55415102ROlder Americans'
Tax GuideWhat's New1 Reminders2Introduction21. 2005 Filing Requirements4General Requirements42. Taxable and Nontaxable Income5Compensation for Services5Retirement Plan Distributions5Social Security and Equivalent
Railroad Retirement Benefits11Sickness and Injury Benefits13Disability Income14Life Insurance Proceeds14Sale of Home15Other Items163. Adjustments to Income17Individual Retirement Arrangement (IRA) Contributions and Deductions174. Deductions18Standard Deduction18Itemized Deductions215. Credits23Credit for the Elderly or the Disabled23Child and Dependent Care Credit26Earned Income Credit266. Estimated Tax27Who Must Make Estimated Tax Payments287. How To Get Tax Help28Index30What's NewStandard deduction.
For most people, the standard deduction has increased. See Standard Deduction, later.
Earned income credit.
The maximum amount of income you can earn and still get the credit has increased. You may be able to take the credit if you earn less than:
$11,750 ($13,750 if married filing jointly), do not have a qualifying child, and are at least 25 years old and under 65.
$31,030 ($33,030 if married filing jointly) and have one qualifying child living with you,
$35,263 ($37,263 if married filing jointly) and have more than one qualifying child living with you, or
For more information, see Earned Income Credit, later.
Katrina Emergency Tax Relief Act of 2005.Hurricane Katrina
This Act provides tax relief for persons affected by Hurricane Katrina. Under the Act, you may be able to:
Take withdrawals from retirement plans without penalty for early distribution,
Take an additional exemption amount for housing individuals displaced by Hurricane Katrina,
Exclude certain cancellation of indebtedness income, and
Elect to use your 2004 earned income to figure the 2005 earned income credit.
See Publication 4492 for more information.
At the time this publication went to print, Congress was considering legislation that would provide additional tax relief for individuals affected
by Hurricanes Katrina, Rita, and Wilma. For more details, and to find out if this legislation was enacted, see Publication 4492.
Choose your preparer carefully. If you pay someone to prepare your return, the preparer is required, under the law, to sign the return and fill in
the other blanks in the Paid Preparer's area of your return. Remember, however, that you are still responsible for the accuracy of every item entered
on your return. If there is any underpayment, you are responsible for paying it, plus any interest and penalty that may be due.
Third party designee.
You can check the Yes box in the Third Party Designee area of your return to authorize the IRS to discuss your return with a friend, family
member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise
during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.
You may be able to have federal income tax withheld from your social security and equivalent railroad retirement benefits. See Tax Withholding
and Estimated Tax under Social Security and Equivalent Railroad Retirement Benefits, later.
Photographs of missing children.Missing childrenPhotographs, missing children
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
The purpose of this publication is to provide a general overview of selected topics that are of interest to older Americans. The publication will
help you determine if you need to file a return and, if so, what items to report on your return. Each topic is discussed only briefly, so you will
find references to other free IRS publications that provide more detail on these topics if you need it.
Table I has a list of questions you may have about filing your federal tax return. To the right of each question is the location of the answer in
this publication. Also, at the back of this publication there is an index to help you search for the topic you need.
While most federal income tax laws apply equally to all taxpayers, regardless of age, there are some provisions that give special treatment to
older Americans. The following are some examples.
Higher gross income threshold for filing. You must be age 65 or older at the end of the year to get this benefit. You are
considered 65 on the day before your 65th birthday. Therefore, you are considered 65 at the end of the year if your 65th birthday is on or before
January 1 of the following year.
Higher standard deduction. If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or
older at the end of the year. You are considered 65 at the end of the year if your 65th birthday is on or before January 1 of the following
year.
Credit for the elderly or the disabled. If you qualify, you may benefit from the credit for the elderly or the disabled. To
determine if you qualify and how to figure this credit, see Credit for the Elderly or the Disabled, later.
Return preparation assistance.Preparing your return
The IRS wants to make it easier for you to file your federal tax return. You may find it helpful to order large print tax forms or visit a
Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), or American Association of Retired Persons (AARP) site near you.
Large print tax forms.Large print tax formsForm:Large print
For easier reading and to practice preparing your return, you may order large print tax forms. Use them as worksheets to figure your tax, but do
not file them. Call 1-800-829-3676 and order:
Publication 1614
Publication:1614, which contains Form 1040, Schedules A, B, D, E, and R, and Form 1040-V, and their instructions, or
Publication 1615
Publication:1615, which contains Form 1040A, Schedules 1, 2, 3, and EIC, and Form 8812, and their instructions.
When you file your actual return, do not send the large print tax forms to IRS. Use the standard forms.
To order other free publications and forms, see chapter 7 in this publication.
Volunteer Income Tax Assistance and Tax Counseling for the Elderly.Volunteer income tax assistance (VITA)Tax counseling for the elderly (TCE)American Association of Retired Persons (AARP)
These programs provide free help for low-income taxpayers and taxpayers age 60 or older to fill in and file their returns. For the VITA/TCE site
nearest you, contact your local IRS office.
For the location of an AARP Tax-Aide site in your community, call 1-888-227-7669. When asked, be ready to press in or speak your 5-digit zip code.
Or, you can visit their website on the Internet at
www.aarp.org/taxaide.
Comments and suggestions.Comments on publicationSuggestions for publication
We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:
Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in
your correspondence.
You can email us at
*taxforms@irs.gov. (The asterisk must be included in the
address.) Please put Publications Comment on the subject line. Although we cannot respond individually to each email, we do appreciate your
feedback and will consider your comments as we revise our tax products.
Tax questions.
If you have a tax question, visit
www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either
of the addresses listed above.
Ordering forms and publications.
Visit
www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the
address shown under How To Get Tax Help in the back of this publication.
<ROM>Table I.</ROM>
<IMARK>What You Should Know About Federal TaxesNote. The following is a list of questions you may have about filling out your federal income tax return.
To the right of each question is the location of the answer in this publication.What I Should KnowWhere To Find the AnswerDo I need to file a return?See chapter 1.Is my income taxable or nontaxable?
If it is nontaxable, must I still report it?See chapter 2.How do I report benefits I received from Social Security or the Railroad Retirement Board?
Are these benefits taxable?See Social Security and Equivalent Railroad Retirement Benefits in chapter 2.Must I report the sale of my home?
