52515047dTaxable and
Nontaxable
IncomeWhat's New1Reminders2Introduction2Employee Compensation2Miscellaneous Compensation3Fringe Benefits4Retirement Plan Contributions8Stock Options10Restricted Property11Special Rules for Certain Employees12Clergy12Members of Religious Orders13Foreign Employer13Military13Volunteers13Business and Investment Income14Rents From Personal Property14Royalties14Partnership Income15S Corporation Income15Sickness and Injury Benefits15Disability Pensions15Long-Term Care Insurance Contracts16Workers' Compensation16Other Sickness and Injury Benefits16Miscellaneous Income17Bartering17Canceled Debts17Host or Hostess19Life Insurance Proceeds19Recoveries19Survivor Benefits26Unemployment Benefits26Welfare and Other Public Assistance Benefits27Other Income28Repayments32How To Get Tax Help33Index35What's NewHurricane Katrina relief provisions.
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.
The Katrina Emergency Tax Relief Act of 2005 provides tax relief for persons affected by Hurricane Katrina. Some of the provisions are covered in
this publication. For information on other provisions, see Publication 4492.
Canceled nonbusiness debt. If you qualify, you can exclude from income the amount of a canceled nonbusiness debt. See
Exceptions, under Canceled Debts.
Mileage reimbursements to charitable volunteers. You can exclude from income amounts you receive as mileage reimbursements from
qualified charitable organizations for the use of a private passenger automobile and for the benefit of the organization in connection with providing
relief related to Hurricane Katrina. The amount you can exclude from income can be up to the standard business mileage rate. See
Volunteers, for more information.
Donation of accrued leave.
If your employer has adopted a leave-based donation program to aid victims of Hurricane Katrina, you can elect to give up vacation, sick, or
personal leave in exchange for cash payments your employer makes to a qualified organization. These payments are not included in your income. For more
information, see Donated accrued leave under Employee Compensation.
Disaster mitigation payments.
You can exclude from income grants you use to mitigate (reduce the severity of) potential damage from future natural disasters that is paid to you
through state and local governments. If you reported income from qualified disaster mitigation payments in previous years, you may be able to file a
claim for refund. For more information, see Disaster mitigation payments under Welfare and Other Public Assistance Benefits.
Nonqualified deferred compensation plans.
Generally, all amounts deferred under a nonqualified deferred compensation plan for all tax years are included in gross income for the current
year, unless certain requirements are met. See Nonqualified deferred compensation plans, under Employee Compensation.
Elective deferrals.Important changes and reminders:Elective deferralsRetirement plansElective deferralsElective deferrals
The limit on the amount of your wages you can elect to defer into certain retirement plans (such as section 401(k) plans) increases each year
through 2006. If you are age 50 or older, you may be able to make additional catch-up elective deferrals. See Elective Deferrals in the
discussion on retirement plan contributions under Employee Compensation.
RemindersTerrorist attacks.Important changes and reminders:Terrorist attacks, assistance or payments due toTerrorist attacks:Victims of, tax relief
You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action. For
more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.
Astronauts.Important changes and reminders:AstronautsAstronauts You can also exclude death payments for astronauts dying in the line of duty after 2002.
Foreign income.Important changes and reminders:Foreign income, reporting ofForeign:Income
If you are a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return
unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage
and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as
interest, dividends, capital gains, pensions, rents, and royalties).
Citizens outside U.S.:Exclusion of foreign incomeOverseas workIf you reside outside the United States, you may be able to exclude part or all of your foreign source earned
income. For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Photographs of missing children.Missing children, photographs of
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.
You can receive income in the form of money, property, or services. This publication discusses many kinds of income and explains whether they are
taxable or nontaxable. It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and
royalties. It also includes information on disability pensions, life insurance proceeds, and welfare and other public assistance benefits. Check the
index for the location of a specific subject.
Nontaxable incomeGenerally, an amount included in your income is taxable unless it is specifically exempted by law. Income that
is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not
taxable.
Constructively received income.Constructive receipt of incomeIncome:Constructive receipt of
You are generally taxed on income that is available to you, regardless of whether it is actually in your possession.
Last day of tax year, income received onA valid check that you received or that was made available to you before the end of the
tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next
year. For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you
must include the amount in your income for that tax year. If the check was mailed so that it could not possibly reach you until after the end of the
tax year, and you could not otherwise get the funds before the end of the year, you include the amount in your income for the next tax year.
Assignment of income.Income:Assigned
Income received by an agent for you is income you constructively received in the year the agent received it. If you agree by contract that a third
party is to receive income for you, you must include the amount in your income when the third party receives it.
Example.
You and your employer agree that part of your salary is to be paid directly to your former spouse. You must include that amount in your income when
your former spouse receives it.
Prepaid income.Accrual method taxpayersIncome:PrepaidPrepaid income
Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it. However, if you use an
accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case,
you include the payment in your income as you earn it by performing the services.
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.
Publication523Selling Your Home527Residential Rental Property (Including Rental of Vacation Homes)550Investment Income and Expenses (Including Capital Gains and Losses)559Survivors, Executors, and Administrators564Mutual Fund Distributions575Pension and Annuity Income915Social Security and Equivalent Railroad Retirement Benefits970Tax Benefits for Education
See How To Get Tax Help, near the end of this publication, for information about getting these publications.
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.
Form 1040:Wages from Form W-2Form 1040A:Wages from Form W-2Form 1040EZ:Wages from Form W-2Form W-2:Wage and tax statementYou should receive a Form W-2, Wage and Tax Statement, from your employer showing the pay you
received for your services. Include your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive a Form W-2.
Childcare providers.Childcare providersDaycare providers:Childcare providersForm 1040, Schedule C:Childcare providers to useForm 1040, Schedule C-EZ:Childcare providers to use
If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your
income. If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or
Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and
control of the person who employs you as to what you are to do and how you are to do it.
Baby-sitting.Baby-sitting
If you baby-sit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to
you.
This section discusses many types of employee compensation. The subjects are arranged in alphabetical order.
Advance commissions and other earnings.
If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include
these amounts in your income in the year you receive them.
Form 1040, Schedule A:Repayment of commissions paid in advanceIf you repay unearned commissions or other amounts in the same year you receive
them, reduce the amount included in your income by the repayment. If you repay them in a later tax year, you can deduct the repayment as an itemized
deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments, later.
Allowances and reimbursements.Business expenses:ReimbursementsReimbursements:Business expensesTravel and transportation expenses:Reimbursements
Fringe benefitsMoving expensesMoving expensesMoving expenses:ReimbursementsReimbursements:Moving expensesIf you receive travel, transportation, or other business expense allowances or reimbursements from your
employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. If you are reimbursed for moving expenses, see Publication 521, Moving
Expenses.
Back pay awards.Back pay, award forDamages from lawsuits:Back pay awardsForm W-2:Back pay awards
Include in income amounts you are awarded in a settlement or judgment for back pay. These include payments made to you for damages, unpaid life
insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W-2.
Bonuses and awards.BonusesPrizes and awards
Form W-2:Bonuses or awardsBonuses or awards you receive for outstanding work are included in your income and should be shown on your
Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must
include the fair market value of the goods or services in your income. However, if your employer merely promises to pay you a bonus or award at some
future time, it is not taxable until you receive it or it is made available to you.
Employee achievement award.Employee achievement awardsPrizes and awards:Achievement awards
If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length-of-service or safety
achievement, you generally can exclude its value from your income. However, the amount you can exclude is limited to your employer's cost and cannot
be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Your employer can tell you
whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and
circumstances that do not create a significant likelihood of it being disguised pay.
However, the exclusion does not apply to the following awards.
A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the
year or the previous 4 years.
Length-of-service awardsPrizes and awards:Length-of-service awards
A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of
eligible employees previously received safety achievement awards during the year.
Prizes and awards:Safety achievementSafety achievement awards
Example.
Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan
awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise
satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, Ben must
include $150 ($1,750 − $1,600) in his income.
If your employer has adopted a leave-based donation program to aid victims of Hurricane Katrina, you can elect to give up vacation, sick, or
personal leave in exchange for cash payments your employer makes to a qualified tax-exempt organization for the relief of those victims. Your employer
must make the payments to the organizations before January 1, 2007. These payments are not included in your income and you do not get a deduction for
the payments made to the organization. For more information on qualifying organizations, see Organizations That Qualify To Receive Deductible
Contributions, in Publication 526, Charitable Contributions.
Government cost-of-living allowances.Cost-of-living allowancesFederal employees:Cost-of-living allowancesGovernment employeesFederal employees
Cost-of-living allowances generally are included in your income. However, they are not included in your income if you are a federal civilian
employee or a federal court employee who is stationed in Alaska, Hawaii, or outside the United States.
Allowances and differentials that increase your basic pay as an incentive for taking a less desirable post of duty are part of your compensation
and must be included in income. For example, your compensation includes Foreign Post, Foreign Service, and Overseas Tropical differentials. For more
information, see Publication 516, U.S. Government Civilian Employees Stationed Abroad.
Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. This amount is shown
on Form W-2, box 12, using code Y. This amount is not included in your income.
However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts
deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. This amount is included in your
wages shown on Form W-2, box 1. It is also shown on Form W-2, box 12, using code Z.
For information on the requirements and the amount to include in income, see Internal Revenue Code section 409A and Notice 2005-1. The notice is on
page 274 of Internal Revenue Bulletin 2005-2 at www.irs.gov/pub/irs-irbs/irb05-02.pdf.
Note received for services.Notes received for services
If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the
note in your income for the year you receive it. When you later receive payments on the note, a proportionate part of each payment is the recovery of
the fair market value that you previously included in your income. Do not include that part again in your income. Include the rest of the payment in
your income in the year of payment.
If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal
amount of the note are compensation income when you receive them.
Severance pay.Employment:ContractsSeverance pay for cancellation ofSeverance pay
Amounts you receive as severance pay are taxable. A lump-sum payment for cancellation of your employment contract must be included in your income
in the tax year you receive it.
Accrued leave payment.Accrued leave payment:At time of retirement or resignationFederal employees:Accrued leave paymentForm W-2:Accrued leave payment at time of retirement or resignationLeaveAccrued leave payment
If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as
wages on your Form W-2.
If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second
agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the
receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2.
If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé
writing and interview techniques), you must include the unreduced amount of the severance pay in income.
Form 1040, Schedule A:Outplacement services, deduction forHowever, you can deduct the value of these outplacement services (up to the difference
between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2% of adjusted gross
income (AGI) limit) on Schedule A (Form 1040).
Sick pay.Sick pay
Pay you receive from your employer while you are sick or injured is part of your salary or wages. In addition, you must include in your income sick
pay benefits received from any of the following payers.
A welfare fund.
A state sickness or disability fund.
An association of employers or employees.
An insurance company, if your employer paid for the plan.
However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. For
more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later.
Social security and Medicare taxes paid by employer.FICA withholding:Paid by employerMedicare taxSocial security and Medicare taxesSocial security and Medicare taxes:Paid by employerMedicare:Tax paid by employer
If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross
wages, you must report the amount of tax paid for you as taxable wages on your tax return. The payment is also treated as wages for figuring your
social security and Medicare taxes and your social security and Medicare benefits. However, these payments are not treated as social security and
Medicare wages if you are a household worker or a farm worker.
Stock appreciation rights.Stock appreciation rights
Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. When you use the right, you are
entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use, minus the fair market value on the date the
right was granted. You include the cash payment in income in the year you use the right.
Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market
value for them or they are specifically excluded by law. Abstaining from the performance of services (for example, under a covenant not to compete) is
treated as the performance of services for purposes of these rules.
See Valuation of Fringe Benefits, later in this discussion, for information on how to determine the amount to include in income.
Recipient of fringe benefit.
You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You are considered to be the
recipient even if it is given to another person, such as a member of your family. An example is a car your employer gives to your spouse for services
you perform. The car is considered to have been provided to you and not to your spouse.
You do not have to be an employee of the provider to be a recipient of a fringe benefit. If you are a partner, director, or independent contractor,
you can also be the recipient of a fringe benefit.
Provider of benefit.
Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually
provides the fringe benefit to you. The provider can be a client or customer of an independent contractor.
Accounting period.
You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report
taxable noncash fringe benefits by using either of the following rules.
The general rule: benefits are reported for a full calendar year (January 1 – December 31).
The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as
paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the
prior year and the first 10 months of the current year.
Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who
receive a particular benefit.
You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example).
Form W-2.Form W-2:Fringe benefits reported on
Your employer reports your taxable fringe benefits in box 1 (Wages, tips, other compensation) of Form W-2. The total value of your fringe benefits
may also be noted in box 14. The value of your fringe benefits may be added to your other compensation on one Form W-2, or you may receive a separate
Form W-2 showing just the value of your fringe benefits in box 1 with a notation in box 14.
Accident or Health PlanAccident insuranceFringe benefits:Accident and health insuranceHealth:InsuranceInsurance:Health
Generally, the value of accident or health plan coverage provided to you by your employer is not included in your income. Benefits you receive from
the plan may be taxable, as explained, later, under Sickness and Injury Benefits.
Long-term care coverage.Long-term care insurance
Contributions by your employer to provide coverage for long-term care services generally are not included in your income. However, contributions
made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. This amount will be reported as
wages in box 1 of your Form W-2.
Archer MSA contributions.Archer MSAs
Form 8853:Archer MSAs and long-term care insurance contractsContributions by your employer to your Archer MSA generally are not
included in your income. Their total will be reported in box 12 of Form W-2, with code R. You must report this amount on Form 8853, Archer MSAs and
Long-Term Care Insurance Contracts. File the form with your return.
Health flexible spending arrangement (health FSA).Health:Flexible spending arrangement
If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of
your medical care expenses and those of your spouse and dependents, generally are not included in your income.
Health reimbursement arrangement (HRA).Health:Reimbursement arrangement
If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses and those
of your spouse and dependents generally are not included in your income.
See also Reimbursement for medical care under Other Sickness and Injury Benefits, later.
Health savings accounts (HSA).Health:Savings account
If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA.
Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Contributions made by your
employer are not included in your income. Distributions from your HSA that are used to pay qualified medical expenses are not included in your income.
Distributions not used for qualified medical expenses are included in your income. See Publication 969, Health Savings Accounts and Other Tax-Favored
Health Plans, for more information.
Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a
distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are
treated as guaranteed payments that are includible in the partner's gross income. In both situations, the partner can deduct the contribution made to
the partner's HSA.
Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in
the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.
You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with
your adoption of an eligible child. See Instructions for Form 8839 (Qualified Adoption Expenses), for more information.
Form 8839:Adoption assistanceAdoption benefits are reported by your employer in box 12 of Form W-2 with code T. They also are
included as social security and Medicare wages in boxes 3 and 5. However, they are not included as wages in box 1. To determine the taxable and
nontaxable amounts, you must complete Part III of Form 8839, Qualified Adoption Expenses. File the form with your return.
If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the
value is not included in your compensation. The gym must be used primarily by employees, their spouses, and their dependent children.
If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in
your compensation.
