of 25 (CODAs) 9 Deferred compensation: insurance 22 Stock options 12 Cash rebates 30 Nonqualified plans 4 Employer­provided: Annuities: Casualty insurance: De minimis benefits 5, 7 Educational assistance 5 Charitable gift 30 Reimbursements from 30 Dependent care benefits 5 Vehicles 9 Railroad retirement 34 Catch­up contributions 9, 10 Depletion allowance 16 Employment: Tax-sheltered 9 Charitable gift annuities 30 Differential wage payments 3 Abroad 15 Archer MSAs 5, 33 Child and Adult Care Food Armed forces 15 Agency fees 30 Armed forces 15 Program: Directors' fees 31 Contracts: Combat zone bonus 16 Payments to daycare Disability: Severance pay for Disability 16 providers 31 Military 16 cancellation of 4 Disability pensions 18 Childcare providers 3, 31 Pensions 17 Endowment proceeds 22 Health professions Child support payments 30 Workers' compensation 19 Energy: scholarship 8 Chronic illness 19 Person with 28 Assistance 29 Military action as cause of Accelerated death benefits paid Unemployment compensation, Conservation: disability injuries 18 to 22 paid as substitute for 27 Subsidies 30 Qualified reservist Citizens outside U.S.: Disaster relief: Utility rebates 34 distribution 16 Exclusion of foreign income 2 Disaster mitigation payments 28 Estate income 30 Rehabilitative program Civil Rights Act of 1964, Title VII: Disaster Relief and Emergency Estimated tax: payments 16 Back pay and damages for Assistance Act: Unemployment Retirement pay 15 emotional distress under 30 Grants 28 compensation 27 Veterans benefits 16 Clergy 14 Unemployment benefits 27 Excess: Assistance (See Tax help) Coal 17 Mitigation payments 2 Annual additions 11 Athletic facilities, Colleges and universities: Payments 28 Contributions 11 employer­provided 5 Faculty lodging 7 Discounts: Deferrals 10 Automobile (See Vehicle, Scholarships and fellowships 34 Employee discounts 5 Expected inheritance 32 employer-provided) Commissions: Employee stock purchase Expenses paid by another 31 Awards (See Damages from Advance 3 plans 13 Exxon Valdez settlement 31 lawsuits) Commuter highway vehicles 8 Mortgage loan for early Eligible retirement plan 31 payment 20 Income averaging 31

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Legal expenses 31 Form 1040: Form 8919: Government Reporting Excess contributions to elective Uncollected social security and employees (See Federal requirement-statement 31 deferrals 11 Medicare tax on wages 3 employees; State employees) Recoveries 24 Form RRB­1099: Grantor trusts 31 Unemployment Railroad retirement board Group­term life insurance: F compensation 27 payments 29 Worksheets 6, 7 Faculty lodging 7 Wages from Form W-2 3 Form SSA­1099: Gulf oil spill 2, 32 Fair market value (FMV) 9 Form 1040A: Social security benefit Stock options 11 Recoveries 24 statement 29 Farming: Unemployment Form W­2: H Qualified farm debt, cancellation compensation 27 501(c)(18)(D) contributions 10 HAMP: of 21 Wages from Form W-2 3 Accrued leave payment at time Home affordable modification Federal employees: Form 1040EZ: of retirement or resignation 4 program: Accrued leave payment 4 Recoveries 24 Back pay awards 3 Pay-for-performance success Compensation Act (FECA) Unemployment Bonuses or awards 3 payments 28 payments 19 compensation 27 Elective deferrals, reporting by Hardest Hit Fund Program 28 Cost-of-living allowances 3 Wages from Form W-2 3 employer 10 Health: Disability pensions 18 Form 1040 or 1040A, Schedule B: Failure to receive from Flexible spending Thrift Savings Plan for 9 Restricted stock dividends 14 employer 3 arrangement 5 Federal income tax: Form 1041, Schedule K­1: Fringe benefits reported on 5 Insurance 5 Refunds 23 Beneficiary's share of income, Stock options from Reimbursement arrangement 5 Fees for services 31 deductions, credits, etc. 30 employers 12 Savings account 5 Financial counseling