If I had a gain, is any part of it taxable?See Sale of Home in chapter 2.What are some of the items that I can deduct to reduce my income?See chapters 3 and 4.How do I report the amounts I set aside for my IRA?See Individual Retirement Arrangement (IRA) Contributions and Deductions in chapter 3.Would it be better for me to claim the standard deduction or itemize my deductions?See chapter 4.What are some of the credits I can claim to reduce my tax?See chapter 5 for discussions on the credit for the elderly or the disabled, the child and dependent care credit, and the earned
income credit.Must I make estimated tax payments?See chapter 6.How do I contact the IRS or get more information?See chapter 7.
If income tax was withheld from your pay, or if you qualify for the earned income credit, the additional child tax credit, or the health coverage
tax credit (see your tax package), you should file a return to get a refund even if you are not required to do so.
General RequirementsFiling requirements:General requirements
If you are a U.S. citizen or resident, you must file a return if your gross income for the year was at least the amount shown on the appropriate
line in Table 1-1. For more information, see the instructions for Form 1040, 1040A, or 1040-EZ, and Publication 501, Exemptions, Standard Deduction,
and Filing Information.
<ROM>Table 1-1.</ROM>
<IMARK>2005 Filing Requirements Chart for Most TaxpayersNote. You must file a return if your gross income was at least the amount shown in the last column.IF your filing status is. . .AND at the end of 2005
you were
*. . .THEN file a return if your gross income
** was at least. . .Singleunder 65$ 8,20065 or older 9,450Head of householdunder 65 10,50065 or older11,750Married filing jointly
***under 65 (both spouses)16,40065 or older (one spouse)17,40065 or older (both spouses)18,400Married filing separatelyany age3,200Qualifying widow(er)
with dependent childunder 6513,20065 or older14,200
*If you were born before January 2, 1941, you are considered to be 65 or older at the end of 2005.**Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax,
including any income from sources outside the United States (even if you may exclude part or all of it). Do not include social security benefits
unless you are married filing a separate return and you lived with your spouse at any time in 2005.***If you did not live with your spouse at the end of 2005 (or on the date your spouse died) and your gross income was at least
$3,200, you must file a return regardless of your age.
Gross income.Gross incomeIncome:Gross, defined
Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. If you are married and live
with your spouse in a community property state, half of any income defined by state law as community income may be considered yours. The community
property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. For more information about community
property, see Publication 555, Community Property.
For more information on what to include in gross income, see chapter 2.
If you are self-employed in a business that provides services (where products are not a factor), gross income from that business is the gross
receipts. If you are self-employed in a business involving manufacturing, merchandising, or mining, gross income from that business is the total sales
minus the cost of goods sold. To this figure, you add any income from investments and from incidental or outside operations or sources.
Dependents.Dependents
If you could be claimed as a dependent by another taxpayer, special filing requirements apply. See Publication 501.
DecedentsDecedentsReturns:DecedentFiling requirements:DecedentsReturns:Executors and administrators
A personal representative of a decedent's estate can be an executor, administrator, or anyone who is in charge of the decedent's property.
If you are acting as the personal representative of a person who died during the year, you may have to file a final return for that decedent. You
also have other duties, such as notifying the IRS that you are acting as the personal representative. Form 56, Notice Concerning Fiduciary
Relationship, is available for this purpose.
When you file a return for the decedent, either as the personal representative or as the surviving spouse, you should write DECEASED, the
decedent's name, and the date of death across the top of the tax return.
If no personal representative has been appointed by the due date for filing the return, the surviving spouse (on a joint return) should sign the
return and write in the signature area Filing as surviving spouse.
For more information, see Publication 559, Survivors, Executors, and Administrators.
If you are the surviving spouse, the year your spouse died is the last year you can file a joint return with that spouse. After that, if you do not
remarry, you must file as a qualifying widow(er) with dependent child, head of household, or single. For more information about each of these filing
statuses, see Publication 501.
If you remarry before the end of the year in which your spouse died, a final joint return with the deceased spouse cannot be filed. You can,
however, file a joint return with your new spouse. In that case, the filing status of your deceased spouse for his or her final return is married
filing separately.
The level of income that requires you to file an income tax return changes when your filing status changes. Even if you and your deceased spouse
were not required to file a return for several years, you may have to file a return for the year of death.
Taxable and
Nontaxable IncomeIncome:TaxableNontaxableTaxable incomeNontaxable income:Generally
Generally, income is taxable unless it is specifically exempt (not taxed) by law. Your taxable income may include compensation for services,
interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income
of all kinds.
Under special provisions of the law, certain items are partially or fully exempt from tax. Provisions that are of special interest to older
taxpayers are discussed in this chapter.
Compensation for ServicesCompensation:For servicesWagesCompensationSalariesCompensation
Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions,
fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.
You need not receive the compensation in cash for it to be taxable. Payments you receive in the form of goods or services generally must be
included in gross income at their fair market value.
Volunteer work.Volunteer work
Do not include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket expenses under any of the
following volunteer programs.
You must include in your income all unemployment compensation you receive.
More information.
See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income.
Retirement Plan DistributionsRetirement plans, distributionsDistributions, retirement plan
This section summarizes the tax treatment of amounts you receive from certain individual retirement arrangements, employee pensions or annuities,
and disability pensions or annuities. More detailed information can be found in Publication 590, Individual Retirement Arrangements (IRAs), and
Publication 575, Pension and Annuity Income.
In general, distributions from a traditional IRA are taxable in the year you receive them. A traditional IRA is any IRA that is not a Roth or
SIMPLE IRA. Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. These
are discussed in Publication 590.
If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. If you do not file Form 8606 with your
return, you may have to pay a $50 penalty. Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can
show, with satisfactory evidence, that nondeductible contributions were made.
Early distributions.
Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 59, or
amounts you receive when you cash in retirement bonds before you are age 59. You must include early distributions of taxable amounts
in your gross income. These taxable amounts are also subject to an additional 10% tax unless the distribution qualifies for an exception. See Tax
on Early Distributions, later.
After age 59 and before age 70.
After you reach age 59, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. Even
though you can receive distributions after you reach age 59, distributions are not required until April 1 of the year following the
year in which you reach age 70.
Required distributions.
If you are the owner of a traditional IRA, you must receive the entire balance in your IRA or start receiving periodic distributions from your IRA
by April 1 of the year following the year in which you reach age 70. See When Must You Withdraw Assets? (Required Minimum
Distributions) in Publication 590. If distributions from your traditional IRA(s) are less than the required minimum distribution for the year,
you may have to pay a 50% excise tax for that year on the amount not distributed as required. See Tax on Excess Accumulation, later.