De Minimis (Minimal) BenefitsDe minimis benefitsFringe benefits:De minimis benefits
If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account
for it, the value is not included in your income. Generally, the value of benefits such as discounts at company cafeterias, cab fares home when
working overtime, and company picnics are not included in your income. Also see Employee Discounts, later.
Holiday gifts.Fringe benefits:Holiday giftsGifts:Holiday gifts from employerHoliday gifts
If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in
your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the
value of that gift as extra salary or wages regardless of the amount involved.
Dependent Care BenefitsDependent care benefitsFringe benefits:Dependent care benefits
If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Dependent
care benefits include:
Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work,
and
The fair market value of care in a daycare facility provided or sponsored by your employer.
The amount you can exclude is limited to the lesser of:
The total amount of dependent care benefits you received during the year,
The total amount of qualified expenses you incurred during the year,
Your earned income,
Your spouse's earned income, or
$5,000 ($2,500 if married filing separately).
Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form
W-2. Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2.
Form 1040A, Schedule 2:Child and dependent care expensesForm 2441:Child and dependent care expensesTo claim the exclusion, you must complete either Part III of Form 2441, Child and
Dependent Care Expenses, or Part III of Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers. (You cannot use Form
1040EZ.)
See the instructions for Form 2441 or Schedule 2 (Form 1040A) for more information.
If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. The
exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. However,
it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds).
The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage.
For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the
employer's previous tax year. (Ask your employer for this percentage.)
Investment counseling feesFinancial counseling fees paid for you by your employer are included in your income and must be
reported as part of wages. If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous
deduction (subject to the 2% of AGI limit).
Financial counseling fees:Retirement planning servicesFringe benefitsRetirement planningRetirement planning servicesInvestment counseling fees:Retirement planning servicesRetirement planning servicesQualified retirement planning services paid for you by your employer may be excluded from your
income. For more information, see Retirement Planning Services, later.
Group-Term Life InsuranceInsuranceLifeLife insuranceInsuranceLifeLife insurance
Generally, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in
your income. However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by
any amount you pay toward the purchase of the insurance.
For exceptions to this rule, see Entire cost excluded, and Entire cost taxed, later.
If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form
W-2. It is also shown separately in box 12 with code C.
Group-term life insurance.
This insurance is term life insurance protection (insurance for a fixed period of time) that:
Provides a general death benefit,
Is provided to a group of employees,
Is provided under a policy carried by the employer, and
Provides an amount of insurance to each employee based on a formula that prevents individual selection.
Permanent benefits.
If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income,
as wages, the cost of the permanent benefits minus the amount you pay for them. Your employer should be able to tell you the amount to include in your
income.
Accidental death benefits.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 insurance.
Former employer.
If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is
reported as wages in box 1 of Form W-2. Also, it is shown separately in box 12 with code C. Box 12 also will show the amount of uncollected social
security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them in your
total tax on line 63, Form 1040, and enter UT and the amount of the taxes on the dotted line next to line 63.
Two or more employers.
Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is
provided by a single employer or multiple employers. If two or more employers provide insurance coverage that totals more than $50,000, the amounts
reported as wages on your Forms W-2 will not be correct. You must figure how much to include in your income. Reduce the amount you figure by any
amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return.
Figuring the taxable cost.
Group-term life insurance:WorksheetsWorksheets:Group-term life insurance (Worksheet 1)Use the following worksheet to figure the amount to include in your income.
<ROM>Worksheet 1. </ROM>Figuring the Cost of Group-Term Life Insurance To Include in Income
1.Enter the total amount of your insurance coverage from your employer(s)1.2.Limit on exclusion for employer-provided group-term life insurance coverage2.50,0003.Subtract line 2 from line 13.4.Divide line 3 by $1,000. Figure to the nearest tenth4.5.Go to Table 1. Using your age on the last day of the tax year, find your age group in the left
column, and enter the cost from the column on the right for your age group 5.6.Multiply line 4 by line 56.
7.Enter the number of full months of coverage at this cost7.8.Multiply line 6 by line 78.9.Enter the premiums you paid per month9.10.Enter the number of months you paid the premiums10.11.Multiply line 9 by line 10.11.12.Subtract line 11 from line 8. Include this amount in your income as wages12.
Tables and figures:Group-term life insurance (Table 1)
<ROM>Table 1. </ROM>Cost of $1,000 of Group-Term Life Insurance for One MonthAgeCostUnder 25 $ .0525 through 29 .0630 through 34 .0835 through 39 .0940 through 44 .1045 through 49 .1550 through 54 .2355 through 59 .4360 through 64 .6665 through 69 1.2770 and older 2.06
If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you would otherwise include in your
income. However, you cannot reduce the amount to include in your income by:
Payments for coverage in a different tax year,
Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or
Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded.
Example.
You are 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your
coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the
amount to include in your income as follows.
<ROM>Worksheet 1.</ROM> Figuring the Cost of Group-Term Life Insurance To Include in Income—IllustratedGroup-term life insurance:WorksheetsWorksheets:Group-term life insurance (Worksheet 1)
1.Enter the total amount of your insurance coverage from your employer(s)1.80,0002.Limit on exclusion for employer-provided group-term life insurance coverage2.50,0003.Subtract line 2 from line 13.30,0004.Divide line 3 by $1,000. Figure to the nearest tenth4.30.05.Go to Table 1. Using your age on the last day of the tax year, find your age group in the left
column, and enter the cost from the column on the right for your age group 5..236.Multiply line 4 by line 56.6.907.Enter the number of full months of coverage at this cost.7.128.Multiply line 6 by line 78.82.809.Enter the premiums you paid per month9.4.1510.Enter the number of months you paid the premiums10.1211.Multiply line 9 by line 10.11.49.8012.Subtract line 11 from line 8. Include this amount in your income as wages12.33.00
The total amount to include in income for the cost of excess group-term life insurance is $33. Neither employer provided over $50,000 insurance
coverage, so the wages shown on your Forms W-2 do not include any part of that $33. You must add it to the wages shown on your Forms W-2 and include
the total on your return.
Entire cost excluded.
You are not taxed on the cost of group-term life insurance if any of the following circumstances apply.
You are permanently and totally disabled and have ended your employment.
Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.
A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is
in force during the tax year. (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the
beneficiary of your policy.)
The plan existed on January 1, 1984, and:
You retired before January 2, 1984, and were covered by the plan when you retired, or
You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.
Entire cost taxed.
You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply.
The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan.
You are a key employee and your employer's plan discriminates in favor of key employees.
InsuranceLifeLife insurance
Meals and LodgingFringe benefits:Meals and lodgingLodging:Employer-paid or reimbursedMeals:Employer-paid or reimbursedReimbursements:Meals and lodging
You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following
conditions are met.
The meals are:
Furnished on the business premises of your employer, and
Furnished for the convenience of your employer.
The lodging is:
Furnished on the business premises of your employer,
Furnished for the convenience of your employer, and
A condition of your employment. (You must accept it in order to be able to properly perform your duties.)
De minimis benefitsFringe benefits:De minimis benefitsYou also do not include in your income the value of meals or meal money that qualifies as a de
minimis fringe benefit. See De Minimis (Minimal) Benefits, earlier.
If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three
conditions above, you still may not have to include the value of the lodging in income. However, the lodging must be qualified campus lodging, and you
must pay an adequate rent.
Academic health center.Academic health centers:Meals and lodging when teaching and research organization
This is an organization that meets the following conditions.
Its principal purpose or function is to provide medical or hospital care or medical education or research.
It receives payments for graduate medical education under the Social Security Act.
One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own
faculty.
Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use
as a home. The lodging must be located on or near a campus of the educational institution or academic health center.
Adequate rent.
The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of:
5% of the appraised value of the lodging, or
The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational
institution.
If the amount you pay is less than the lesser of these amounts, you must include the difference in your income.
The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis.
Example.
Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. The house is appraised
at $100,000. The average rent paid for comparable university lodging by persons other than employees or students is $7,000 a year. Carl pays an annual
rent of $5,500. Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house
(5% × $100,000 = $5,000). If Carl paid annual rent of only $4,000, he would have to include $1,000 in his income ($5,000 − $4,000).
Generally, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid
them yourself, the value is not included in your income. See Publication 521 for more information.
The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer:
Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and
Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you
paid for the service).
Generally, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services.
Example.
You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Your employer allows you to take personal flights
(if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. The value of the personal
flight is not included in your income. However, the value of the hotel room is included in your income because you do not work in the hotel business.
If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not
included in your income. Qualified services include retirement planning advice, information about your employer's retirement plan, and information
about how the plan may fit into your overall individual retirement income plan. You cannot exclude the value of any tax preparation, accounting,
legal, or brokerage services provided by your employer. Also, see Financial Counseling Fees, earlier.
TransportationTravel and transportation expenses:Fringe benefits
If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. A
qualified transportation fringe benefit is:
Transportation in a commuter highway vehicle (such as a van) between your home and work place,
Fringe benefits:ParkingParking fees:Employer-paid or reimbursedCash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. However, cash
reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily
available for direct distribution to you.
Exclusion limit.
The exclusion for commuter highway vehicle transportation and transit pass fringe benefits cannot be more than a total of $105 a month.
The exclusion for the qualified parking fringe benefit cannot be more than $200 a month.
If the benefits have a value that is more than these limits, the excess must be included in your income.
Commuter highway vehicle.Vehicle:Commuter highway
This is a highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle's mileage must reasonably be
expected to be:
For transporting employees between their homes and work place, and
On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver).
This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a
reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation.
Qualified parking.Parking fees:Employer-paid or reimbursed
This is parking provided to an employee at or near the employer's place of business. It also includes parking provided on or near a location from
which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. It does not include parking at or near the
employee's home.
You can exclude a qualified tuition reduction from your income. This is the amount of a reduction in tuition:
For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled,
or his or her spouse and dependent children.
For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research
activities for that institution.
Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship
Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.
Armed Forces Health Professions ScholarshipNational Health Service Corps Scholarship ProgramFor more information, see Publication 970.
Working Condition BenefitsFringe benefits:Working condition benefitsWorking condition benefits
If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you
paid for it yourself, the cost is not included in your income.
Example.
You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. The cost of the subscription is not
included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself.
Valuation of Fringe BenefitsFringe benefits:Valuation ofValuation:Fringe benefits
If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the
special valuation rules. For an exception, see Group-Term Life Insurance, earlier.
General valuation rule.
You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of:
The amount, if any, you paid for the benefit, plus
The amount, if any, specifically excluded from your income by law.
If you pay fair market value for a fringe benefit, no amount is included in your income.
Fair market value.Fair market value (FMV)
The fair market value of a fringe benefit is determined by all the facts and circumstances. It is the amount you would have to pay a third party to
buy or lease the benefit. This is determined without regard to:
If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit.
Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or
a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. An example of a comparable lease term is the
amount of time the vehicle is available for your use, such as a 1-year period. The value cannot be determined by multiplying a cents-per-mile rate
times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis.
Flights on employer-provided aircraft.AircraftAirlines:Valuation of flights on employer-provided aircraftFlights:Employer-provided aircraft
Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the
aircraft for the flight, the value is the amount it would cost to charter the flight from a third party.
If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. The division must be
based on all the facts, including which employee or employees control the use of the aircraft.
Special valuation rules.
You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. If your employer uses a special valuation
rule, you cannot use a different special rule to value that benefit. You always can use the general valuation rule discussed earlier, based on facts
and circumstances, even if your employer uses a special rule.
If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule
minus the sum of:
Any amount you repaid your employer, plus
Any amount specifically excluded from income by law.
For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits.
Employee compensation:Fringe benefits For information on the non-commercial flight and commercial flight valuation rules, see sections 1.61-21(g)
and 1.61-21(h) of the regulations.
Fringe benefits:Valuation ofFringe benefitsRetirement Plan ContributionsEmployee compensation:Retirement plan contributionsRetirement plans:Contributions
Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. (Your employer can tell
you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See
Group-Term Life Insurance, earlier, under Fringe Benefits.
If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in
which the contributions are made. However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you
have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is
transferable or is no longer subject to a substantial risk of forfeiture.
If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a
retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a
qualified plan. It is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to social security
and Medicare taxes.
Elective deferrals include elective contributions to the following retirement plans.
Cash or deferred arrangements (section 401(k) plans).
Cash or deferred arrangements (CODAs)401(k) plans
The Thrift Savings Plan for federal employees.
Federal employees:Thrift Savings Plan forThrift Savings Plan
Section 501(c)(18)(D) plans. (But see Reporting by employer, later.)
501(c)(18)(D) plans
Section 457 plans.
457 plans
Overall limit on deferrals.Elective deferrals:Limit on
For 2005, you generally should not have deferred more than a total of $14,000 of contributions to the plans listed in (1) through (6) above. You
should not have deferred more than the lesser of your includible compensation (defined later) or $14,000 of contributions to the plan listed in (7)
above (section 457 plan).
Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you are responsible for
monitoring the total you defer to ensure that the deferrals are not more than the overall limit.
You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. For more
information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans (403(b) Plans).
For more information about additional elective deferrals to:
SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in Publication 560, Retirement Plans for Small
Business.
SIMPLE plans, see How Much Can Be Contributed on Your Behalf in chapter 3 of Publication 590, Individual Retirement Arrangements
(IRAs).
Section 457 plans, see Limit for deferrals under section 457 plans, later.
Limit for deferrals under SIMPLE plans.SIMPLE plans:Limit for deferrals under
If you are a participant in a SIMPLE plan, you generally should not have deferred more than $10,000 in 2005. Amounts you defer under a SIMPLE plan
count toward the overall limit ($14,000 for 2005) and may affect the amount you can defer under other elective deferral plans.
Limit for deferrals under section 457 plans.457 plans:Limit for deferrals under
If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt
organizations), you should have deferred no more than the lesser of your includible compensation or $14,000. However, if you are within 3 years of
normal retirement age, you may be allowed an increased limit if the plan allows it. See Increased limit, later.
Includible compensation.
This is the pay you received for the year from the employer who maintained the section 457 plan. It generally includes all the following payments.
Wages and salaries.
Fees for professional services.
The value of any employer-provided qualified transportation fringe benefit (defined under Transportation, earlier) that is not
included in your income.
Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items.
Commissions and tips.
Fringe benefits.
Bonuses.
Employer contributions (elective deferrals) to:
The section 457 plan.
Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income.
A salary reduction simplified employee pension (SARSEP).
A tax-sheltered annuity (section 403(b) plan).
A savings incentive match plan for employees (SIMPLE plan).
A section 125 cafeteria plan.
Instead of using the amounts listed above to determine your includible compensation, your employer can use any of the following amounts.
Your wages as defined for income tax withholding purposes.
Your wages as reported in box 1 of Form W-2, Wage and Tax Statement.
Your wages that are subject to social security withholding (including elective deferrals).
Increased limit.Elective deferrals:Increased limit for last 3 years prior to retirement age
During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the
lesser of:
Twice the dollar limit for the year, or
The limit for prior years minus the amount you deferred in prior years plus the lesser of:
Your includible compensation for the current year, or
You generally can have additional elective deferrals made to your governmental section 457 plan if:
You reached age 50 by the end of the year, and
No other elective deferrals can be made for you to the plan for the year because of limits or restrictions.