fees 6 Form 1041: Wage and tax statement 3 Highly compensated employees: Fellowships 34 Estates and trusts 30 Form W­2G: Excess contributions to elective FICA withholding: Form 1065, Schedule K­1: Gambling winnings 32 deferrals 11 Foreign employers, U.S. citizens Partner's share of income 17 Form W­4V: Historic preservation grants 32 working for in U.S. 15 Form 1065: Unemployment compensation, Hobby losses 32 Paid by employer 4 Partnership return 17 voluntary withholding Holding period requirement 12 Fiduciaries: Form 1098: request 27 Holiday gifts 5 Fees for services 31 Mortgage interest statement 23 Form W­9: Holocaust victims restitution 32 Financial counseling fees 6 Form 1099­B: Request for taxpayer Home, sale of 34 (See also Retirement planning Barter exchange identification number 20 Host or hostess 21 services) transactions 20 Foster care 31 Hotels: Fitness programs: Form 1099­C: Foster Grandparent Program 16 No-additional-cost services 8 Employer-provided 5 Cancellation of debt 20 Found property 32 Housing (See Lodging) Flights: Form 1099­DIV: Fringe benefits 4–9 Employer-provided aircraft 9 Restricted stock dividends 14 Accident and health insurance 5 No-additional-cost services 8 Form 1099­G: Adoption, employer I Food benefits: State tax refunds 23 assistance 5 Identity theft 36 Daycare providers, food program Unemployment Athletic facilities 5 Illegal activities 32 payments to 31 compensation 27 Commuter highway vehicles 8 Incentive stock options Nutrition Program for the Form 1099­MISC: De minimis benefits 5, 7 (ISOs) 12, 13 Elderly 29 Services totaling $600 or Dependent care benefits 5 Income: Foreign: more 31 Educational assistance 5 Assigned 2 Currency transactions 31 Stock options exercised incident Employee discounts 5 Business and investment 16, 17 Employment 15 to divorce 12 Faculty lodging 7 Constructive receipt of 2 Governments, employees of 15 Form 1099­R: Financial counseling fees 6 Estate and trust 30 Income 2 Charitable gift annuities 30 Holiday gifts 5 Foreign employers 15 Service 18 Excess annual additions 11 Meals and lodging 7 Illegal 32 Form 1040, Schedule A: Excess deferral amounts 10 Moving expenses (See Moving Miscellaneous 20 Outplacement services, Surrender of life insurance policy expenses) Other 29 deduction for 4 for cash 22 No-additional-cost services 8 Partnership 17 Repayment of commissions paid Form 1120­POL: Parking 8 Prepaid 2 in advance 3 Political organizations 29 Retirement S corporation 17 Form 1040, Schedule C: Form 1120S, Schedule K­1: planning (See Retirement Indian fishing rights 32 Bartering 20 Shareholder's share of income, planning services) Indian money account 32 Childcare providers to use 3 credits, deductions, etc. 17 Transit pass 8 Individual retirement Personal property rental, Form 1120S: Tuition reduction 8 arrangements (IRAs): reporting income from 16 S corporation return 17 Valuation of 8, 9 Deduction 29 Royalties 16 Form 2441: Vehicle 9 Inherited IRA 32 Form 1040, Schedule C­EZ: Child and dependent care Working condition benefits 8 Inheritance 32 Bartering 20 expenses 5 Frozen deposits: IRA 32 Childcare Providers to use 3 Form 4255: Interest on 33 Property not substantially Personal property rental, Recapture of investment vested 14 reporting income from 16 credit 27 Injury benefits 17–20 Royalties 16 Form 6251: G Insurance: Form 1040, Schedule D: Alternative minimum tax 12 Gambling winnings and Credit card 30 Stock options 12 Form 8839: losses 32 Health 5 Stock options reported on 12 Adoption assistance 5 Gas: Life (See Life insurance) Form 1040, Schedule E: Form 8853: Royalties from 16 Long-term care (See Long-term Partner's return 17 Accelerated death benefits 22 Gifts 32 care insurance) Royalties 16 Archer MSAs and long-term care Holiday gifts from employer 5 Interest: insurance contracts 5 Canceled debt including 20 Frozen deposits 33