Pensions and AnnuitiesAnnuitiesPensions
Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold part of the cost of the
contract from your pay while you worked, the amounts you receive each year are fully taxable.
If you have a cost to recover from your pension or annuity plan (see Cost, below), you can exclude part of each annuity payment from
income as a recovery of your cost. This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the
amount of the payment changes. The rest of each payment is taxable.
You figure the tax-free part of the payment using one of the following methods.
Simplified Method.Simplified method You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan,
a qualified employee annuity, or a tax-sheltered annuity plan or contract). You cannot use this method if your annuity is paid under a nonqualified
plan.
General Rule.General rule, pension or annuityYou must use this method if your annuity is paid under a nonqualified plan. You generally cannot
use this method if your annuity is paid under a qualified plan.
You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your
cost.
Exclusion limit.
If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as
long as you receive your annuity. The total exclusion may be more than your cost.
If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost cannot
exceed your total cost.
In either case, any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return
of the decedent. This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions.
Cost.Contributions:Pension or annuityCost, pension or annuity
Before you can figure how much, if any, of your pension or annuity benefits is taxable, you must determine your cost in the plan (your investment).
In general, your cost is your net investment in the contract as of the annuity starting date. This includes amounts your employer contributed that
were taxable to you when paid.
From this total cost paid or considered paid by you, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts
you received by the later of the annuity starting date or the date on which you received your first payment.
Starting date, annuity
The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the
plan's obligations became fixed.
The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that you receive.
If you worked abroad, certain amounts your employer paid into your retirement plan may be considered part of your cost. For details, see
Foreign employment contributions in Publication 575.
Withholding.Withholding:Pensions and annuitiesForm:W-4P
Your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to
you. However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. See
Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information.
For payments other than eligible rollover distributions, you can tell the payer how to withhold by filing a Form W-4P, Withholding Certificate for
Pension or Annuity Payments.
Simplified Method.
Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly
payments. For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date
and is determined from a table. For any other annuity, this number is the number of monthly annuity payments under the contract.
Who must use the Simplified Method.
You generally must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your pension or annuity
payments from a qualified plan or annuity.
In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you generally could have chosen to use the
Simplified Method for payments from a qualified plan.
Who cannot use the Simplified Method.
You cannot use the Simplified Method and must use the General Rule if you receive pension or annuity payments from:
A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan, or
A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed payments
(defined later).
In addition, you must use the General Rule for payments from a qualified plan if your annuity starting date is after July 1, 1986, and before
November 19, 1996, and you did not choose to use the Simplified Method. You also must use the General Rule for payments from a qualified plan if your
annuity starting date is before July 2, 1986, and you did not qualify to use the Three-Year Rule.
Complete information on the General Rule, including the tables you need, is contained in Publication 939, General Rule for Pensions and Annuities.
Guaranteed payments.
Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment)
is payable even if you and any survivor annuitant do not live to receive the minimum. If the minimum amount is less than the total amount of the
payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are
entitled to less than 5 years of guaranteed payments.
How to use the Simplified Method.
Complete the Simplified Method Worksheet in the Form 1040 or Form 1040A instructions or in Publication 575 to figure your taxable annuity for 2005.
If your annuity is payable over one or more life expectancies, use either your age or the combined ages on the annuity starting date, as instructed.
If the annuity does not depend on anyone's life expectancy, use the total number of monthly annuity payments under the contract.
Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years.
Example.
Bill Smith, age 65, began receiving retirement benefits in 2005, under a joint and survivor annuity. Bill's annuity starting date is January 1,
2005. The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had
received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a
monthly survivor benefit of $600 upon Bill's death.
Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. See the
illustrated Worksheet 2-A, Simplified Method Worksheet, later.
His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages and Table 2 at the bottom of the
worksheet in completing line 3 of the worksheet. Bill's tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet).
Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. The full amount
of any annuity payments received after 310 payments are paid must be included in gross income.
If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income
tax return of the last to die. This deduction is not subject to the 2%-of-adjusted-gross-income limit.
<ROM>Worksheet 2-A.</ROM>
<IMARK>Simplified Method Worksheet—Illustrated <ITL>Keep for Your Records</ITL>1.Enter the total pension or annuity payments received this year. Also, add this amount to the total for
Form 1040, line 16a, or Form 1040A, line 12a1.$ 14,4002.Enter your cost in the plan (contract) at the annuity starting date2.31,000Note.If your annuity starting date was before this year and you completed this worksheet last
year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3.3.Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the
payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below3.3104.Divide line 2 by the number on line 34.1005.Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting
date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 65.1,2006.Enter any amount previously recovered tax free in years after 19866.07.Subtract line 6 from line 27.31,0008.Enter the smaller of line 5 or line 78.1,2009.Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero.
Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. Note. If your Form 1099-R shows a larger taxable
amount, use the amount on this line instead9.$ 13,20010.Add lines 6 and 810.1,20011.Balance of cost to be recovered. Subtract line 10 from line 211.$ 29,800
Table 1 for Line 3 AboveAND your annuity starting date was— IF the age at
annuity starting date was . . .before November 19, 1996, enter on line 3 . . .after November 18, 1996,
enter on line 3 . . .55 or under30036056-6026031061-6524026066-7017021071 or over120160Table 2 for Line 3 AboveIF the combined ages at annuity starting date were . . .THEN enter on line 3 . . .110 or under410111-120360121-130310131-140260141 or over210
Survivors.Survivors
If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total
received in your income. The retiree's cost has already been recovered tax free.
If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your
initial payment called for in the contract. The resulting tax-free amount will then remain fixed. Any increases in the survivor annuity are fully
taxable.
If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the
tax-free amount figured by the retiree at the annuity starting date. See Simplified Method, earlier.
How to report.Reporting pension income
If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. If your pension or annuity is fully taxable, enter
it on line 16b. Do not make an entry on line 16a. For example, if you received monthly payments totaling $1,200 during 2005 from a pension plan that
was completely financed by your employer, and you had paid no tax on the payments that your employer made to the plan, the entire $1,200 is taxable.
You include $1,200 only on Form 1040, line 16b.
If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. If your pension or annuity is fully taxable, enter
it on line 12b. Do not make an entry on line 12a.
Joint return.