If you qualify, your limit can be the lesser of your includible compensation or $14,000 ($15,000 for 2006), plus $4,000 ($5,000 for 2006).
However, if you are within 3 years of retirement age and your plan provides the increased limit earlier, that limit may be higher.
If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2005 generally is $14,000 ($15,000 for
2006). However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare
service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the
least of the following amounts.
$3,000.
$15,000, reduced by increases to the overall limit that you were allowed in earlier years because of this years-of-service rule.
$5,000 times your number of years of service for the organization, minus the total elective deferrals under the plan for earlier years.
For more information, see Publication 571.
Reporting by employer.Elective deferrals:Reporting by employerForm W-2:Elective deferrals, reporting by employerW-2 formForm W-2
Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. Instead, your employer should mark the Retirement
plan checkbox in box 13 and show the total amount deferred in box 12.
Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. The
amount you contributed should be identified with code H in box 12. You may deduct the amount deferred subject to the limits that apply. Include
your deduction in the total on Form 1040, line 36. Enter the amount and 501(c)(18)(D) on the dotted line next to line 36.
If your deferrals exceed the limit, you must notify your plan by the date required by the plan. If the plan permits, the excess amount will be
distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions.
You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan must then pay you the amount
of the excess, along with any income earned on that amount, by April 15 of the following year.
You must include the excess deferral in your income for the year of the deferral. File Form 1040 to add the excess deferral amount to your wages on
line 7. Do not use Form 1040A or Form 1040EZ to report excess deferral amounts.
Excess not distributed.
If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. Therefore,
you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution.
Excess distributed to you.
If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not
include it in income again in the year you receive it. If you receive it later, you must include it in income in both the year of the deferral and the
year you receive it. Any income on the excess deferral taken out is taxable in the tax year in which you take it out. If you take out part of the
excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income.
Form 1099-R:Excess deferral amountsYou should receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year in which the excess deferral is distributed to you. Use the following rules to
report a corrective distribution shown on Form 1099-R for 2005.
If the distribution was for a 2005 excess deferral, your Form 1099-R should have the code 8 in box 7. Add the excess deferral amount
to your wages on your 2005 tax return.
If the distribution was for a 2004 excess deferral, your Form 1099-R should have the code P in box 7. If you did not add the excess
deferral amount to your wages on your 2004 tax return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return. If
you did not receive the distribution by April 15, 2005, you also must add it to your wages on your 2005 tax return.
If the distribution was for a 2003 excess deferral, your Form 1099-R should have the code D in box 7. If you did not add the excess
deferral amount to your wages on your 2003 tax return, you must file an amended return on Form 1040X. You also must add it to your wages on your 2005
income tax return.
If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code 8 in box 7. Add the income
amount to your wages on your 2005 income tax return, regardless of when the excess deferral was made.
Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you.
Include the loss as a negative amount on Form 1040, line 21 and identify it as Loss on Excess Deferral Distribution.
Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan.
It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.
If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section
401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly
compensated employees.
Form 1040:Excess contributions to elective deferralsHighly compensated employees:Excess contributions to elective deferralsIf the total contributed to the plan is more than the amount allowed under the
ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as
distributed to you and then contributed by you to the plan. You must include the excess contributions in your income as wages on Form 1040, line 7.
You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts.
If you receive excess contributions from a 401(k) plan and any income earned on the contributions within 2 months after the close
of the plan year, you must include them in your income in the year of the contribution. If you receive them later, or receive less than $100 excess
contributions, include the excess contributions and earnings in your income in the year distributed. If the excess contributions are recharacterized,
you must include them in income in the year a corrective distribution would have occurred. For a SARSEP, the employer must notify you by March 15
following the year in which excess contributions are made that you must withdraw the excess and earnings. You must include the excess contributions in
your income in the year of the contribution (or the year of the notification if less than $100) and include the earnings in your income in the year
withdrawn.
Form 1099-R:Excess contribution amountsYou should receive a Form 1099-R for the year in which the excess contributions are distributed
to you (or are recharacterized). Add excess contributions or earnings shown on Form 1099-R for 2005 to your wages on your 2005 tax return if code
8 is in box 7. If code P or D is in box 7, you may have to file an amended 2004 or 2003 return on Form 1040X to add the excess
contributions or earnings to your wages in the year of the contribution.
Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the
plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.
The amount contributed in 2005 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $42,000. Under
certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals
or a return of your after-tax contributions and earnings from these contributions.
A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in
the year paid. A corrective payment consisting of your after-tax contributions is not taxable.
Form 1099-R:Excess annual additionsIf you received a corrective payment of excess annual additions, you should receive a separate Form
1099-R for the year of the payment with the code E in box 7. Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or
line 12a of Form 1040A. Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A.
Retirement plans:ContributionsEven though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not
otherwise treated as a distribution from the plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early
distributions.
Employee compensation:Retirement plan contributionsStock OptionsEmployee compensation:Stock optionsOptions, stockStock options
If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you
receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the
option. However, if your option is a statutory stock option (defined later), you will not have any income until you sell or exchange your stock. Your
employer can tell you which kind of option you hold.
Nonstatutory Stock Options
Valuation:Stock optionsNonstatutory stock optionsIf you are granted a nonstatutory stock option, the amount of income to include and the time to
include it depend on whether the fair market value of the option can be readily determined. The fair market value of an option can be readily
determined if it is actively traded on an established market.
Fair market value (FMV):Stock optionsThe fair market value of an option that is not traded on an established market can be readily determined only
if all of the following conditions exist.
You can transfer the option.
You can exercise the option immediately in full.
The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of
the purchase price) that has a significant effect on the fair market value of the option.
The fair market value of the option privilege can be readily determined.
The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of
property subject to the option without risking any capital. For example, if during the exercise period the fair market value of stock subject to an
option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher
value. The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the
property subject to the option.
If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the
value of nonstatutory options and other stock-based compensation from that corporation. For more information on the excise tax, see Internal Revenue
Code section 4985.
Option with readily determined value.
If you receive a nonstatutory stock option that has a readily determined fair market value at the time it is granted to you, the option is treated
like other property received as compensation. See Restricted Property, later, for rules on how much income to include and when to include
it. However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not
apply to a nonstatutory option.
Option without readily determined value.
If the fair market value of the option is not readily determined at the time it is granted to you (even if it is determined later), you do not have
income until you transfer or exercise the option. When you exercise this kind of option, the restricted property rules apply to the property received.
The amount to include in your income is the difference between the amount you pay for the property and its fair market value when it becomes
substantially vested. Your basis in the property you acquire under the option is the amount you pay for it plus any amount you must include in your
gross income under this rule. For more information on restricted property, see Restricted Property, later.
Unrelated person.
If you transferred this kind of option in an arm's-length transaction to an unrelated person, you must include in your income the money or other
property you received for the transfer, as if you had exercised the option.
Related person.
Related party transactions:Stock option transferIf you transferred this kind of option in an arm's-length transaction to a related person after July
1, 2003, the option is not treated as exercised or closed at that time, and you do not include in your income the money or other property you received
for the transfer at that time. See Regulations section 1.83-7 for the definition of a related person.
Recourse note in satisfaction of the exercise price of an option.
If you are an employee, and you issue a recourse note to your employer in satisfaction of the exercise price of an option to acquire your
employer's stock, and your employer and you subsequently agree to reduce the stated principal amount of the note, you generally recognize compensation
income at the time and in the amount of the reduction.
Tax form.Form W-2:Stock options from employers
If you receive compensation from employer-provided nonstatutory stock options, it is reported in box 1 of Form W-2. It is also reported in box 12
using code V.
Divorced taxpayers:Stock options exercised incident to divorceForm 1099-MISC:Stock options exercised incident to divorceIf you are a nonemployee spouse and you exercise nonstatutory stock options you
received incident to a divorce, the income is reported to you on Form 1099-MISC, Miscella- neous Income, in box 3.
Statutory Stock Options
There are two kinds of statutory stock options.
Incentive stock options (ISOs), and
Form 1040, Schedule D:Stock options reported onIncentive stock options (ISOs)
Options granted under employee stock purchase plans.
Employee stock purchase plans
For either kind of option, you must be an employee of the company granting the option, or a related company, at all times beginning with the date
the option is granted, until 3 months before you exercise the option (for an incentive stock option, 1 year before if you are disabled). Also, the
option must be nontransferable except at death. If you do not meet the employment requirements, or you receive a transferable option, your option is a
nonstatutory stock option. See Nonstatutory Stock Options, earlier in this discussion.
If you receive a statutory stock option, do not include any amount in your income either when the option is granted or when you exercise it. You
have taxable income or a deductible loss when you sell the stock that you bought by exercising the option. Your income or loss is the difference
between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital
gain or loss and report it on Schedule D (Form 1040), Capital Gains and Losses, for the year of the sale.
However, you may have ordinary income for the year that you sell or otherwise dispose of the stock in either of the following situations.
You do not meet the holding period requirement. This situation generally applies if you sell the stock within 1 year after its transfer to
you or within 2 years after the option was granted. However, you are considered to meet the holding period requirement for certain sales after October
22, 2004, to comply with conflict-of-interest requirements.
You meet the conditions described under Option granted at a discount, under Employee stock purchase plan,
later.
Report your ordinary income as wages on Form 1040, line 7, for the year of the sale.
Capital gains or losses:Incentive stock options (ISOs)If you sell stock acquired by exercising an ISO and meet the holding period requirement, your
gain or loss from the sale is capital gain or loss.
If you do not meet the holding period requirement and you have a gain from the sale, the gain is ordinary income up to the amount by which the
stock's fair market value when you exercised the option exceeded the option price. Any excess gain is capital gain. If you have a loss from the sale,
it is a capital loss and you do not have any ordinary income.
Example.
Your employer, X Corporation, granted you an ISO on March 11, 2003, to buy 100 shares of X Corporation stock at $10 a share, its fair market value
at the time. You exercised the option on January 14, 2004, when the stock was selling on the open market for $12 a share. On January 24, 2005, you
sold the stock for $15 a share. Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the
option. In 2005, you must report the difference between the option price ($10) and the value of the stock when you exercised the option ($12) as
wages. The rest of your gain is capital gain, figured as follows:
Selling price ($15 × 100 shares) $ 1,500 Purchase price ($10 × 100 shares) −1,000 Gain $ 500 Amount reported as wages
[($12 × 100 shares) − $1,000] − 200 Amount reported as capital gain$ 300
Alternative minimum tax (AMT).Alternative minimum tax (AMT):Stock options
Form 6251:Alternative minimum taxFor the AMT, you must treat stock acquired through the exercise of an ISO as if no special treatment
applied. This means that, when your rights in the stock are transferable or no longer subject to a substantial risk of forfeiture, you must include as
an adjustment in figuring alternative minimum taxable income the amount by which the fair market value of the stock exceeds the option price. Enter
this adjustment on line 13 of Form 6251, Alternative Minimum Tax—Individuals. Increase your AMT basis in any stock you acquire by exercising the
ISO by the amount of the adjustment. However, no adjustment is required if you dispose of the stock in the same year you exercise the option.
See Restricted Property, later, for more information.
Your AMT basis in stock acquired through an ISO is likely to differ from your regular tax basis. Therefore, keep adequate records for both the AMT
and regular tax so that you can figure your adjusted gain or loss.
Example.
The facts are the same as in the previous example. On January 18, 2005, when the stock was selling on the open market for $14 a share, your rights
to the stock first became transferable. You include $400 ($1,400 value when your rights first became transferable minus $1,000 purchase price) as an
adjustment on Form 6251, line 13.
If you sold stock acquired by exercising an option granted under an employee stock purchase plan, determine your ordinary income and your capital
gain or loss as follows.
Option granted at a discount.Discounts:Employee stock purchase plans
If at the time the option was granted, the option price per share was less than 100% (but not less than 85%) of the fair market value of the share,
and you dispose of the share after meeting the holding period requirement, or you die while owning the share, you must include in your income as
compensation, the lesser of:
The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time the option was
granted, or
The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time of the
disposition or death.
For this purpose, if the option price was not fixed or determinable at the time the option was granted, the option price is figured as if the
option had been exercised at the time it was granted.
Capital gains or losses:Employee stock option plans (ESOPs)Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss,
and you do not have any ordinary income.
Example.
Your employer, Y Corporation, granted you an option under its employee stock purchase plan to buy 100 shares of stock of Y Corporation for $20 a
share at a time when the stock had a value of $22 a share. Eighteen months later, when the value of the stock was $23 a share, you exercised the
option, and 14 months after that you sold your stock for $30 a share. In the year of sale, you must report as wages the difference between the option
price ($20) and the value at the time the option was granted ($22). The rest of your gain ($8 per share) is capital gain, figured as follows:
Selling price ($30 × 100 shares) $ 3,000 Purchase price (option price)
($20 × 100 shares) −2,000 Gain $ 1,000 Amount reported as wages
[($22 × 100 shares) − $2,000]− 200 Amount reported as capital gain$ 800
Holding period requirement not met.
If you do not meet the holding period requirement, your ordinary income is the amount by which the stock's fair market value when you exercised the
option exceeded the option price. This ordinary income is not limited to your gain from the sale of the stock. Increase your basis in the stock by the
amount of this ordinary income. The difference between your increased basis and the selling price of the stock is a capital gain or loss.
Example.
Employee compensation:Stock optionsOptions, stockStock optionsThe facts are the same as in the previous example, except that you sold the stock only 6 months after you exercised
the option. You did not hold the stock long enough, so you must report $300 as wages and $700 as capital gain, figured as follows:
Selling price ($30 × 100 shares) $3,000 Purchase price (option price)
($20 × 100 shares) −2,000 Gain $1,000 Amount reported as wages
[($23 × 100 shares) − $2,000]− 300 Amount reported as capital gain [$3,000 – ($2,000 + $300)]$700
Generally, if you receive property for your services, you must include its fair market value in your income in the year you receive the property.
However, if you receive stock or other property that has certain restrictions that affect its value, you do not include the value of the property in
your income until it has been substantially vested. (You can choose to include the value of the property in your income in the year it is transferred
to you, as discussed later, rather than the year it is substantially vested.)
Until the property becomes substantially vested, it is owned by the person who makes the transfer to you, usually your employer. However, any
income from the property, or the right to use the property, is included in your income as additional compensation in the year you receive the income
or have the right to use the property.
When the property becomes substantially vested, you must include its fair market value, minus any amount you paid for it, in your income for that
year.
Example.
Your employer, the RST Corporation, sells you 100 shares of its stock at $10 a share. At the time of the sale the fair market value of the stock is
$100 a share. Under the terms of the sale, the stock is under a substantial risk of forfeiture (you have a good chance of losing it) for a 5-year
period. Your stock is not substantially vested when it is transferred, so you do not include any amount in your income in the year you buy it. At the
end of the 5-year period, the fair market value of the stock is $200 a share. You must include $19,000 in your income [100 shares × ($200 fair
market value − $10 you paid)]. Dividends paid by the RST Corporation on your 100 shares of stock are taxable to you as additional compensation
during the period the stock can be forfeited.