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Mortgage refunds 23 Refunds: Option on insurance 22 M P Federal income tax 23 Recovery amounts 23 Manufacturer incentive Parking fees: Mortgage interest 23 Savings bond 33 payments 33 Employer-paid or reimbursed 8 State tax 23 State and local government Meals: Partner and partnership Rehabilitative program obligations 33 Employer-paid or reimbursed 7 income 17 payments 16 Interference with business Nutrition Program for the Patents: Reimbursements: operations: Elderly 29 Infringement damages 30 Business expenses 3 Damages as income 30 Medicaid waiver payments 2, 31 Royalties 16 Casualty losses 30 International organizations, Medical: Peace Corps 16 Meals and lodging 7 employees of 15 Care reimbursements 19 Pensions: Medical expenses 19 Interview expenses 33 Savings accounts 33 Clergy 15 Moving expenses 3, 33 Investment counseling fees 6 Medicare: Disability pensions 17 Related party transactions: (See also Retirement planning Advantage MSAs 33 Inherited pensions 32 Stock option transfer 12 services) Benefits 29 Military 15 Religious order members 15 Investment income 16, 17 Tax paid by employer 4 Personal property: Rental income and expenses: IRAs (See Individual retirement Medicare tax (See Social security Rental income and expense 16 Personal property rental 16 arrangements (IRAs)) and Medicare taxes) Sale of 34 Reporting of 16 Iron ore 17 Military (See Armed forces) Personal Repayments 34, 35 Itemized deductions: Minerals: representatives (See Fiduciarie Repossession 30 Limited 25 Royalties from 16 s) Restricted property 13, 14 Recoveries 23 Miscellaneous: Prepaid income 2 Retired Senior Volunteer Compensation 3 Price reduced after purchase 21 Program (RSVP) 16 Income 20 Prizes and awards 3, 33 Retirement: J Missing children, photographs Achievement awards 3 Settlement 2 Job interview expenses 33 of 2 Employee awards or Retirement planning services 6, Joint returns: Mortgage: bonuses 33 8 Social security benefits or Assistance payment (under sec. Length-of-service awards 3 Retirement plans 15 railroad retirement 235 of National Housing Pulitzer, Nobel, and similar (See also Pensions) payments 29 Act) 28 prizes 33 Automatic contribution Joint state/local tax return: Discounted loan 20 Safety achievement 3 arrangements 9 Recoveries 23 Interest refund 23 Scholarship prizes 34 Contributions 9, 11, 12 Jury duty pay 33 Qualified principal residence Profit­sharing plan 18 Elective deferrals (See Elective indebtedness 21 Public assistance benefits 28 deferrals) Relief 20 Publications (See Tax help) Rewards 34 K Motor vehicle, Public Health Service 18 Roth contributions 10 Kickbacks 33 employer­provided 9 Public safety officers killed in Royalties 16 Moving expenses: line of duty 27 Reimbursements 3, 33 Public transportation passes, L MSAs (Medical savings employer­provided 8 S Labor unions: accounts) 33 Pulitzer prize 33 Safety achievement awards 3 Convention expenses, Punitive damages 30 Salary reduction simplified reimbursed 34 employee pension Dues 34 N plans (See SARSEPs) Strike and lockout benefits 34 National Health Service Corps Q Sale of home 34 Unemployment benefits paid Scholarship Program 8 Qualified joint venture 2 Sales contracts: from 27 National Oceanic and Qualified tuition program Cancellation of 29 Last day of tax year, income Atmospheric (QTP) 33 SARSEPs 9 received on 2 Administration 18 Excess contributions 11 Leave (See Accrued leave National Senior Service Savings bonds 33 payment) Corps 16 R Savings incentive match plans Length­of­service awards 3 Net Investment Income Tax Raffles 32 for employees (See SIMPLE Life insurance: (NIIT) 2 Railroad: plans) Employer-owned 22 No­additional­cost services 8 Retirement annuities 34 Scholarships and fellowships 34 Proceeds 21 Nobel prize 33 Sick pay 19 S corporations 17 