If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities
on Form 1040, line 16a, or Form 1040A, line 12a, and report the total of the taxable parts on Form 1040, line 16b, or Form 1040A, line 12b.
Form 1099-R.Form:1099-R
You should receive a Form 1099-R for your pension or annuity. Form 1099-R shows your pension or annuity for the year and any income tax withheld.
You must attach Forms 1099-R to your tax return if federal income tax was withheld.
If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of
your cost. Nonperiodic distributions include cash withdrawals, distributions of current earnings, and certain loans. For information on how to figure
the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575.
The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. See Tax on Early Distributions, later.
If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before
January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part from active participation in the plan
before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974
that you do not report as capital gain) is ordinary income. You may be able to use the 10-year tax option to figure tax on the ordinary income part.
Form 1099-R.Form:1099-R
If you receive a total distribution from a plan, you should receive a Form 1099-R. If the distribution qualifies as a lump-sum distribution, box 3
shows the capital gain. The amount in box 2a minus the amount in box 3 is the ordinary income.
More information.
For more detailed information on lump-sum distributions, get Publication 575 or Form 4972, Tax on Lump-Sum Distributions.
Tax on Early DistributionsTax:Early distributionsEarly distributions, tax
Most distributions you receive from your qualified retirement plan or deferred annuity contract before you reach age 59 are subject
to an additional tax of 10%. The tax applies to the taxable part of the distribution.
For this purpose, a qualified retirement plan is:
Qualified retirement plan
A qualified employee plan,
A qualified employee annuity plan,
A tax-sheltered annuity plan (403(b) plan),
An IRA, or
An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts
the plan received in a direct transfer or rollover from one of the other plans listed here).
5% rate on certain early distributions from deferred annuity contracts.Deferred annuity, early distribution
If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% rate applies to
distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986,
you had begun receiving payments under the election. On Form 5329, line 4, multiply by 5% instead of 10%. Attach an explanation to your return.
Exceptions to tax.
The early distribution tax does not apply to any distribution that meets one of the following exceptions.
General exceptions.
The tax does not apply to distributions that are:
Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint
lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified employee plan, the payments must begin after separation
from service),
Made because you are totally and permanently disabled,
Made on or after the death of the plan participant or contract holder, or
Hurricane KatrinaQualified Hurricane Katrina distributions (see below).
Additional exceptions for qualified retirement plans.
The tax does not apply to distributions that are:
From a qualified retirement plan, other than an IRA, after your separation from service in or after the year you reached age 55,
From a qualified retirement plan, other than an IRA, to an alternate payee under a qualified domestic relations order,
From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted
gross income), whether or not you itemize your deductions for the year,
From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1,
1986, you had separated from service and had begun receiving payments under the election,
From an employee stock ownership plan for dividends on employer securities held by the plan, or
From a qualified retirement plan due to an IRS levy of the plan.
Additional exceptions for nonqualified annuity contracts.
The tax does not apply to distributions that are:
From a deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982,
From a deferred annuity contract under a qualified personal injury settlement,
From a deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan
and held by your employer until your separation from service, or
From an immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from
the date of purchase and are paid at least annually).
Special rule for qualified Hurricane Katrina distributions.
Hurricane KatrinaThe tax on early distributions does not apply if all of the following requirements are met.
Your main home on August 28, 2005, was in the Hurricane Katrina disaster area and you sustained an economic loss.
Your distribution is from an eligible retirement plan (qualified retirement plan, section 403(b) plan, annuity, or IRA).
Your distribution was made on or after August 25, 2005, and before January 1, 2007.
The total amount of qualified Hurricane Katrina distributions you received from all plans, annuities, and IRAs is not more than
$100,000.
You will file Form 8915 instead of following the reporting instructions below. See Publication 4492 for more information.
Reporting tax or exception.
If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is correctly shown in Form 1099-R,
box 7, multiply the taxable part of the early distribution by 10% (.10) and enter the result on Form 1040, line 60. Write No under the heading
Other Taxes to the left of line 60 to indicate that you do not have to file Form 5329.
You do not have to file Form 5329 if you qualify for an exception to the 10% tax and distribution code 2, 3, or 4 is correctly shown on Form
1099-R, box 7. However, you must file Form 5329 if the code is not shown or the code shown is incorrect (for example, code 1 is shown although you
meet an exception).
Tax on Excess AccumulationMinimum distributionsTax:Excess accumulationExcess accumulation, tax on
To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the
payments that you receive from qualified retirement plans generally must begin no later than your required beginning date (unless the rule for 5%
owners applies). This is April 1 of the year that follows the later of:
The calendar year in which you reach age 70, or
The calendar year in which you retire from employment with the employer maintaining the plan.
For this purpose, a qualified retirement plan includes:
A qualified employee plan,
A qualified employee annuity plan,
An eligible section 457 deferred compensation plan, or
A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986).
5% owners.
If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified
retirement plan, you must begin to receive distributions by April 1 of the year after the calendar year in which you reach age 70. See
Publication 575 for more information.
Amount of tax.
If you do not receive the required minimum distribution, you are subject to an additional tax. The tax equals 50% of the difference between the
amount that must be distributed and the amount that was distributed during the tax year. You can get this excise tax excused if you establish that the
shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall.
Form 5329.Form:5329
You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan.
Additional information.
For more detailed information on the tax on excess accumulation, see Publication 575.
Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes.
Tier 1.
The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or
beneficiary would have been entitled to receive under the social security system. This part of the tier 1 benefit is the social security equivalent
benefit (SSEB) and is treated (for tax purposes) like social security benefits. (See Social Security and Equivalent Railroad Retirement
Benefits, later.)
Non-social security equivalent benefits.
The second category consists of the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB), and any tier 2 benefit,
vested dual benefit (VDB), and supplemental annuity benefit. This category of benefits is treated as an amount received from a qualified employee
plan. This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits.
Vested dual benefits and supplemental annuity benefits are fully taxable.
More information.
For more information about railroad retirement benefits, see Publication 575.
Military Retirement PayMilitary retirement pay
Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, lines 16a and 16b or
on Form 1040A, lines 12a and 12b. But, certain military and government disability pensions that are based on a percentage of disability from active
service in the Armed Forces of any country generally are not taxable. For more information, including information about veterans' benefits and
insurance, see Publication 525.
Social Security and
Equivalent Railroad
Retirement BenefitsSocial security benefitsRailroad retirement benefits
This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits.