It is not subject to a substantial risk of forfeiture. (You do not have a good chance of losing it.)
Transferable property.Transferable property
Property is transferable if you can sell, assign, or pledge your interest in the property to any person (other than the transferor), and if the
person receiving your interest in the property is not required to give up the property, or its value, if the substantial risk of forfeiture occurs.
Substantial risk of forfeiture.Substantial risk of forfeiture
A substantial risk of forfeiture exists if the rights in the property transferred depend on performing (or not performing) substantial services, or
on a condition related to the transfer, and the possibility of forfeiture is substantial if the condition is not satisfied.
Example.
The Spin Corporation transfers to you as compensation for services 100 shares of its corporate stock for $100 a share. Under the terms of the
transfer, you must resell the stock to the corporation at $100 a share if you leave your job for any reason within 3 years from the date of transfer.
You must perform substantial services over a period of time and you must resell the stock to the corporation at $100 a share (regardless of its value)
if you do not perform the services, so your rights to the stock are subject to a substantial risk of forfeiture.
Choosing to include in income for year of transfer.
You can choose to include the value of restricted property at the time of transfer (minus any amount you paid for the property) in your income for
the year it is transferred. If you make this choice, the substantial vesting rules do not apply and, generally, any later appreciation in value is not
included in your compensation when the property becomes substantially vested. Your basis for figuring gain or loss when you sell the property is the
amount you paid for it plus the amount you included in income as compensation.
If you make this choice, you cannot revoke it without the consent of the Internal Revenue Service. Consent will be given only if you were under a
mistake of fact as to the underlying transaction.
If you forfeit the property after you have included its value in income, your loss is the amount you paid for the property minus any amount you
realized on the forfeiture.
You cannot make this choice for a nonstatutory stock option.
How to make the choice.
You make the choice by filing a written statement with the Internal Revenue Service Center where you file your return. You must file this statement
no later than 30 days after the date the property was transferred. A copy of the statement must be attached to your tax return for the year the
property was transferred. You also must give a copy of this statement to the person for whom you performed the services and, if someone other than you
received the property, to that person.
83(b) electionYou must sign the statement and indicate on it that you are making the choice under section 83(b) of the Internal
Revenue Code. The statement must contain all of the following information.
Your name, address, and taxpayer identification number.
A description of each property for which you are making the choice.
The date or dates on which the property was transferred and the tax year for which you are making the choice.
The nature of any restrictions on the property.
The fair market value at the time of transfer (ignoring restrictions except those that will never lapse) of each property for which you are
making the choice.
Any amount that you paid for the property.
A statement that you have provided copies to the appropriate persons.
Dividends received on restricted stock.Dividends:Restricted stock
Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on
your Form W-2. If they are also reported on a Form 1099-DIV, Dividends and Distributions, you should list them on Schedule B (Form 1040) or Schedule 1
(Form 1040A), Interest and Ordinary Dividends for Form 1040A Filers, with a statement that you have included them as wages. Do not include them in the
total dividends received.
Stock you chose to include in your income.Form 1040, Schedule B:Restricted stock dividendsForm 1040A, Schedule 1:Restricted stock dividendsForm 1099-DIV:Restricted stock dividends
Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends.
You should receive a Form 1099-DIV showing these dividends. Do not include the dividends in your wages on your return. Report them as dividends.
Sale of property not substantially vested.
These rules apply to the sale or other disposition of property that you did not choose to include in your income in the year transferred and that
is not substantially vested.
If you sell or otherwise dispose of the property in an arm's-length transaction, include in your income as compensation for the year of sale the
amount realized minus the amount you paid for the property. If you exchange the property in an arm's-length transaction for other property that is not
substantially vested, treat the new property as if it were substituted for the exchanged property.
The sale or other disposition of a nonstatutory stock option to a related person is not considered an arm's-length transaction. See Regulations
section 1.83-7 for the definition of a related person.
If you sell the property in a transaction that is not at arm's length, include in your income as compensation for the year of sale the total of any
money you received and the fair market value of any substantially vested property you received on the sale. In addition, you will have to report
income when the original property becomes substantially vested, as if you still held it. Report as compensation its fair market value minus the total
of the amount you paid for the property and the amount included in your income from the earlier sale.
Example.
In 2002, you paid your employer $50 for a share of stock that had a fair market value of $100 and was subject to forfeiture until 2005. In 2004,
you sold the stock to your spouse for $10 in a transaction not at arm's length. You had compensation of $10 from this transaction. In 2005, when the
stock had a fair market value of $120, it became substantially vested. For 2005, you must report additional compensation of $60, figured as follows:
Fair market value of stock at time of substantial vesting $120 Minus: Amount paid for stock $50 Minus: Compensation previously included in income from sale to spouse 10 −60 Additional income $60
Inherited property not substantially vested.Inheritance:Property not substantially vested
Employee compensation:Restricted propertyRestricted propertyIf you inherit property not substantially vested at the time of the decedent's death, any income you receive
from the property is considered income in respect of a decedent and is taxed according to the rules for restricted property received for services. For
information about income in respect of a decedent, see Publication 559.
Employee compensationSpecial Rules for
Certain Employees
This part of the publication deals with special rules for people in certain types of employment: members of the clergy, members of religious
orders, people working for foreign employers, military personnel, and volunteers.
ClergyClergy
If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc.,
in addition to your salary. If the offering is made to the religious institution, it is not taxable to you.
If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your
income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. See Publication 526. Also, see
Members of Religious Orders, later.
Pension.Pensions:Clergy
A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. It must be reported on lines 16a and 16b
of Form 1040 or on lines 12a and 12b of Form 1040A.
HousingHousingLodgingLodging:Clergy
Special rules for housing apply to members of the clergy. Under these rules, you do not include in your income the rental value of a home
(including utilities) or a designated housing allowance provided to you as part of your pay. However, the exclusion cannot be more than the reasonable
pay for your service. If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. The home or
allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. However, you must include the rental
value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040), Self-Employment Tax, if you are subject to the
self-employment tax. For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Members of Religious OrdersReligious order members
If you are a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order
depends on whether your services are performed for the order.
Services performed for the order.
If you are performing the services as an agent of the order in the exercise of duties required by the order, do not include in your income the
amounts turned over to the order.
If your order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to be
performing the services as an agent of the order. Any wages you earn as an agent of an order that you turn over to the order are not included in your
income.
Example.
You are a member of a church order and have taken a vow of poverty. You renounce any claims to your earnings and turn over to the order any
salaries or wages you earn. You are a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the
church. However, you remain under the general direction and control of the order. You are considered to be an agent of the order and any wages you
earn at the hospital that you turn over to your order are not included in your income.
Services performed outside the order.
If you are directed to work outside the order, your services are not an exercise of duties required by the order unless they meet both of the
following requirements.
They are the kind of services that are ordinarily the duties of members of the order.
They are part of the duties that you must exercise for, or on behalf of, the religious order as its agent.
If you are an employee of a third party, the services you perform for the third party will not be considered directed or required of you by the
order. Amounts you receive for these services are included in your income, even if you have taken a vow of poverty.
Example 1.
Mark Brown is a member of a religious order and has taken a vow of poverty. He renounces all claims to his earnings and turns over his earnings to
the order.
Mark is a schoolteacher. He was instructed by the superiors of the order to get a job with a private tax-exempt school. Mark became an employee of
the school, and, at his request, the school made the salary payments directly to the order.
Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. The wages Mark earns
working for the school are included in his income.
Example 2.
Gene Dennis is a member of a religious order who, as a condition of membership, has taken vows of poverty and obedience. All claims to his earnings
are renounced. Gene received permission from the order to establish a private practice as a psychologist and counsels members of religious orders as
well as nonmembers. Although the order reviews Gene's budget annually, Gene controls not only the details of his practice but also the means by which
his work as a psychologist is accomplished.
Gene's private practice as a psychologist does not make him an agent of the religious order. The psychological services provided by Gene are not
the type of services that are provided by the order. The income Gene earns as a psychologist is earned in his individual capacity. Gene must include
in his income the earnings from his private practice.
Foreign EmployerEmployer, foreignForeign:EmploymentIncome:Foreign employersInternational organizations, employees of
Special rules apply if you work for a foreign employer.
U.S. citizen.
If you are a U.S. citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign
employer, you must include your salary in your income.
Social security and Medicare taxes.FICA withholding:Foreign employers, U.S. citizens working for in U.S.Medicare taxSocial security and Medicare taxesSelf-employed persons:U.S. citizens working for foreign employers in U.S. treated asSocial security and Medicare taxes:Foreign employers, U.S. citizens working for in U.S.
You are exempt from social security and Medicare employee taxes if you are employed in the United States by an international organization or a
foreign government. However, you must pay self-employment tax on your earnings from services performed in the United States, even though you are not
self-employed. This rule also applies if you are an employee of a qualifying wholly owned instrumentality of a foreign government.
Employees of international organizations or foreign governments.
Your compensation for official services to an international organization is exempt from federal income tax if you are not a citizen of the United
States or you are a citizen of the Philippines (whether or not you are a citizen of the United States).
Foreign:Governments, employees ofYour compensation for official services to a foreign government is exempt from federal income tax
if all of the following are true.
You are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United
States).
Your work is like the work done by employees of the United States in foreign countries.
The foreign government gives an equal exemption to employees of the United States in its country.
Waiver of alien status.Alien status, waiver of
If you are an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration
and Nationality Act to keep your immigrant status, any salary you receive after the date you file the waiver is not exempt under this rule. However,
it may be exempt under a treaty or agreement. See Publication 519, U.S. Tax Guide for Aliens, for more information about treaties.
Nonwage income.
This exemption applies only to employees' wages, salaries, and fees. Pensions and other income do not qualify for this exemption.
Employment abroad.Employment:Abroad
For information on the tax treatment of income earned abroad, see Publication 54.
MilitaryArmed forcesMilitaryArmed forces
Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension.
Allowances generally are not taxed. For more information on the tax treatment of military allowances and benefits, see Publication 3, Armed Forces'
Tax Guide.
Military retirement pay.Armed forces:Retirement payPensions:MilitaryRetirement plans:Pensions
If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 16a and 16b of
Form 1040 or on lines 12a and 12b of Form 1040A. Do not include in your income the amount of any reduction in retirement or retainer pay to provide a
survivor annuity for your spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan.
For a more detailed discussion of survivor annuities, see Publication 575.
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). The following amounts paid to veterans or their families are not taxable.
Education, training, and subsistence allowances.
Disability compensation and pension payments for disabilities paid either to veterans or their families.
Grants for homes designed for wheelchair living.
Grants for motor vehicles for veterans who lost their sight or the use of their limbs.
Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment
policy paid before death.
Interest on insurance dividends left on deposit with the VA.
Benefits under a dependent-care assistance program.
The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001.
Rehabilitative program payments.Armed forces:Rehabilitative program paymentsRehabilitative program payments
VA payments to hospital patients and resident veterans for their services under the VA's therapeutic or rehabilitative programs are not treated as
nontaxable veterans' benefits. Report these payments as income on Form 1040, line 21.
VolunteersVolunteer work
The tax treatment of amounts you receive as a volunteer is covered in the following discussions.
Mileage reimbursements to charitable volunteers providing relief relating to Hurricane Katrina.
You can exclude from income amounts you receive as mileage reimbursements from qualified charitable organizations. You cannot claim a deduction or
credit for amounts you receive as a mileage reimbursement.
The reimbursements must be for the use of a private passenger automobile for the benefit of the organization in providing relief related to
Hurricane Katrina during the period beginning on August 25, 2005, and ending on December 31, 2006. You must keep records of miles driven, time, place
(or use), and purpose of the mileage. The amount you can exclude from income can be up to the standard business mileage rate.
For expenses incurred after August 24, 2005, and before September 1, 2005, the standard business mileage rate is 40.5 cents per mile. For expenses
incurred after August 31, 2005, and before January 1, 2006, the standard business mileage rate is 48.5 cents per mile.
Peace Corps.Peace Corps
Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are
exempt from tax.
Taxable allowances.
The following allowances must be included in your income and reported as wages.
Allowances paid to your spouse and minor children while you are a volunteer leader training in the United States.
Living allowances designated by the Director of the Peace Corps as basic compensation. These are allowances for personal items such as
domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses.
Leave allowances.
Readjustment allowances or termination payments. These are considered received by you when credited to your account.
Example.
Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump
sum at the end of his tour of duty. Although the allowance is not available to him until the end of his service, Gary must include it in his income on
a monthly basis as it is credited to his account.
Volunteers in Service to America (VISTA).Volunteers in Service to America (VISTA)
If you are a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages.
National Senior Service Corps programs.National Senior Service Corps
Do not include in your income amounts you receive for supportive services or reimbursements for out- of-pocket expenses from the following
programs.
Retired Senior Volunteer Program (RSVP).
Retired Senior Volunteer Program (RSVP)
Foster Grandparent Program.
Foster Grandparent Program
Senior Companion Program.
Senior Companion Program
Service Corps of Retired Executives (SCORE).Service Corps of Retired Executives (SCORE)
If you receive amounts for supportive services or reimbursements for out- of-pocket expenses from SCORE, do not include these amounts in
gross income.
Volunteer tax counseling.Elderly persons:Tax Counseling for the ElderlyTax Counseling for the ElderlyVolunteer work:Tax counseling (Volunteer Income Tax Assistance Program)
Do not include in your income any reimbursements you receive for transportation, meals, and other expenses you have in training for, or actually
providing, volunteer federal income tax counseling for the elderly (TCE).
You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA)
program.
Business and
Investment IncomeBusiness incomeIncome:Business and investmentInvestment income
This section provides information on the treatment of income from certain rents and royalties, and from interests in partnerships and S
corporations. For additional information about business and investment income, you may want to see the following publications.
Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).
Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
Publication 541, Partnerships.
Publication 544, Sales and Other Dispositions of Assets.
Publication 550, Investment Income and Expenses (Including Capital Gains and Losses).
Income from sales at auctions, including online auctions, may be business income. For more information, see Publication 334.
Rents From Personal PropertyPersonal property:Rental income and expenseRental income and expenses:Personal property rental
If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by:
Whether or not the rental activity is a business, and
Whether or not the rental activity is conducted for profit.
Generally, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental
activity is a business. See Publication 535, Business Expenses, for details on deducting expenses for both business and not-for-profit activities.
Reporting business income and expenses.Form 1040, Schedule C:Personal property rental, reporting income fromForm 1040, Schedule C-EZ:Personal property rental, reporting income fromRental income and expenses:Reporting of
If you are in the business of renting personal property, report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). The form
instructions have information on how to complete them.
Reporting nonbusiness income.
If you are not in the business of renting personal property, report your rental income on Form 1040, line 21. List the type and amount of the
income on the dotted line next to line 21.
Reporting nonbusiness expenses.
If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040, line 36. Also, enter the amount
and PPR on the dotted line next to line 36.
If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset other income. See Activity
not for profit under Other Income in the discussion of Miscellaneous Income, later.
RoyaltiesRoyalties
Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income.