Surrender of policy for cash 22 No­fault car insurance: Unemployment compensation Self­employed persons: Loans 20 Disability benefits under 19 benefits 27 U.S. citizens working for foreign (See also Mortgage) Nonrecourse debt 20 Real estate: employers in U.S. treated Below-market 29 Nonstatutory stock options 11 Qualified real property business as 15 Student 21 Nontaxable income 2 debt, cancellation of 21 Senior Companion Program 16 Lockout benefits 34 Notary fees 31 Rebates: Service Corps of Retired Lodging: Notes received for services 4 Cash 30 Executives (SCORE) 16 Campus lodging 8 Not­for­profit activities 29 Utility 34 Severance pay 4 Clergy 15 Nutrition Program for the Recovery of amounts previously Outplacement services 4 Employer-paid or reimbursed 7 Elderly 29 deducted 23, 24 Sickness and injury benefits 17, Faculty lodging 7 Itemized deductions 23 20 Replacement housing Non-itemized deductions 25 Sick pay 4 payments 28 O Unused tax credits, refiguring SIMPLE plans 9 Long­term care insurance 5, 18 Oil: of 25 Limit for deferrals under 9 Lotteries and raffles 32 Royalties from 16 Worksheet of itemized Smallpox vaccine injuries 34 Lump­sum distributions: Options, stock 11, 13 deductions (Worksheet Social security and Medicare Survivor benefits 27 Outplacement services 4 2) 26 taxes: Overseas work 2 Foreign employers, U.S. citizens working for in U.S. 15

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Paid by employer 4 Survivor benefits 27 Travel and transportation Retroactive VA Standard deduction: expenses: determination 18 Recoveries 24 Free tours from travel Special statute of limitations. 18 State employees: T agencies 32 Viatical settlements 22 Unemployment benefits paid Tables and figures: Fringe benefits 8 Virtual Currency 2, 4 to 27 Group-term life insurance Reimbursements 3 Volunteers in Service to America State or local governments: (Table 1) 6 School children, transporting (VISTA) 16 Interest on obligations of 33 Tax benefit rule 23 of 34 Volunteer work 16 State or local taxes: Tax Counseling for the Trusts: Tax counseling (Volunteer Refunds 23 Elderly 16 Grantor trusts 31 Income Tax Assistance Statutory stock option holding Tax help 35 Income 30 Program) 16 period 12 Tax­sheltered annuity plans Tuition program, qualified Stock appreciation rights 4 (403(b) plans) 9 (QTP) 33 Stockholder debts 20 Limit for 9 Tuition reduction 8 W Stock options 11, 13 Terminal illness 22 W­2 form (See Form W-2) Stock options, nonstatutory: Terrorist attacks: Welfare benefits 28 Exercise or transfer 11 Disability payments for injuries U Whistleblower 34 Grant 11 from 18 Unemployment Winter energy payments 29 Sale 12 Victims of, tax relief 2, 18 compensation 27 Withholding: Stock options, statutory: Thrift Savings Plan 9 Unions (See Labor unions) Barter exchange Exercise 12 Title VII, Civil Rights Act of 1964: Unlawful discrimination suits: transactions 20 Grant 12 Back pay and damages for Deduction for costs 30 Unemployment Sale 12 emotional distress under 30 compensation 27 Stolen property 34 Tour guides, free tours for 32 Workers' compensation 19 Strike benefits 34 Trade Act of 1974: V Working condition benefits 8 Student loans: Trade readjustment allowances Valuation: Worksheets: Cancellation of debt 21 under 27 Fringe benefits 8, 9 Group-term life insurance Substantially vested property 14 Transferable property 14 Stock options 11 (Worksheet 1) 6, 7 Substantial risk of forfeiture 14 Transit passes 8 VA payments 34 Recoveries of itemized Supplemental unemployment Travel agencies: Vehicle: deductions (Worksheet benefits 27 Free tour to organizer of group of Commuter highway 8 2) 26 Surviving spouse: tourists 32 Employer-provided 9 Work­training programs 28 Life insurance proceeds paid Veterans benefits 16 to 22 Disability compensation 18

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