Social security benefits include monthly retirement, survivor, and disability benefits. They do not include supplemental security income (SSI)
payments, which are not taxable.
Railroad retirement benefitsEquivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad
employee or beneficiary would have been entitled to receive under the social security system. They commonly are called the social security equivalent
benefit (SSEB) portion of tier 1 benefits.
If you received these benefits during 2005, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are
a nonresident alien).
Note.
When the term benefits is used in this section, it applies to both social security benefits and equivalent tier 1 railroad retirement benefits.
Are Any of Your Benefits Taxable?Taxation of benefitsBenefits:Social security
To find out whether any of your benefits may be taxable, compare the base amount for your filing status to the total of:
One-half of your benefits, plus
All your other income, including tax-exempt interest.
When making this comparison, do not reduce your other income by any exclusions for:
Interest from qualified U.S. savings bonds,
Employer-provided adoption benefits,
Foreign earned income or foreign housing, or
Income earned in American Samoa or Puerto Rico by bona fide residents.
Figuring total income.
To figure amount of income to compare with your base amount, use Worksheet 2-B. If the total is more than your base amount, part of your benefits
may be taxable.
If you are married and file a joint return for 2005, you and your spouse must combine your incomes and your benefits to figure whether any of your
combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of
your benefits are taxable.
If the only income you received during 2005 was your social security or SSEB portion of tier 1 railroad retirement benefits, your benefits
generally are not taxable and you probably do not have to file a return. If you have income in addition to your benefits, you may have to file a
return even if none of your benefits are taxable.
<ROM>Worksheet 2-B.</ROM> Are Any of Your Benefits Taxable? <ITL>Keep for Your
Records</ITL>A. Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include
the full amount of any lump-sum benefit payments received in 2005, for 2005 and
earlier years. (If you received more than one form, combine the amounts from box 5
and enter the total.) A. Note. If the amount on line A is zero or less, stop here; none of your benefits are
taxable this year.B. Enter one-half of the amount on line A B. C. Add your taxable pensions, wages, interest, dividends, and other taxable income and
enter the total C. D. Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income
for:
• Interest from qualified U.S. savings bonds,
• Employer-provided adoption benefits,
• Foreign earned income or foreign housing, or
• Income earned in American Samoa or Puerto Rico by bona fide residents D.E. Add lines B, C, and D and enter the total E. F.If you are:
• Married filing jointly, enter $32,000
• Single, head of household, qualifying widow(er), or married filing separately and you
lived apart from your spouse for all of 2005, enter $25,000
• Married filing separately and you lived with your spouse at any time during 2005,
enter -0-F.G.Is the amount on line F less than or equal to the amount on line E?
No. None of your benefits are taxable this year.
Yes. Some of your benefits may be taxable. To figure how much of your benefits
are taxable, see Which worksheet to use under How Much Is Taxable, later.
Base AmountBase amount, social security benefits
Your base amount is:
$25,000 if you are single, head of household, or qualifying widow(er),
$25,000 if you are married filing separately and lived apart from your spouse for all of 2005,
$32,000 if you are married filing jointly, or
$0 if you are married filing separately and lived with your spouse at any time during 2005.
Repayment of BenefitsRepayments:Social security benefits
Any repayment of benefits you made during 2005 must be subtracted from the gross benefits you received in 2005. It does not matter whether the
repayment was for a benefit you received in 2005 or in an earlier year. If you repaid more than the gross benefits you received in 2005, see
Repayments More Than Gross Benefits, later.
Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Your repayments are shown in box 4. The amount in box 5 shows your net
benefits for 2005 (box 3 minus box 4). Use the amount in box 5 to figure whether any of your benefits are taxable.
Tax Withholding and Estimated TaxTax:EstimatedEstimated tax
You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits.
If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. You can choose withholding at 7%, 10%, 15%, or 25% of your
total benefit payment.
If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the
year. For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals.
How Much Is Taxable?
If part of your benefits are taxable, how much is taxable depends on the total amount of your benefits and other income. Generally, the higher that
total amount, the greater the taxable part of your benefits.
Maximum taxable part.
The taxable part of your benefits usually cannot be more than 50%. However, up to 85% of your benefits can be taxable if either of the following
situations applies to you.
The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing
jointly).
You are married filing separately and lived with your spouse at any time during 2005.
Which worksheet to use.Worksheets, social security
A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. However, you will need to use a different
worksheet(s) if any of the following situations applies to you.
You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse is covered by a retirement plan at work. In
this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable
benefits.
Situation (1) does not apply and you take an exclusion for interest from qualified U.S. savings bonds (Form 8815), for adoption benefits
(Form 8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or for income earned in American Samoa (Form 4563) or Puerto Rico by
bona fide residents. In this situation, you must use Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to
figure your taxable benefits.
You received a lump-sum payment for an earlier year. In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication
915.
How To Report Your Benefits
If part of your benefits are taxable, you must use Form 1040 or Form 1040A. You cannot use Form 1040EZ.
Reporting on Form 1040.
Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. If you are
married filing separately and you lived apart from your spouse for all of 2005, also enter D to the right of the word benefits on line
20a.
Reporting on Form 1040A.
Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. If you are
married filing separately and you lived apart from your spouse for all of 2005, enter D to the right of the word benefits on line 14a.
Benefits not taxable.
If none of your benefits are taxable, do not report any of them on your tax return. However, if you are married filing separately and you lived
apart from your spouse for all of 2005, make the following entries: On Form 1040, enter D to the right of the word benefits on line 20a
and -0- on line 20b. On Form 1040A, enter D to the right of the word benefits on line 14a and -0- on line 14b.
Lump-Sum ElectionLump-sum election, social security
You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2005 in your 2005 income, even if the payment
includes benefits for an earlier year.
This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their
beneficiaries. No part of the lump-sum death benefit is subject to tax.
Generally, you use your 2005 income to figure the taxable part of the total benefits received in 2005. However, you may be able to figure the
taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your
taxable benefits. See Publication 915 for more information.
Repayments More
Than Gross Benefits
In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box
3) you received. If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be
taxable. If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for
that same year.
If you have any questions about this negative figure, contact your local Social Security Administration office or your local U.S. Railroad
Retirement Board field office.
Joint return.
If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5 but your spouse's does not, subtract
the amount in box 5 of your form from the amount in box 5 of your spouse's form. You do this to get your net benefits when figuring if your combined
benefits are taxable.