Form 1040, Schedule C:RoyaltiesForm 1040, Schedule C-EZ:RoyaltiesForm 1040, Schedule E:RoyaltiesYou generally report royalties in Part I of Schedule E (Form 1040), Supplemental Income and Loss. However, if you
hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses
on Schedule C or Schedule C-EZ (Form 1040).
Copyrights and patents.Copyrights:RoyaltiesPatents:Royalties
Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions, are amounts paid to you for
the right to use your work over a specified period of time. Royalties generally are based on the number of units sold, such as the number of books,
tickets to a performance, or machines sold.
Oil, gas, and minerals.Oil:Royalties fromGas:Royalties fromMinerals:Royalties from
Royalty income from oil, gas, and mineral properties is the amount you receive when natural resources are extracted from your property. The
royalties are based on units, such as barrels, tons, etc., and are paid to you by a person or company who leases the property from you.
Depletion.Depletion allowance
If you are the owner of an economic interest in mineral deposits or oil and gas wells, you can recover your investment through the depletion
allowance. For information on this subject, see chapter 10 of Publication 535.
Coal and iron ore.CoalIron ore
Under certain circumstances, you can treat amounts you receive from the disposal of coal and iron ore as payments from the sale of a capital asset,
rather than as royalty income. For information about gain or loss from the sale of coal and iron ore, see Publication 544.
Sale of property interest.1231 property sale
If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of section 1231
property, not royalty income. Under certain circumstances, the sale is subject to capital gain or loss treatment on Schedule D (Form 1040). For more
information on selling section 1231 property, see chapter 3 of Publication 544.
If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the property, you have made a lease
or a sublease, and any cash you receive for the assignment of other interests in the property is ordinary income subject to a depletion allowance.
Part of future production sold.
If you own mineral property but sell part of the future production, you generally treat the money you receive from the buyer at the time of the
sale as a loan from the buyer. Do not include it in your income or take depletion based on it.
When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct depletion from that amount to
arrive at your taxable income from the property.
Partnership IncomeIncome:PartnershipPartner and partnership income
A partnership generally is not a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed through to the
partners based on each partner's distributive share of these items. For more information, see Publication 541, Partnerships.
Partner's distributive share.
Your distributive share of partnership income, gains, losses, deductions, or credits generally is based on the partnership agreement. You must
report your distributive share of these items on your return whether or not they actually are distributed to you. However, your distributive share of
the partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took
place.
Partnership agreement.
The partnership agreement usually covers the distribution of profits, losses, and other items. However, if the agreement does not state how a
specific item of gain or loss will be shared, or the allocation stated in the agreement does not have substantial economic effect, your distributive
share is figured according to your interest in the partnership.
Partnership return.Form 1065:Partnership return
Although a partnership generally pays no tax, it must file an information return on Form 1065, U.S. Return of Partnership Income. This shows the
result of the partnership's operations for its tax year and the items that must be passed through to the partners.
Schedule K-1 (Form 1065).Form 1065, Schedule K-1:Partner's share of income
You should receive from each partnership in which you are a member a copy of Schedule K-1 (Form 1065), Partner's Share of Income, Deductions,
Credits, etc., showing your share of income, deductions, credits, and tax preference items of the partnership for the tax year. Retain Schedule K-1
for your records. Do not attach it to your Form 1040.
Partner's return.
Form 1040, Schedule E:Partner's returnYou generally must report partnership items on your individual return the same way as they are reported on
the partnership return. That is, if the partnership had a capital gain, you report your share on Schedule D (Form 1040). You report your share of
partnership ordinary income on Schedule E (Form 1040).
Form 1065, Schedule K-1:Partner's share of incomeGenerally, Schedule K-1 (Form 1065) will tell you where to report each item of income on your
individual return.
S Corporation IncomeIncome:S corporationS corporations
In general, an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed
through to the shareholders based on each shareholder's pro rata share. You must report your share of these items on your return.
Generally, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate.
S corporation return.Form 1120S:S corporation return
An S corporation must file a return on Form 1120S, U.S. Income Tax Return for an S Corporation. This shows the results of the corporation's
operations for its tax year and the items of income, losses, deductions, or credits that affect the shareholders' individual income tax returns.
Schedule K-1 (Form 1120S).Form 1120S, Schedule K-1:Shareholder's share of income, credits, deductions, etc.
You should receive from the S corporation in which you are a shareholder a copy of Schedule K-1 (Form 1120S), Shareholder's Share of Income,
Deductions, Credits, etc., showing your share of income, losses, deductions, and credits, of the S corporation for the tax year. Retain Schedule K-1
for your records. Do not attach it to your Form 1040.
Shareholder's return.
Your distributive share of the items of income, losses, deductions, or credits of the S corporation must be shown separately on your Form 1040. The
character of these items generally is the same as if you had realized or incurred them personally.
Generally, Schedule K-1 (Form 1120S) will tell you where to report each item of income on your individual return.
Distributions.
Generally, S corporation distributions are a nontaxable return of your basis in the corporation stock. However, in certain cases, part of the
distributions may be taxable as a dividend, or as a long-term or short-term capital gain, or as both. The corporation's distributions may be in the
form of cash or property.
More information.
Business incomeIncome:Business and investmentInvestment incomeFor more information, see the Instructions for Form 1120S.
Sickness and
Injury BenefitsInjury benefitsSickness and injury benefits
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. For information on nontaxable payments, see Military and Government Disability
Pensions and Other Sickness and Injury Benefits, later in this discussion.
Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established.
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. See Recoveries under Miscellaneous Income, later.
Cafeteria plans.Cafeteria plans
Generally, if you are covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums was not
included in your income, you are not considered to have paid the premiums and you must include any benefits you receive in your income. If the amount
of the premiums was included in your income, you are considered to have paid the premiums and any benefits you receive are not taxable.
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.
Military and Government
Disability PensionsArmed forces:Disability pensionsFederal employees:Disability pensions
Certain military and government disability pensions are not taxable.
Service-connected disability.
You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting
from active service in one of the following government services.
The armed forces of any country.
The National Oceanic and Atmospheric Administration.
National Oceanic and Atmospheric Administration
The Public Health Service.
Public Health Service
The Foreign Service.
Foreign:Service
Conditions for exclusion.
Do not include the disability payments in your income if any of the following conditions apply.
You were entitled to receive a disability payment before September 25, 1975.
You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on
September 24, 1975.
You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:
Results directly from armed conflict,
Takes place while you are engaged in extra-hazardous service,
Takes place under conditions simulating war, including training exercises such as maneuvers, or
Is caused by an instrumentality of war.
You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it.
Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.
Pension based on years of service.
If you receive a disability pension based on years of service, you generally must include it in your income. However, if the pension qualifies for
the exclusion for a service-connected disability (discussed earlier), do not include in income the part of your pension that you would have received
if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.
Retroactive VA determination.Veterans' benefits:Disability compensation
If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA,
your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to
receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form
1040X for each previous year during the retroactive period.
If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from
your income. However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from
active duty, even if you are later given a retroactive disability rating by the VA.
Terrorist attack or military action.Armed forces:Military action as cause of disability injuriesTerrorist attacks:Disability payments for injuries from
Do not include in your income disability payments you receive for injuries resulting directly from a terrorist or military action.
A terrorist action is one that is directed against the United States or any of its allies (including a multinational force in which the United
States is participating). A military action is one that involves the armed forces of the United States and is a result of actual or threatened
violence or aggression against the United States or any of its allies, but does not include training exercises.
Long-Term Care
Insurance ContractsLong-term care insurance
InsuranceLong-term careLong-term care insuranceLong-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. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance
contract, you must file Form 8853 with your return.
A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. The contract must:
Be guaranteed renewable,
Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends
under the contract may be used only to reduce future premiums or increase future benefits, and
Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a
secondary payer or the contract makes per diem or other periodic payments without regard to expenses.
Qualified long-term care services.
Qualified long-term care services are:
Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care
services, and
Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Chronically ill individual.Chronic illness
A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the
following.
An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to
loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive
impairment.
Limit on exclusion.
The exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract is subject to a limit.
The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life
insurance contract because the insured is chronically ill. (For more information on accelerated death benefits, see Life Insurance Proceeds
under Miscellaneous Income, later.)
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for
the cost of qualified long-term care services during the period from the larger of the following amounts.
The cost of qualified long-term care services during the period.
The dollar amount for the period ($240 per day for any period in 2005).
See Section C of Form 8853 and its instructions for more information.
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 Other
Income under Miscellaneous Income, later.
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.
If your disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities, part of it may be
workers' compensation. That part is exempt from tax. The rest of your pension, based on years of service, is taxable as pension or annuity income. If
you die, the part of your survivors' benefit that is a continuation of the workers' compensation is exempt from tax.
Other Sickness
and Injury Benefits
In addition to disability pensions and annuities, you may receive other payments for sickness or injury.
Railroad sick pay.Railroads:Sick pay
Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. However, do
not include them in your income if they are for an on-the-job injury.
Black lung benefit payments.Black lung benefit payments
These payments are similar to workers' compensation and generally are not taxable.
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. For a discussion of the taxability of these benefits, see
Other Income under Miscellaneous Income, later.
You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. It is a
miscellaneous deduction subject to the 2% of AGI limit on Schedule A (Form 1040). If you buy back sick leave in the same year you used it, the amount
reduces your taxable sick leave pay. Do not deduct it separately.
Other compensation.
Many other amounts you receive as compensation for sickness or injury are not taxable. These include the following amounts.
Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments. See
Court awards and damages under Other Income, later.
Compensatory damagesDamages from lawsuits:Compensatory damages
Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums
but you had to include them in your income.
Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.
No-fault car insurance:Disability benefits under
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.
Reimbursement for medical care.Medical:Care reimbursementsReimbursements:Medical expenses
A reimbursement for medical care generally is not taxable. However, it may reduce your medical expense deduction. If you receive reimbursement for
an expense you deducted in an earlier year, see Recoveries, later.
If you receive an advance reimbursement or loan for future medical expenses from your employer without regard to whether you suffered
a personal injury or sickness or incurred medical expenses, that amount is included in your income, whether or not you incur uninsured medical
expenses during the year.
Reimbursements received under your employer's plan for expenses incurred before the plan was established are included in income.
Injury benefitsSickness and injury benefitsReimbursements received under your employer's plan of the amount paid for nonprescription medicines
and drugs (such as allergy medicine, pain reliever, and cold medicine) are not included in income. However, reimbursements of the amount paid for
dietary supplements (such as vitamins) that are merely beneficial to your general health are included in income.
This section discusses various types of income. You may have taxable income from certain transactions even if no money changes hands. For example,
you may have taxable income if you lend money at a below-market interest rate or have a debt you owe canceled.
BarteringBarter income
Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or
services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time as to the value of the
services, that value will be accepted as fair market value unless the value can be shown to be otherwise.
Form 1040, Schedule C:BarteringForm 1040, Schedule C-EZ:BarteringGenerally, you report this income on Schedule C or Schedule C-EZ (Form 1040). However, if the barter involves an
exchange of something other than services, such as in Example 4 below, you may have to use another form or schedule instead.
Example 1.
You are a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you shares of its stock as
payment for your services. You must include the fair market value of the shares in your income on Schedule C or Schedule C-EZ (Form 1040) in the year
you receive them.
Example 2.
You are a self-employed accountant. You and a house painter are members of a barter club. Members get in touch with each other directly and bargain
for the value of the services to be performed. In return for accounting services you provided, the house painter painted your home. You must report as
your income on Schedule C or Schedule C-EZ (Form 1040) the fair market value of the house painting services you received. The house painter must
include in income the fair market value of the accounting services you provided.
Example 3.
You are self-employed and a member of a barter club. The club uses credit units as a means of exchange. It adds credit units to your account for
goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. The club
subtracts credit units from your account when you receive goods or services from other members. You must include in your income the value of the
credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year.
Example 4.
You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. You must
report as rental income on Schedule E (Form 1040) the fair market value of the artwork, and the artist must report as income on Schedule C or Schedule
C-EZ (Form 1040) the fair rental value of the apartment.
Form 1099-B from barter exchange.Form 1099-B:Barter exchange transactions
If you exchanged property or services through a barter exchange, Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, or a similar
statement from the barter exchange should be sent to you by January 31, 2006. It should show the value of cash, property, services, credits, or scrip
you received from exchanges during 2005. The IRS will also receive a copy of Form 1099-B.
The income you receive from bartering generally is not subject to regular income tax withholding. However, backup withholding will apply in certain
circumstances to ensure that income tax is collected on this income.
Under backup withholding, the barter exchange must withhold, as income tax, 28% of the income if:
You do not give the barter exchange your taxpayer identification number (generally a social security number or an employer identification
number), or
The IRS notifies the barter exchange that you gave it an incorrect identification number.
Form W-9:Request for taxpayer identification numberIf you join a barter exchange, you must certify under penalties of perjury that your taxpayer identification number is correct and that you are
not subject to backup withholding. If you do not make this certification, backup withholding may begin immediately. The barter exchange will give you
a Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form, for you to make this certification.
The barter exchange will withhold tax only up to the amount of any cash paid to you or deposited in your account and any scrip or credit issued to
you (and converted to cash).
Form 1099-B:Barter exchange transactionsIf tax is withheld from your barter income, the barter exchange will report the amount of tax
withheld on Form 1099-B, or similar statement.
Canceled DebtsCancellation of debtDebts:Canceled
Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You
have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches
to property you hold.
If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it is a business debt, report the amount on Schedule C or
Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you are a farmer).
Form 1099-C.Form 1099-C:Cancellation of debt
If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form
1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2.
Interest included in canceled debt.Interest:Canceled debt including
If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will be shown in box 3. Whether or
not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible if you paid it. See
Deductible debt under Exceptions, later.
If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. If the
interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less
the interest amount shown in box 3).
Discounted mortgage loan.Discounts:Mortgage loan for early paymentLoans:MortgageMortgage:Discounted loan
If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must
include the canceled amount in your income.
Mortgage relief upon sale or other disposition.Debts:RecourseMortgage:Relief
If you are personally liable for a mortgage (recourse debt), and you are relieved of the mortgage when you dispose of the property, you may realize
gain or loss up to the fair market value of the property. To the extent the mortgage discharge exceeds the fair market value of the property, it is
income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt, later. Report any income from discharge of
indebtedness on nonbusiness debt that does not qualify for exclusion as other income on Form 1040, line 21.
Debts:Nonrecourse debtsNonrecourse debtIf you are not personally liable for a mortgage (nonrecourse debt), and you are relieved of the mortgage when
you dispose of the property (such as through foreclosure or repossession), that relief is included in the amount you realize. You may have a taxable
gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness property as a capital gain.
See Foreclosures and Repossessions in Publication 544 for more information.
If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution
that is generally dividend income to you. For more information, see Publication 542, Corporations.
If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. This is
because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.
Repayment of canceled debt.
If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was
included in income. You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. The statute of limitations
generally does not end until 3 years after the due date of your original return.
Exceptions
There are several exceptions to the inclusion of canceled debt in income. These are explained next.
Debt canceled as a result of Hurricane Katrina.