Repayment of benefits received in an earlier year.
If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part
of this negative figure that represents benefits you included in gross income in an earlier year.
If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized
deductions. Claim it on Schedule A (Form 1040), line 22.
If this deduction is more than $3,000, you have some special instructions to follow. See Publication 915 for those instructions.
Sickness and
Injury BenefitsInjury benefitsSickness and injury benefitsNontaxable income:Sickness and injury benefitsBenefits:Sickness and injury
Generally, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by
your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as
income. However, certain payments may not be taxable to you. Some of these payments are discussed later in this section. Also, see Military and
Government Disability Pensions in Publication 525.
Cost paid by you.
If you pay the entire cost of an accident or health plan, do not include any amounts you receive from the plan for personal injury or sickness as
income on your tax return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of
the reimbursement in your income.
If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You
must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Minimum retirement
age generally is the age at which you can first receive a pension or annuity if you are not disabled.
You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit, see Publication
524, Credit for the Elderly or the Disabled.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines
16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. For more information on pensions and annuities, see Publication 575.
Retirement and profit-sharing plans.Profit-sharing plan
If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a
disability pension. The payments must be reported as a pension or annuity.
Accrued leave payment.Accrued leave payment:Disability retirement and
If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment is not a disability
payment. Include it in your income in the tax year you receive it.
Long-Term Care
Insurance ContractsLong-term care insuranceInsurance:Benefits, long-term careBenefits:Long-term care
Long-term care insurance contracts generally are treated as accident and health insurance contracts. Amounts you receive from them (other than
policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal injury or sickness. However, the
amount you can exclude may be limited. Long-term care insurance contracts are discussed in more detail in Publication 525.
Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers'
compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, does
not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired
because of an occupational sickness or injury.
If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered
social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the taxability of these benefits, see Social
Security and Equivalent Railroad Retirement Benefits, earlier.
Return to work.
If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages.
Other Sickness
and Injury Benefits
In addition to disability pensions and annuities, you may receive other payments for sickness or injury.
Federal Employees' Compensation Act (FECA).Federal Employees:Compensation Act (FECA) payments
Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. However,
you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Report this income on
line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Also, pay for sick leave while a claim is being processed is taxable and must be
included in your income as wages.
If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is
considered social security (or equivalent railroad retirement) benefits and may be taxable.
Other compensation.
Many other amounts you receive as compensation for sickness or injury are not taxable. These include the following amounts.
Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums
but you had to include them in your income.
Insurance:Accident and healthBenefits:Accident or healthNontaxable income:Accident or health insurance benefits
Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.
Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This
compensation must be based only on the injury and not on the period of your absence from work. These benefits are not taxable even if your employer
pays for the accident and health plan that provides these benefits.
Compensation:Loss or disfigurementLoss or disfigurement compensation
Generally, if you retire on disability, you must report your pension or annuity as income.
If you were 65 or older by the end of 2005, or you were retired on permanent and total disability and received taxable disability income, you may
be able to claim the credit for the elderly or the disabled. See Credit for the Elderly or the Disabled, later.
Taxable disability pensions or annuities.
Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan that is paid for by
your employer. However, certain payments may not be taxable to you. See Sickness and Injury Benefits, earlier.
Cost paid by you.
If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax
return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement
in your income.
Accrued leave payment.
If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment is not a disability
payment. Include it in your income in the year you receive it.
Workers' compensation.
If part of your disability pension is workers' compensation, that part is exempt from tax. The exemption also applies to your survivors.
How to report.
You must report all your taxable disability income as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age.
Generally, this is the age at which you can first receive a pension or annuity if you are not disabled.
Beginning on the day after you reach minimum retirement age, the payments you receive are taxable as a pension. Report them on Form 1040, lines 16a
and 16b or on Form 1040A, lines 12a and 12b.
Life Insurance ProceedsInsurance:Life insurance proceedsProceeds paid after deathLife insurance proceeds
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a
price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract.
Proceeds not received in installments.
If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the
amount payable to you at the time of the insured person's death. If the benefit payable at death is not specified, you include in your income the
benefit payments that are more than the present value of the payments at the time of death.
Proceeds received in installments.
If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.
To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured
person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.
Installments for life.
If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a
refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life
expectancy. If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial
value of the guarantee.
Surviving spouse.Surviving spouse, insurance
If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments,
you can exclude up to $1,000 a year of the interest included in the installments. If you remarry, you can continue to take the exclusion.
Surrender of policy for cash.Surrender of Iife insurance
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance
policy. You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on Form 1040, lines 16a and 16b, or
Form 1040A, lines 12a and 12b.
Endowment ProceedsEndowment proceeds
Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. To determine your
cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other
consideration) paid for the contract. Include the part of the lump-sum payment that is more than your cost in your income.
Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity.
This is explained in Publication 575. For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part
of the lump sum. This election must be made within 60 days after the lump-sum payment first becomes payable to you.
Accelerated Death BenefitsDeath benefit, acceleratedInsurance:Proceeds paid before deathAccelerated death benefitsViatical settlement
Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded
from income if the insured is terminally or chronically ill. See Exception, later. For a chronically ill individual, the payments must be
for costs incurred for qualified long-term care services or made on a periodic basis without regard to the costs.
In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or
assigned to a viatical settlement provider, the amount received also is excluded from income. Generally, a viatical settlement provider is one who
regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or
chronically ill.
Form:8853To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form
8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return.
Terminally or chronically ill defined.Terminally ill, definedChronically ill, defined
A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to
result in death within 24 months from the date of the certification. A chronically ill person is one who is not terminally ill but has been certified
(within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions.
The person is unable to perform (without substantial help) at least two activities of daily living for a period of 90 days or more because
of a loss of functional capacity.
The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive
impairment.
Exception.
The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of
the insured because the insured:
Is a director, officer, or employee of the other person, or
Has a financial interest in the business of the other person.
Sale of Home
Home, sale ofSale of homeResidence, sale ofGain on sale of homeSale of homeIncome:Sale of homeYou may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on
the sale of your main home. Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return.
Maximum Amount of ExclusionExclusion, gain on sale of home
You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.
You meet the ownership test.
You meet the use test.
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.
You are married and file a joint return for the year.
Either you or your spouse meets the ownership test.
Both you and your spouse meet the use test.
During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another
home.
Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you
must have:
Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
Exception to ownership and use tests.
If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in some cases. Generally, you must
have sold the home due to a change in place of employment, health, or unforeseen circumstances. The maximum amount you can exclude will be reduced.
See Publication 523, Selling Your Home, for more information.
Exception to ownership test for property acquired in a like-kind exchange.
You must have owned your main home for at least 5 years to qualify for the exclusion if you meet both of the following conditions.
You sold your main home after October 22, 2004.
You acquired your main home in a like-kind exchange.
A like-kind exchange is an exchange of property held for productive use in a trade or business or for investment. See Publication 523 for more
information.
Married Persons
In the special situations discussed below, if you and your spouse file a joint return for the year of sale you can exclude gain if either spouse
meets the ownership and use tests. See Maximum Amount of Exclusion, earlier.
Death of spouse before sale.
If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home
during any period of time when your spouse owned and lived in it as a main home.
Home transferred from spouse.
If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it
during any period of time when your spouse owned it.
Use of home after divorce.
You are considered to have used property as your main home during any period when:
You owned it, and
Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main
home.
Business Use or Rental of Home
You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But, you must meet the
ownership and use tests. See Publication 523 for more information.
Depreciation after May 6, 1997.
If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the
part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. See Publication 523 for more
information.
Reporting the Sale
Do not report the 2005 sale of your main home on your tax return unless:
You have a gain and you do not qualify to exclude all of it, or
You have a gain and you choose not to exclude it.
If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain on Schedule D (Form 1040). If you
used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property, to report the sale of the business
or rental part. See Publication 523 for more information.
Other ItemsOther items
The following items generally are excluded from taxable income. You should not report them on your return.
Gifts and inheritances.BequestsGiftsInheritancesNontaxable income:BequestsGiftsInheritances
Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later
produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid,
credited, or distributed to you, that income also is taxable to you. If the gift, bequest, or inheritance is the income from property, that income is
taxable to you.
Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of
Veterans Affairs (VA). See Publication 525.
Public assistance.Public assistance paymentsNontaxable income:Public assistance payments
Do not include in your income benefit payments from a public welfare fund, such as payments due to blindness.
Payments from a state fund for victims of crime.Victims of crimeNontaxable income:State fund for victims of crime
These payments should not be included in the victims' incomes if they are in the nature of welfare payments. Do not deduct medical expenses that
are reimbursed by such a fund. You must include in your income any welfare payments that are compensation for services that are obtained fraudulently.
Payments made under section 235 of the National Housing Act for mortgage assistance are not included in the homeowner's income. Interest paid for
the homeowner under the mortgage assistance program cannot be deducted.
Payments to reduce cost of winter energy use.Winter energy use paymentsNontaxable income:Winter energy use
Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable.
Nutrition Program for the Elderly.Nutrition program for elderlyNontaxable income:Nutrition program for elderly
Food benefits you receive under the Nutrition Program for the Elderly are not taxable. If you prepare and serve free meals for the program, include
in your income as wages the cash pay you receive, even if you also are eligible for food benefits.
Cancellation of indebtedness because of Hurricane Katrina.
Hurricane KatrinaIf you were relieved of nonbusiness debt on or after August 25, 2005, and before January 1, 2007, you may not
have to include it in income. You must have had your main home in the Hurricane Katrina disaster area on August 25, 2005, and have suffered an
economic loss because of Hurricane Katrina. See Publication 4492 for more information.
Adjustments to IncomeAdjustments to incomeIncome:AdjustmentsAdjusted gross income (AGI)
You may be able to subtract amounts from your total income (Form 1040, line 22 or Form 1040A, line 15) to get your adjusted gross income (Form
1040, line 37 or Form 1040A, line 21). Some adjustments to income follow.
Contributions to your individual retirement arrangement (IRA) (Form 1040, line 32, or Form 1040A, line 17), explained later in this
publication.
Certain moving expenses (Form 1040, line 26) if you changed job locations or started a new job in 2005. See Publication 521, Moving
Expenses, or see Form 3903, Moving Expenses, and its instructions.
Some health insurance costs (Form 1040, line 29) if you were self-employed and had a net profit for the year, or if you received wages in
2005 from an S corporation in which you were a more than 2% shareholder. For more details, see Publication 535, Business Expenses.
Payments to your self-employed SEP, SIMPLE, or qualified plan (Form 1040, line 28). For more information, including limits on how much you
can deduct, see Publication 560, Retirement Plans for Small Business.
Penalties paid on early withdrawal of savings (Form 1040, line 30). Form 1099-INT, Interest Income, or Form 1099-OID, Original Issue
Discount, will show the amount of any penalty you were charged.
Alimony payments (Form 1040, line 31a). For more information, see Publication 504, Divorced or Separated Individuals.
There are other items you can claim as adjustments to income. These adjustments are discussed in the Form 1040 instructions.
Individual Retirement Arrangement (IRA) Contributions and DeductionsIndividual retirement arrangement (IRA)Adjustments to income
This section explains the tax treatment of amounts you pay into traditional IRAs. A traditional IRA is any IRA that is not a Roth or SIMPLE IRA.
For more detailed information, see Publication 590.
An IRA is a personal savings plan that offers you tax advantages to set aside money for your retirement. Two advantages of a traditional IRA are:
You may be able to deduct some or all of your contributions to it, depending on your circumstances, and
Generally, amounts in your IRA, including earnings and gains, are not taxed until distributed.
Although interest earned from your traditional IRA generally is not taxed in the year earned, it is not tax-exempt interest. Do not report this
interest on your tax return as tax-exempt interest.
General limit.
The most that can be contributed for any year to your traditional IRA is the lesser of the following amounts.
Your compensation that you must include in income for the year, or
$4,000 ($4,500 if you were age 50 or older by the end of 2005).
Contributions to spousal IRAs.
In the case of a married couple filing a joint return, up to $4,000 ($4,500 for each spouse age 50 or older by the end of 2005) can be contributed
to IRAs (other than SIMPLE IRAs) on behalf of each spouse, even if one spouse has little or no compensation.
For more information on the general limit and the spousal IRA limit, see How Much Can Be Contributed? in Publication 590.
Generally, you can deduct the lesser of the contributions to your traditional IRA for the year or the general limit (or spousal IRA limit, if
applicable) just explained. However, if you or your spouse was covered by an employer retirement plan at any time during the year for which
contributions were made, you may not be able to deduct all of the contributions. Your deduction may be reduced or eliminated, depending on your filing
status and the amount of your income.