If you qualify, you can exclude from income the amount of a canceled nonbusiness debt. The debt must be canceled by an applicable entity after
August 24, 2005, and before January 1, 2007.
You qualify for this relief if your main home on August 25, 2005, was located:
In the core disaster area, or
In the Hurricane Katrina disaster area (but outside the core disaster area) and you suffered economic loss that was caused by Hurricane
Katrina.
For a definition of Hurricane Katrina disaster area and the core disaster area, see Publication 4492.
This exclusion does not apply to a canceled debt to the extent that real property, which was security for the debt, is located outside of the
Hurricane Katrina disaster area.
Applicable entity.
The term applicable entity means an executive, judicial, or legislative agency and an applicable financial entity as defined in Internal Revenue
Code section 6050P(c).
Student loans.Loans:StudentStudent loans:Cancellation of debt
Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if
you work for a certain period of time in certain professions for any of a broad class of employers.
You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. To qualify,
the loan must have been made by:
The Federal Government, a state or local government, or an instrumentality, agency, or subdivision thereof,
A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are
considered public employees under state law, or
An educational institution:
Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or
As part of a program of the institution designed to encourage students to serve in occupations or areas with unmet needs and under which the
services provided are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization (defined later).
A loan to refinance a qualified student loan will also qualify if it was made by an educational institution or a tax-exempt section 501(a)
organization under its program designed as described in (3)(b) above.
An educational institution is an organization with a regular faculty and curriculum and a regularly enrolled body of students in attendance at the
place where the educational activities are carried on.
501(c)(3) organizationsA section 501(c)(3) organization is any corporation, community chest, fund, or foundation organized and
operated exclusively for one or more of the following purposes.
Charitable.
Educational.
Fostering national or international amateur sports competition (but only if none of the organization's activities involve providing athletic
facilities or equipment).
Literary.
Preventing cruelty to children or animals.
Religious.
Scientific.
Testing for public safety.
Exception.
You do have income if your student loan was made by an educational institution and is canceled because of services you performed for the
institution or other organization that provided the funds.
Deductible debt.
You do not have income from the cancellation of a debt if your payment of the debt would be deductible. This exception applies only if you use the
cash method of accounting. For more information, see chapter 5 of Publication 334.
Education loan repayment assistance.
Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program) or a state
education loan repayment program eligible for funds under the Public Health Service Act are not taxable if you agree to provide primary health
services in health professional shortage areas. For more information, see Publication 970.
Price reduced after purchase.Price reduced after purchase
Generally, if the seller reduces the amount of debt you owe for property you purchased, you do not have income from the reduction. The reduction of
the debt is treated as a purchase price adjustment and reduces your basis in the property.
Excluded debt.Debts:Excluded debt
Do not include a canceled debt in your gross income in the following situations.
The debt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide.
Bankruptcy:Canceled debt not deemed to be income
The debt is canceled when you are insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which
you are insolvent. See Publication 908.
The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Publication 225, Farmer's Tax Guide.
Farming:Qualified farm debt, cancellation of
The debt is qualified real property business debt. See chapter 5 of Publication 334.
Real estate:Qualified real property business debt, cancellation of
The cancellation is intended as a gift.
Host or HostessHost or hostess
If you host a party at which sales are made, any gift you receive for giving the party is a payment for helping a direct seller make sales. You
must report it as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible as miscellaneous
itemized deductions subject to the 2% of AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party.
For more information about the 50% limit for meal and entertainment expenses, see 50% Limit in Publication 463.
Life Insurance ProceedsLife 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.Death benefits:Life insurance
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.
Example.
The face amount of the policy is $75,000 and, as beneficiary, you choose to receive 120 monthly installments of $1,000 each. The excluded part of
each installment is $625 ($75,000 ÷ 120), or $7,500 for an entire year. The rest of each payment, $375 a month (or $4,500 for an entire year),
is interest income to you.
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:Life insurance proceeds paid to
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.
Interest option on insurance.Interest:Option on insurance
If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you are paid is taxable.
If your spouse died before October 23, 1986, and you chose to receive only the interest from your insurance proceeds, the $1,000 interest exclusion
for a surviving spouse does not apply. If you later decide to receive the proceeds from the policy in installments, you can take the interest
exclusion from the time you begin to receive the installments.
Surrender of policy for cash.Life insurance:Surrender of policy for cash
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. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded
premiums, rebates, dividends, or unrepaid loans that were not included in your income.
Form 1099-R:Surrender of life insurance policy for cashYou should receive a Form 1099-R showing the total proceeds and the taxable
part. Report these amounts on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.
For information on when the proceeds are excluded from income, see Accelerated Death Benefits, later.
Split-dollar life insurance.
Generally, a split-dollar life insurance arrangement is an arrangement between an owner and a non-owner of a life insurance contract under which
either party to the arrangement pays all or part of the premiums, and one of the parties paying the premiums is entitled to recover all or part of
those premiums from the proceeds of the contract. There are two mutually exclusive regimes to tax split-dollar life insurance arrangements.
Under the economic benefit regime, the owner of the life insurance contract is treated as providing current life insurance protection and
other taxable economic benefits to the non-owner of the contract.
Under the loan regime, the non-owner of the life insurance contract is treated as loaning premium payments to the owner of the
contract.
Only one of these regimes applies to any one policy. For more information, see sections 1.61-22 and 1.7872-15 of the regulations.
Endowment Contract ProceedsEndowment proceeds
An endowment contract is a policy under which you are paid a specified amount of money on a certain date unless you die before that date, in which
case, the money is paid to your designated beneficiary. Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are
more than the cost of the policy. To determine your cost, subtract any amount that you previously received under the contract and excluded from your
income from the total premiums (or other consideration) paid for the contract. Include the part of the lump sum payment that is more than your cost in
your income.
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 BenefitsAccelerated death benefitsDeath benefits:Accelerated
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.
Viatical settlement.Viatical settlements
This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical
settlement provider is a person 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 and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code.
Exclusion for terminal illness.Terminal illness
Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been certified by a
physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the
certification.
Exclusion for chronic illness.Chronic illness:Accelerated death benefits paid to
If the insured is a chronically ill individual who is not terminally ill, accelerated death benefits paid on the basis of costs incurred for
qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis are
excludable up to a limit. This limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care
insurance contracts. For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term
care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits, earlier.
Exception.
The exclusion does not apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured
because the insured:
Is a director, officer, or employee of the person, or
Has a financial interest in the person's business.
Form 8853.Form 8853:Accelerated death benefits
To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853 with your
return. You do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.
RecoveriesRecovery of amounts previously deductedItemized deductions:RecoveriesRecovery of amounts previously deducted:Itemized deductions
A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds, reimbursements,
and rebates of deductions itemized on Schedule A (Form 1040). You also may have recoveries of non-itemized deductions (such as payments on previously
deducted bad debts) and recoveries of items for which you previously claimed a tax credit.
Tax benefit rule.Tax benefit rule
You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered
amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the
deduction or credit is considered to have reduced your tax in the earlier year.
Federal income tax refund.Federal income tax:RefundsRefunds:Federal income tax
Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from income.
State tax refund.Form 1099–G:State tax refundsRefunds:State taxState or local taxes:Refunds
If you received a state or local income tax refund (or credit or offset) in 2005, you generally must include it in income if you deducted the tax
in an earlier year. The payer should send Form 1099-G, Certain Government Payments, to you by January 31, 2006. The IRS also will receive a copy of
the Form 1099-G. Use the worksheet in the 2005 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income.
For 2004 you could choose to deduct:
State and local income taxes, or
State and local general sales taxes.
For 2005, the refund that you must include in income is limited to the excess of the tax you chose to deduct over the tax you did not choose to
deduct.
Example 1.
For 2004 you can choose an $11,000 state income tax deduction or a $10,000 state general sales tax deduction. You choose to deduct the state income
tax. In 2005 you receive a $2,500 state income tax refund. You must include $1,000 of the refund in your income since you could have deducted $10,000
in state sales tax.
Example 2.
For 2004 you can choose an $11,500 state general sales tax deduction based on actual expenses or an $11,200 state income tax deduction. You choose
to deduct the general sales tax deduction. In 2005 you return an item you had purchased and receive a $500 sales tax refund. In 2005 you also receive
a $1,500 state income tax refund. You must include the $500 sales tax refund in your income since it is less than the excess of the tax deducted
($11,500) over the tax you did not choose to deduct ($11,200 - $1,500 = $9,700). Since you did not choose to deduct the state income tax, you do not
include the state income tax refund in income.
If you received a refund or credit in 2005 of mortgage interest paid in an earlier year, the amount should be shown in box 3 of your Form 1098,
Mortgage Interest Statement. Do not subtract the refund amount from the interest you paid in 2005. You may have to include it in your income under the
rules explained in the following discussions.
Interest on recovery.Interest:Recovery amounts
Interest on any of the amounts you recover must be reported as interest income in the year received. For example, report any interest you received
on state or local income tax refunds on Form 1040, line 8a.
Recovery and expense in same year.
If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and is not reported as income.
Recovery for 2 or more years.
If you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate, on a pro rata
basis, the recovered amount between the years in which you paid it. This allocation is necessary to determine the amount of recovery from any earlier
years and to determine the amount, if any, of your allowable deduction for this item for the current year.
Example.
You paid 2004 estimated state income tax of $4,000 in four equal payments. You made your fourth payment in January 2005. You had no state income
tax withheld during 2004. In 2005, you received a $400 tax refund based on your 2004 state income tax return. You claimed itemized deductions each
year on your federal income tax return.
You must allocate the $400 refund between 2004 and 2005, the years in which you paid the tax on which the refund is based. You paid 75% ($3,000
÷ $4,000) of the estimated tax in 2004, so 75% of the $400 refund, or $300, is for amounts you paid in 2004 and is a recovery item. If all of
the $300 is a taxable recovery item, you will include $300 on Form 1040, line 10, for 2005, and attach a copy of your computation showing why that
amount is less than the amount shown on the Form 1099-G you received from the state.
The balance ($100) of the $400 refund is for your January 2005 estimated tax payment. When you figure your deduction for state and local income
taxes paid during 2005, you will reduce the $1,000 paid in January by $100. Your deduction for state and local income taxes paid during 2005 will
include the January net amount of $900 ($1,000 − $100), plus any estimated state income taxes paid in 2005 for 2005, and any state income tax
withheld during 2005.
Deductions not itemized.
If you did not itemize deductions for the year for which you received the recovery of an expense that was deductible only if you itemized, do not
include any of the recovery amount in your income.
Example.
You claimed the standard deduction on your 2004 federal income tax return. In 2005 you received a refund of your 2004 state income tax. Do not
report any of the refund as income because you did not itemize deductions for 2004.
Itemized Deduction RecoveriesItemized deductions:RecoveriesRecovery of amounts previously deducted:Itemized deductions
The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as
an itemized deduction. However, you generally do not need to use this discussion if the recovery is for state or local income taxes paid in 2004.
Instead, use the worksheet in the 2005 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income.
You cannot use the Form 1040 worksheet and must use this discussion if any of the following statements are true.
The recovery is for a tax year other than 2004.
The recovery is for a deducted item other than state or local income taxes, such as a general sales tax or real property tax
refund.
On your 2004 Form 1040, line 41 was more than line 40.
You received a refund of state and local income taxes in 2005 that was more than the excess of your 2004 state and local income tax
deduction over the amount you could have deducted for your 2004 state and local general sales tax.
You made your last payment of 2004 state or local estimated tax in 2005.
You owed alternative minimum tax for 2004.
You could not deduct all your tax credits for 2004 because their total was more than the amount of tax shown on your 2004 Form 1040, line
45.
You could be claimed as a dependent by someone else in 2004.
You had to use the Itemized Deductions Worksheet in the 2004 Schedule A instructions because your 2004 adjusted gross income was over
$142,700 ($71,350 if married filing separately) and both of the following apply.
You could not deduct all of the amount on the 2004 Itemized Deductions Worksheet, line 1.
The amount on line 8 of that 2004 worksheet would be more than the amount on line 4 of that worksheet if the amount on line 4 were reduced
by 80% of the refund you received in 2005.
If you also recovered an amount deducted as a non-itemized deduction, figure the amount of that recovery to include in your income and add it to
your adjusted gross income before applying the rules explained here. See Non-Itemized Deduction Recoveries, later.
Total recovery included in income.
If you recover any amount that you deducted in an earlier year on Schedule A (Form 1040), you generally must include the full amount of the
recovery in your income in the year you receive it. This rule applies if, for the earlier year, all of the following statements are true.
Your itemized deductions exceeded the standard deduction by at least the amount of the recovery. (If your itemized deductions did not exceed
the standard deduction by at least the amount of the recovery, see Standard deduction limit, later.)
You had taxable income. (If you had no taxable income, see Negative taxable income, later.)
Your deduction for the item recovered equals or exceeds the amount recovered. (If your deduction was less than the amount recovered, see
Recovery limited to deduction, later.)
Your itemized deductions were not subject to the limit on itemized deductions. (If your deductions were limited, see Itemized
deductions limited, later.)
You had no unused tax credits. (If you had unused tax credits, see Unused tax credits, later.)
You were not subject to alternative minimum tax. (If you were subject to alternative minimum tax, see Subject to alternative minimum
tax, later.)
If any of the above statements is not true, see Total recovery not included in income, later.
State tax refund.
In addition to the previous six items, you must include in your income the full amount of a refund of state or local income tax or general sales
tax if the excess of the tax you deducted over the tax you did not deduct is more than the refund of the tax deducted.
If the refund is more than the excess, see Total recovery not included in income, later.
Where to report.Form 1040:RecoveriesForm 1040A:RecoveriesForm 1040EZ:Recoveries
Enter your state or local income tax refund on Form 1040, line 10, and the total of all other recoveries as other income on Form 1040, line 21. You
cannot use Form 1040A or Form 1040EZ.
Example.
For 2004, you filed a joint return. Your taxable income was $60,000 and you were not entitled to any tax credits. Your standard deduction was
$9,700, and you had itemized deductions of $11,000. In 2005, you received the following recoveries for amounts deducted on your 2004 return:
Medical expenses $200 State and local income tax refund 400 Refund of mortgage interest 325 Total recoveries $925
None of the recoveries were more than the deductions taken for 2004. The difference between the state and local income tax you deducted and
your local general sales tax was more than $400.
Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($11,000 − $9,700 = $1,300),
so you must include your total recoveries in your income for 2005. Report the state and local income tax refund of $400 on Form 1040, line 10, and the
balance of your recoveries, $525, on Form 1040, line 21.
Total recovery not included in income.
If one or more of the six statements listed in the preceding discussion is not true, you may be able to exclude at least part of the recovery from
your income. If statements (4), (5), and (6) are true (your itemized deductions were not limited, you had no unused tax credits, and you were not
subject to the alternative minimum tax), you can use Worksheet 2 to determine the part of your recovery to include in your income. You can also use
Worksheet 2 to determine the part of a state tax refund (discussed earlier) to include in income.
Allocating the included part.
If you are not required to include all of your recoveries in your income, and you have both a state income tax refund and other itemized deduction
recoveries, you must allocate the taxable recoveries between the state income tax refund you report on Form 1040, line 10, and the amount you report
as other income on Form 1040, line 21. If you do not use Worksheet 2, make the allocation as follows.
Divide your state income tax refund by the total of all your itemized deduction recoveries.
Multiply the amount of taxable recoveries by the percentage in (1). This is the amount you report as a state income tax refund.
Subtract the result in (2) above from the amount of taxable recoveries. This is the amount you report as other income.
Example.
In 2005 you recovered $2,500 of your 2004 itemized deductions, but the recoveries you must include in your 2005 income are only $1,500. Of the
$2,500 you recovered, $500 was due to your state income tax refund. Your state income tax was more than your state general sales tax by $600. The
amount you report as a state tax refund on Form 1040, line 10, is $300 [($500 ÷ $2,500) × $1,500]. The balance of the taxable recoveries,
$1,200, is reported as other income on Form 1040, line 21.
Standard deduction limit.Standard deduction:Recoveries and
You generally are allowed to claim the standard deduction if you do not itemize your deductions. Only your itemized deductions that are more than
your standard deduction are subject to the recovery rule (unless you are required to itemize your deductions). If your total deductions on the earlier
year return were not more than your income for that year, include in your income this year the lesser of:
Your recoveries, or
The amount by which your itemized deductions exceeded the standard deduction.
Standard deduction for earlier years.
To determine if amounts recovered in 2005 must be included in your income, you must know the standard deduction for your filing status for the year
the deduction was claimed. The standard deduction tables for 2004, 2003, and 2002 are shown in Tables 2, 3, and 4. If you need the standard deduction
amounts for years before 2002, see the copy of your return for that year.
Recovery of amounts previously deducted:Worksheet of itemized deductionsWorksheets:Recoveries of itemized deductions (Worksheet 2)
<ROM>Worksheet 2.</ROM> Recoveries of Itemized DeductionsTo determine whether you should complete this worksheet to figure the part of a recovery amount to
include in income on your 2005 Form 1040, see Total recovery not included in income under Itemized Deduction Recoveries. If you
recovered amounts from more than one year, such as a state income tax refund from 2004 and a casualty loss reimbursement from 2003, complete a
separate worksheet for each year. Use information from Schedule A (Form 1040) 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 credit
11.2.Enter the total of all other Schedule A refunds or reimbursements
(excluding the amount you entered on line 1)
22.3.Add lines 1 and 23.4.Itemized deductions for the prior year
(for example, line 28 of Schedule A for 2004)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 46.7.Standard deduction for the prior year. (The standard deduction amounts for 2004, 2003, and 2002 are shown
in Tables 2, 3, and 4.)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 taxable8.9.Enter the smaller of line 3 or line 89.10.Taxable income for prior year
3 (for example, line 42, Form 1040 for 2004)10.11.Amount to include in income for 2005:
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).
4
11.If line 11 equals line 3— Enter the amount from line 1 on line 10, Form 1040.
Enter the amount from line 2 on line 21, Form 1040.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 line 10, Form 1040.
If there is an amount on line 2, enter the amount from line 11 on line 21, Form 1040.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 percentageA.B.Multiply the amount on line 11 by the percentage on line A.
Enter the result here and on line 10, Form 1040 B.C.Subtract the amount on line B from the amount on line 11.
Enter the result here and on line 21, Form 1040 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 If taxable income is a negative amount (for example, line 41 was more than line 40 on your 2004 Form 1040), enter that amount in
brackets. Do not enter zero unless your taxable income is exactly zero. Taxable income will have to be adjusted for any net operating loss carryover.
For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.4 For example, $700 + ($400) = $300.
Standard deduction:Recoveries and:Tables (2004-2002)Tables and figures:Standard deduction (Tables 2-4)Table 2. 2004 Standard Deduction TablesSummary: These tables are used to determine the deduction the taxpayer can claim. There are separate tables for people born before January 2,
1940, who or blind, dependents, and most all other people.Table I. Standard Deduction Chart for Most PeopleFootnote: DO NOT use this chart if you were born before January 2, 1940 or blind, OR if someone else can claim an exemption for you (or your
spouse if married filing jointly). Use Table II or III instead.
If Your Filing Status is:
Your Standard Deduction is:
Single or married filing separately
$4,850
Married filing joint return or Qualifying widow(er) with dependent child
9,700
Head of household
7,150
Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1940 or Were BlindFootnote: If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III, instead.Check the correct number of boxes below. Then go to the chart.You: Born before January 2, 1940 checkboxYou: Blind checkboxYour spouse, if claiming spouse's exemption: Born before January 2, 1940r checkboxYour spouse, if claiming spouse's exemption: Blind checkboxTotal number of boxes you checked field
If Your Filing Status is:
And the Number in the Box Above is:
Your Standard Deduction is:
Single
1
$6,050
Single
2
7,250
Married filing joint return or Qualifying widow(er) with dependent child
1
10,650
Married filing joint return or Qualifying widow(er) with dependent child
2
11,600
Married filing joint return or Qualifying widow(er) with dependent child
3
12,550
Married filing joint return or Qualifying widow(er) with dependent child
4
13,500
Married filing separate return
1
5,800
Married filing separate return
2
6,750
Married filing separate return
3
7,700
Married filing separate return
4
8,650
Head of household
1
8,350
Head of household
2
9,550
Table III. Standard Deduction Worksheet for DependentsFootnote: Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly).If you were 65 or older or blind, check the correct number of boxes below. Then go to the worksheet.You: Born before January 2, 1940 checkboxYou: Blind checkboxYour spouse, if claiming spouse's exemption: Born before January 2, 1940 checkboxYour spouse, if claiming spouse's exemption: Blind checkboxTotal number of boxes you checked field1. Enter your earned income (Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal
services you performed. It also includes any amount received as a scholarship that you must include in your income.). If none, enter 0.
field2. Additional amount $2503. Add lines 1 and 2 field4. Minimum standard deduction $8005. Enter the larger of line 3 or line 4. field6. Enter the amount shown below for your filing status. fieldSingle or married filing separately, enter $4,850Married filing jointly or Qualifying widow(er) with dependent child, enter $9,700Head of household, enter $7,1507. Standard deduction.7a. Enter the smaller of line 5 or line 6. If born after January 1, 1940, and not blind, stop here. This is your standard deduction.
Otherwise, go to line 7b. field7b. If born before January 2, 1940, or blind, multiply $1,200 ($950 if married or qualifying widow(er) with dependent child) by the number in
the box above. field7c. Add lines 7a and 7b. This is your standard deduction for 2004. fieldTable 3. 2003 Standard Deduction TablesSummary: These tables are used to determine the deduction the taxpayer can claim. There are separate tables for people born before January 2,
1939 or who are blind, dependents, and most all other people.Table I. Standard Deduction Chart for Most PeopleFootnote: DO NOT use this chart if you were born before January 2, 1939 or you are blind, OR if someone else can claim an exemption for you
(or your spouse if married filing jointly). Use Table II or III instead.
If Your Filing Status is:
Your Standard Deduction is:
Single
$4,750
Married filing joint return or Qualifying widow(er) with dependent child
9,500
Head of household
7,000
Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1939 or Were BlindFootnote: If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III, instead.Check the correct number of boxes below. Then go to the chart.You: Born before January 2, 1939 checkboxYou: Blind checkboxYour spouse, if claiming spouse's exemption: Born before January 2, 1939 checkboxYour spouse, if claiming spouse's exemption: Blind checkboxTotal number of boxes you checked field
If Your Filing Status is:
And the Number in the Box Above is:
Your Standard Deduction is:
Single
1
$5,900
Single
2
7,050
Married filing joint return or Qualifying widow(er) with dependent child
1
10,450
Married filing joint return or Qualifying widow(er) with dependent child
2
11,400
Married filing joint return or Qualifying widow(er) with dependent child
3
12,350
Married filing joint return or Qualifying widow(er) with dependent child
4
13,300
Married filing separate return
1
5,700
Married filing separate return
2
6,650
Married filing separate return
3
7,600
Married filing separate return
4
8,550
Head of household
1
8,150
Head of household
2
9,300
Head of household
3
10,450
Head of household
4
11,600
Table III. Standard Deduction Worksheet for DependentsFootnote: Use 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, 1939 or were blind, check the correct number of boxes below. Then go to the worksheet.You: Born before January 2, 1939 checkboxYou: Blind checkboxYour spouse, if claiming spouse's exemption: Born before January 2, 1939 checkboxYour spouse, if claiming spouse's exemption: Blind checkboxTotal number of boxes you checked field1. Enter your earned income (Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal
services you performed. It also includes any amount received as a scholarship that you must include in your income.). If none, enter 0.
field2. Additional amount $2503. Add lines 1 and 2 field4. Minimum standard deduction $7505. Enter the larger of line 3 or line 4. field6. Enter the amount shown below for your filing status. fieldSingle or Married filing separately, enter $4,750Married filing jointly or Qualifying widow(er) with dependent child, enter $9,500Head of household, enter $7,0007. Standard deduction.7a. Enter the smaller of line 5 or line 6. If born after January 1, 1939 and not blind, stop here. This is your standard deduction. Otherwise,
go to line 7b. field7b. If born before January 2, 1939, or blind, multiply $1,150 ($950 if married or qualifying widow(er) with dependent child) by the number in
the box above. field7c. Add lines 7a and 7b. This is your standard deduction for 2003. fieldTable 4. 2002 Standard Deduction TablesSummary: These tables are used to determine the deduction the taxpayer can claim. There are separate tables for people age 65 or older or
blind, dependents, and most all other people.Table I. Standard Deduction Chart for Most PeopleFootnote: DO NOT use this chart if you were born before January 2, 1938, or you are blind, OR if someone else can claim an exemption for you
(or your spouse if married filing jointly). Use Table II or III instead.
If Your Filing Status is:
Your Standard Deduction is:
Single
$4,700
Married filing joint return or Qualifying widow(er) with dependent child
7,850
Married filing separate return
3,925
Head of household
6,900
Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1938, or Were BlindFootnote: If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III instead.Check the correct number of boxes below. Then go to the chart.You: Born before January 2, 1938 checkboxYou: Blind checkboxYour spouse, if claiming spouse's exemption: Born before January 2, 1938 checkboxYour spouse, if claiming spouse's exemption: Blind checkboxTotal number of boxes you checked field
If Your Filing Status is:
And the Number in the Box Above is:
Your Standard Deduction is:
Single
1
$5,850
Single
2
7,000
Married filing joint return or Qualifying widow(er) with dependent child
1
8,750
Married filing joint return or Qualifying widow(er) with dependent child
2
9,650
Married filing joint return or Qualifying widow(er) with dependent child
3
10,550
Married filing joint return or Qualifying widow(er) with dependent child
4
11,450
Married filing separate return
1
4,825
Married filing separate return
2
5,725
Married filing separate return
3
6,625
Married filing separate return
4
7,525
Head of household
1
8,050
Head of household
2
9,200
Table III. Standard Deduction Worksheet for DependentsFootnote: Use 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, 1938 or were blind, check the correct number of boxes below. Then go to the worksheet.You: Born before January 2, 1938 checkboxYou: Blind checkboxYour spouse, if claiming spouse's exemption: Born before January 2, 1938 checkboxYour spouse, if claiming spouse's exemption: Blind checkboxTotal number of boxes you checked field1. Enter your earned income (Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal
services you performed. It also includes any amount received as a scholarship that you must include in your income.). If none, enter 0.
field2. Additional amount $2503. Add lines 1 and 2 field4. Minimum standard deduction $7505. Enter the larger of line 3 or line 4. field6. Enter the amount shown below for your filing status. fieldSingle, enter $4,700Married filing separate return, enter $3,925Married filing jointly or Qualifying widow(er) with dependent child, enter $7,850Head of household, enter $6,9007. Standard deduction.7a. Enter the smaller of line 5 or line 6. If born after January 1, 1938 and not blind, stop here. This is your standard deduction. Otherwise,
go to line 7b. field7b. If born before January 2, 1938, or blind, multiply $1,150 ($900 if married or qualifying widow(er) with dependent child) by the number in
the box above. field7c. Add lines 7a and 7b. This is your standard deduction for 2002. fieldExample.
You filed a joint return for 2004 with taxable income of $45,000. Your itemized deductions were $10,350. The standard deduction that you could have
claimed was $9,700. In 2005, you recovered $2,100 of your 2004 itemized deductions. None of the recoveries were more than the actual deductions for
2004. Include $650 of the recoveries in your 2005 income. This is the smaller of your recoveries ($2,100) or the amount by which your itemized
deductions were more than the standard deduction ($10,350 − $9,700 = $650).
Negative taxable income.
If your taxable income was a negative amount, reduce the recovery you must otherwise include in your income by the negative amount. For example,
line 41 was more than line 40 on your 2004 Form 1040.
Example.
The facts are the same as in the previous example except line 41 was $400 more than line 40 on your 2004 Form 1040 giving you a negative taxable
income of $400. You must include $250 in your 2005 income, rather than $650.
Recovery limited to deduction.
You do not include in your income any amount of your recovery that is more than the amount you deducted in the earlier year. The amount you include
in your income is limited to the smaller of:
The amount deducted on Schedule A (Form 1040), or
The amount recovered.
Example.
During 2004, you paid $1,700 for medical expenses. From this amount you subtracted $1,500, which was 7.5% of your adjusted gross income. Your
actual medical expense deduction was $200. In 2005, you received a $500 reimbursement from your medical insurance for your 2004 expenses. The only
amount of the $500 reimbursement that must be included in your income for 2005 is $200—the amount actually deducted.
You were subject to the limit on itemized deductions in the earlier year if your adjusted gross income (AGI) was more than a base amount. For
example, this amount was:
For 2004, $142,700 ($71,350 if married filing separately),
For 2003, $139,500 ($69,750 if married filing separately), and
For 2002, $137,300 ($68,650 if married filing separately).
If the limit applied, your itemized deductions were reduced by the smaller of the following amounts.
3% of the amount by which your AGI exceeded the base amount.
80% of your otherwise allowable deductions other than medical and dental expenses, investment interest expense, nonbusiness casualty and
theft losses, and gambling losses.
If the amount you recovered was deducted in a year in which your itemized deductions were limited, you must include it in income up to the
difference between the amount of itemized deductions actually allowed that year and the amount you would have been allowed (the greater of your
itemized deductions or your standard deduction) if you had figured your deductions using only the net amount of the recovery item.
To determine the part of the recovery you must include in income, follow the two steps below.
Figure the greater of:
The standard deduction for the earlier year, or
The amount of itemized deductions you would have been allowed for the earlier year (after taking into account the limit on itemized
deductions) if you had figured them using only the net amount of the recovery item. The net amount is the amount you actually paid reduced by the
recovery amount.
Note. If you were required to itemize your deductions in the earlier year, use step 1(b) and not step 1(a).
Subtract the amount in step 1 from the amount of itemized deductions actually allowed in the earlier year after applying the limit on
itemized deductions.
The result of step 2 is the amount of the recovery to include in your income for the year you receive the recovery. If your taxable income for
the earlier year was a negative amount, reduce your recovery by the negative amount.