Nondeductible contribution.
The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. You must file Form
8606, Nondeductible IRAs, to report nondeductible contributions even if you do not have to file a tax return for the year.
Roth IRA.Roth IRAIRA, Roth
Regardless of your age, you may be able to establish and contribute to a Roth IRA. You cannot claim a deduction for any contributions to a Roth
IRA. But, if you satisfy the requirements, all earnings are tax free and neither your nondeductible contributions nor any earnings on them are taxable
when you withdraw them.
DeductionsDeductions:Generally
Most taxpayers have a choice of taking a standard deduction or itemizing their deductions. You benefit from the standard deduction if your standard
deduction is more than the total of your allowable itemized deductions. If you have a choice, you should use the method that gives you the lower tax.
Standard DeductionDeductions:StandardStandard deduction
The standard deduction is a dollar amount that reduces the amount of income on which you are taxed. It is a benefit that eliminates the need for
many taxpayers to itemize actual deductions. The standard deduction is higher for taxpayers who are age 65 or older or blind.
The standard deduction amounts for most taxpayers under age 65 are shown in Table 4-1.
Persons not eligible for the standard deduction.
Your standard deduction is zero and you should itemize any deductions you have if:
You are married and filing a separate return, and your spouse itemizes deductions,
You are filing a tax return for a short tax year because of a change in your annual accounting period, or
You are a nonresident or dual-status alien during the year. You are considered a dual-status alien if you were both a nonresident alien and
a resident alien during the year.
If you are a nonresident alien who is married to a U.S. citizen or resident at the end of the year, you can choose to be treated as a U.S.
resident. See Publication 519, U.S. Tax Guide for Aliens. If you make this choice, you can take the standard deduction.
Higher standard deduction for age 65 or older.
You are entitled to a higher standard deduction if you are age 65 or older at the end of the year. You are considered 65 on the day before your
65th birthday. Therefore, you can take the higher standard deduction for 2005 if you were born before January 2,1941.
Use Table 4-2 to find the amount of your standard deduction.
Higher standard deduction for blindness.
If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. Use Table 4-2 to
find the amount. You qualify for this benefit if you are totally or partly blind.
Partly blind.
If you are partly blind, you must get a certified statement from an eye physician or registered optometrist that:
You cannot see better than 20/200 in the better eye with glasses or contact lenses, or
Your field of vision is not more than 20 degrees.
If your eye condition will never improve beyond these limits, the statement should include this fact. You must keep the statement in your records.
If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers,
you can take the higher standard deduction for blindness if you otherwise qualify.
Spouse 65 or older or blind.
You can take a higher standard deduction if your spouse is age 65 or older or blind and:
You file a joint return, or
You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and an exemption for your
spouse could not be claimed by another taxpayer.
You cannot claim the higher standard deduction for an individual other than yourself and your spouse.
Decedents.
The amount of the standard deduction for a decedent's final return is the same as it would have been had the decedent continued to live. However,
if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed.
Examples.
The following examples illustrate how to determine your standard deduction using Tables 4-1 and 4-2.
Example 1.
Larry, 66, and Donna, 67, are filing a joint return for 2005. Neither is blind. They decide not to itemize their deductions. They use Table 4-2.
Their standard deduction is $12,000.
Example 2.
Assume the same facts as in Example 1 except that Larry is blind at the end of 2005. They use Table 4-2. Larry and Donna's standard deduction is
$13,000.
Example 3.
Susan, 67, who is blind, qualifies as head of household in 2005. She has no itemized deductions. She uses Table 4-2. Her standard deduction is
$9,800.
Additional exemption amount for housing individuals displaced by Hurricane Katrina.
Hurricane KatrinaIn 2005 and 2006, you may be able to take an additional $500 exemption, up to $2,000, for each displaced person
you shelter because of Hurricane Katrina. See Publication 4492 for more information about the requirements and limitations.
Standard Deduction for Dependents
The standard deduction for an individual for whom an exemption can be claimed on another person's tax return generally is limited to the greater
of:
$800, or
The individual's earned income for the year plus $250 (but not more than the regular standard deduction amount, generally
$5,000).
However, if the individual is age 65 or older or blind, his or her standard deduction may be higher. Use Table 4-3 to determine his or her
standard deduction.
2005 Standard Deduction Tables
If you are married filling a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard
deduction even if you were born before January 2, 1941, or you are blind.
<ROM>Table 4-1.</ROM>
<IMARK>Standard Deduction Chart for Most People*IF your filing status is...THEN your standard deduction is...Single or Married filing separately$ 5,000 Married filing jointly or Qualifying widow(er) with dependent child10,000 Head of household7,300
* Do not use this chart if you were born before January 2, 1941, or you are blind, or if someone else can claim an exemption
for you (or your spouse if married filing jointly). Use Table 4-2 or 4-3 instead.
<ROM>Table 4-2.</ROM>
<IMARK>Standard Deduction Chart for People Born Before January 2, 1941, or Who are Blind*Check the correct number of boxes below. Then go to the chart.YouBorn before January 2, 1941
Blind
Your spouse, if claiming spouse's exemptionBorn before January 2, 1941
Blind
Total number of boxes you checked
IF your
filing status is...AND the number in the box above is...THEN your standard deduction is...Single1$ 6,250 27,500 Married filing jointly or 111,000 Qualifying widow(er)212,000 with dependent child313,000 414,000 Married filing 16,000 separately27,000 38,000 49,000 Head of household18,550 29,800
* If someone can claim an exemption for you (or your spouse if married filing jointly), use Table 4-3,
instead.
<ROM>Table 4-3.</ROM>
<IMARK>Standard Deduction Worksheet for DependentsUse this worksheet only if someone else can claim an exemption for you (or your spouse if married filing jointly).If you were born before January 2, 1941, or you are blind, check the correct number of boxes below. Then go to the
worksheet.YouBorn before January 2, 1941
Blind
Your spouse, if claiming spouse's exemptionBorn before January 2, 1941
Blind
Total number of boxes you checked
1.Enter your earned income (defined below). If none, enter -0-.1.2.Additional amount2.$2503.Add lines 1 and 2.3.4.Minimum standard deduction.4.$8005.Enter the larger of line 3 or line 4.5.6.Enter the amount shown below for your filing status.• Single or Married filing separately— $5,0006.• Married filing jointly or Qualifying
widow(er) with dependent child—$10,000