If you had unused tax credits in the earlier year, see Unused tax credits on page 25.
For more information on this computation, see Revenue Ruling 93-75. This ruling is in Cumulative Bulletin 1993-2.
Example.
Eileen Martin is single. She had an AGI of $1,142,700 and itemized her deductions on her federal income tax return for 2004. She was not subject to
alternative minimum tax and was not entitled to any credit against income tax. Her only allowable deduction was $40,000 of state income taxes. Her
state general sales tax was $20,000. Eileen deducted only $10,000 of her state income taxes in 2004 because her otherwise allowable deductions of
$40,000 were reduced by $30,000. In 2005, she received a $5,000 refund of her state income taxes for 2004.
The following shows how Eileen figured the $30,000 reduction and other amounts from the Itemized Deduction Worksheet in the 2004 Schedule A (Form
1040) instructions. These amounts are needed to figure the part of the $5,000 refund that Eileen must include in her income for 2005.
AGI for 2004 $1,142,700 State income taxes paid in 2004 $40,000 3% reduction (amount on
2004 Itemized Deduction
Worksheet, line 8),
[($1,142,700 − $142,700) × 3%]$30,000 80% reduction not applied (amount
on 2004 Itemized
Deduction Worksheet, line 4)
($40,000 × 80%) $32,000 2004 deduction (amount on
2004 Itemized Deduction
Worksheet, line 10)
($40,000 − $30,000) $10,000 Refund received in 2005 of 2004
state income tax $5,000 Net amount of 2004 state income
tax ($40,000 − $5,000) $35,000
If Eileen had used the $35,000 net amount of state income tax to figure her itemized deductions for 2004, the deduction allowed would have been
$7,000. This is her otherwise allowable deduction of $35,000 reduced by $28,000 ($35,000 × 80%). By deducting the full $10,000 paid in 2004, she
derived a tax benefit of $3,000 ($10,000 − $7,000). Therefore, only $3,000 of the $5,000 refund is included in her income for 2005.
Unused tax credits.Credits:Recoveries, refiguring of unused creditsRecovery of amounts previously deducted:Unused tax credits, refiguring of
If you recover an item deducted in an earlier year in which you had unused tax credits, you must refigure the earlier year's tax to determine if
you must include the recovery in your income. To do this, add the amount of the recovery to your earlier year's taxable income and refigure the tax
and the credits on the recomputed amount. If the recomputed tax, after application of the credits, is more than the actual tax in the earlier year,
include the recovery in your income up to the amount of the deduction that reduced the tax in the earlier year. For this purpose, any increase to a
credit carried over to the current year that resulted from deducting the recovered credit in the earlier year is considered to have reduced your tax
in the earlier year. If the recovery is for an itemized deduction claimed in a year in which the deductions were limited, see Itemized deductions
limited, earlier.
If your tax, after application of the credits, does not change, you did not have a tax benefit from the deduction. Do not include the recovery in
your income.
Example.
In 2004, Jean Black filed as head of household and itemized her deductions. Her taxable income was $5,260 and her tax was $528. She claimed a child
care credit of $1,200. The credit reduced her tax to zero and she had an unused tax credit of $672 ($1,200 − $528). In 2005, Jean recovered
$1,000 of her itemized deductions. She reduces her 2004 itemized deductions by $1,000 and recomputes that year's tax on taxable income of $6,260.
However, the child care credit exceeds the recomputed tax of $628. Jean's tax liability for 2004 is not changed by reducing her deductions by the
recovery. She did not have a tax benefit from the recovered deduction and does not include any of the recovery in her income for 2005.
Subject to alternative minimum tax.Alternative minimum tax (AMT):Recoveries, refiguring of
If you were subject to the alternative minimum tax in the year of the deduction, you will have to recompute your tax for the earlier year to
determine if the recovery must be included in your income. This will require a recomputation of your regular tax, as shown in the preceding example,
and a recomputation of your alternative minimum tax. If inclusion of the recovery does not change your total tax, you do not include the recovery in
your income. However, if your total tax increases by any amount, you received a tax benefit from the deduction and you must include the recovery in
your income up to the amount of the deduction that reduced your tax in the earlier year.
Non-Itemized Deduction RecoveriesRecovery of amounts previously deducted:Non-itemized deductions
This section discusses recovery of deductions other than those deducted on Schedule A (Form 1040).
Total recovery included in income.
If you recover an amount that you deducted in an earlier year in figuring your adjusted gross income, you must generally include the full amount of
the recovery in your income in the year received.
Total recovery not included in income.
If any part of the deduction you took for the recovered amount did not reduce your tax, you may be able to exclude at least part of the recovery
from your income. You must include the recovery in your income only up to the amount of the deduction that reduced your tax in the year of the
deduction. (See Tax benefit rule, earlier.)
Negative taxable income.
If your taxable income was a negative amount, reduce the recovery by that negative amount. For example, line 41 was more than line 40 on your 2004
Form 1040. Include this reduced recovery in your income.
Unused tax credits.Credits:Recoveries, refiguring of unused creditsRecovery of amounts previously deducted:Unused tax credits, refiguring of
If you recover an item deducted in an earlier year in which you had unused tax credits, you must refigure the earlier year's tax to determine if
you must include the recovery in your income. To do this, add the amount of the recovery to your earlier year's taxable income and refigure the tax
and the credits on the recomputed amount. If the recomputed tax, after application of the credits, is more than the actual tax in the earlier year,
include the recovery in your income up to the amount of the deduction that reduced the tax in the earlier year. For this purpose, any increase to an
amount carried over to the current year that resulted from deducting the recovered amount in the earlier year is considered to have reduced your tax
in the earlier year.
If your tax, after application of the credits, does not change, you did not have a tax benefit from the deduction. Do not include the recovery in
your income.
Amounts Recovered for Credits
If you received a recovery in 2005 for an item for which you claimed a tax credit in an earlier year, you must increase your 2005 tax by the amount
of the recovery, up to the amount by which the credit reduced your tax in the earlier year. You had a recovery if there was a downward price
adjustment or similar adjustment on the item for which you claimed a credit.
Form 4255:Recapture of investment creditThis rule does not apply to the investment credit or the foreign tax credit. Recoveries of
these credits are covered by other provisions of the law. See Publication 514, Foreign Tax Credit for Individuals, or Form 4255, Recapture of
Investment Credit, for details.
Survivor BenefitsSurvivor benefits
Generally, payments made by or for an employer because of an employee's death must be included in income. The following discussions explain the tax
treatment of certain payments made to survivors. For additional information, see Publication 559.
Lump-sum payments you receive from a decedent's employer as the surviving spouse or beneficiary may be accrued salary payments; distributions from
employee profit-sharing, pension, annuity, or stock bonus plans; or other items that should be treated separately for tax purposes. The tax treatment
of these lump-sum payments depends on the type of payment.
Salary or wages.
Salary or wages received after the death of the employee are usually ordinary income to you.
Qualified employee retirement plans.
Lump-sum distributions from qualified employee retirement plans are subject to special tax treatment. For information on these distributions, see
Publication 575 (or Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits, if you are the survivor of a federal employee or retiree).
Public safety officer killed in the line of duty.Public safety officers killed in line of duty
If you are a survivor of a public safety officer who was killed in the line of duty, you may be able to exclude from income certain amounts you
receive. For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance
crew members. For more information, see Publication 559.
You must include in your income all unemployment compensation you receive. You should receive a Form 1099-G showing the amount paid to you.
Generally, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.
Types of unemployment compensation.
Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It
includes the following benefits.
Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund.
State unemployment insurance benefits.
Railroad unemployment compensation benefits.
Railroads:Unemployment compensation benefits
Disability payments from a government program paid as a substitute for unemployment compensation. (Amounts received as workers' compensation
for injuries or illness are not unemployment compensation. See Workers' Compensation under Sickness and Injury Benefits,
earlier.)
Disability:Unemployment compensation, paid as substitute for
Trade readjustment allowances under the Trade Act of 1974.
Trade Act of 1974:Trade readjustment allowances under
Unemployment assistance under the Disaster Relief and Emergency Assistance Act.
Disaster relief:Disaster Relief and Emergency Assistance Act:Unemployment benefits
Governmental program.
If you contribute to a governmental unemployment compensation program and your contributions are not deductible, amounts you receive under the
program are not included as unemployment compensation until you recover your contributions.
Repayment of unemployment compensation.
If you repaid in 2005 unemployment compensation you received in 2005, subtract the amount you repaid from the total amount you received and enter
the difference on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. On the dotted line next to your entry, enter Repaid
and the amount you repaid. If you repaid unemployment compensation in 2005 that you included in your income in an earlier year, you can deduct the
amount repaid on Schedule A (Form 1040), line 22, if you itemize deductions. If the amount is more than $3,000, see Repayments, later.
You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary
Withholding Request, and give it to the paying office. Tax will be withheld at 10% of your payment.
Estimated tax:Unemployment compensationIf you do not choose to have tax withheld from your unemployment compensation, you may be liable
for estimated tax. For more information on estimated tax, see Publication 505, Tax Withholding and Estimated Tax.
Benefits received from an employer-financed fund (to which the employees did not contribute) are not unemployment compensation. They are taxable as
wages and are subject to withholding for income tax. They may be subject to social security and Medicare taxes. For more information, see
Supplemental Unemployment Benefits in Publication 15-A, section 5, Employer's Supplemental Tax Guide. Report these payments on line 7 of
Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
Repayment of benefits.
Trade Act of 1974:Trade readjustment allowances underYou may have to repay some of your supplemental unemployment benefits to qualify for
trade readjustment allowances under the Trade Act of 1974. If you repay supplemental unemployment benefits in the same year you receive them, reduce
the total benefits by the amount you repay. If you repay the benefits in a later year, you must include the full amount of the benefits in your income
for the year you received them.
Deduct the repayment in the later year as an adjustment to gross income on Form 1040. (You cannot use Form 1040A or Form 1040EZ.) Include the
repayment on Form 1040, line 36, and enter Sub-Pay TRA and the amount on the dotted line next to line 36. If the amount you repay in a later
year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. For information
on this, see Repayments, later.
Private unemployment fund.
Unemployment benefit payments from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are
more than your total payments into the fund. Report the taxable amount on Form 1040, line 21.
Payments by a union.Labor unions:Unemployment benefits paid from
Benefits paid to you as an unemployed member of a union from regular union dues are included in your income on Form 1040, line 21. However, if the
unemployment benefits are paid from a special fund to which you contributed, your payments to the fund are not deductible, and the benefit payments
are includible in your income only to the extent they are more than your contributions.
Guaranteed annual wage.
Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are
taxable as wages. Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
State employees.Government employeesState employeesState employees:Unemployment benefits paid to
Payments similar to a state's unemployment compensation may be made by the state to its employees who are not covered by the state's unemployment
compensation law. Although the payments are fully taxable, do not report them as unemployment compensation. Report these payments on Form 1040, line
21.
Welfare and Other
Public Assistance BenefitsPublic assistance benefitsWelfare benefits
Do not include in your income governmental benefit payments from a public welfare fund based upon need, such as payments due to blindness. Payments
from a state fund for the victims of crime should not be included in the victims' incomes if they are in the nature of welfare payments. Do not deduct
medical expenses that are reimbursed by such a fund. You must include in your income any welfare payments that are compensation for services or that
are obtained fraudulently.
Work-training program.Work-training programs
Payments you receive from a state welfare agency for taking part in a work-training program are not included in your income, as long as the
payments (exclusive of extra allowances for transportation or other costs) do not total more than the public welfare benefits you would have received
otherwise. If the payments are more than the welfare benefits you would have received, the entire amount must be included in your income as wages.
Alternative trade adjustment assistance (ATAA) payments.
Payments you receive from a state agency under the Demonstration Project for Alternative Trade Adjustment Assistance for Older Workers (ATAA) must
be included in your income. The state must send you Form 1099-G to advise you of the amount you should include in income. The amount should be
reported on Form 1040, line 21.
Persons with disabilities.Disability:Person with
If you have a disability, you must include in income compensation you receive for services you perform unless the compensation is otherwise
excluded. However, you do not include in income the value of goods, services, and cash that you receive, not in return for your services, but for your
training and rehabilitation because you have a disability. Excludable amounts include payments for transportation and attendant care, such as
interpreter services for the deaf, reader services for the blind, and services to help mentally retarded persons do their work.
Disaster relief grants.Disaster relief:Disaster Relief and Emergency Assistance Act:Grants
Do not include post-disaster grants received under the Disaster Relief and Emergency Assistance Act in your income if the grant payments are made
to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Do not
deduct casualty losses or medical expenses that are specifically reimbursed by these disaster relief grants. Unemployment assistance payments under
the Act are taxable unemployment compensation. See Unemployment compensation under Unemployment Benefits, earlier.
Disaster relief payments.Disaster relief:Payments
You can exclude from income any amount you receive that is a qualified disaster relief payment. A qualified disaster relief payment is an amount
paid to you:
To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified
disaster,
To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its
contents to the extent it is due to a qualified disaster,
By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries
incurred as a result of a qualified disaster, or
By a federal, state, or local government, or agency or instrumentality in connection with a qualified disaster in order to promote the
general welfare.
You can only exclude this amount to the extent any expense it pays for is not paid for by insurance or otherwise. The exclusion does not apply
if you were a participant or conspirator in a terrorist action or his or her representative.
A qualified disaster is:
A disaster which results from a terrorist or military action,
A Presidentially declared disaster, or
A disaster which results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic by the
Secretary of the Treasury or his or her delegate.
For amounts paid under item (4), a disaster is qualified if it is determined by an applicable federal, state, or local authority to warrant
assistance from the federal, state, or local government, agency, or instrumentality.
You can also exclude from income any amount you receive that is a qualified disaster mitigation payment. Like qualified disaster relief payments,
qualified disaster mitigation payments are also most commonly paid to you in the period immediately following damage to property as a result of a
natural disaster. However, disaster mitigation payments are grants you use to mitigate (reduce the severity of) potential damage from future natural
disasters. They are paid to you through state and local governments based on the provisions of the Robert T. Stafford Disaster Relief and Emergency
Assistance Act or the National Flood Insurance Act.
You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments.
If in a previous year you filed a tax return reporting disaster mitigation payments as taxable income, you should file Form 1040X to claim a refund
for tax years that are not closed by the statute of limitations. The statute of limitations generally does not end until 3 years after the due date of
your original return.
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.
Replacement housing payments made under the Uniform Relocation Assistance and Real Property Acquisition Policies Act for Federal and Federally
Assisted Programs are not includible in gross income, but are includible in the basis of the newly acquired property.
Relocation payments and home rehabilitation grants.
A relocation payment under section 105(a)(11) of the Housing and Community Development Act made by a local jurisdiction to a displaced individual
moving from a flood-damaged residence to another residence is not includible in gross income. Home rehabilitation grants received by low-income
homeowners in a defined area under the same act are also not includible in gross income.
Indian financing grants.
Nonreimbursable grants under title IV of the Indian Financing Act of 1974 to Indians to expand profit-making Indian-owned economic enterprises on
or near reservations are not includible in gross income.
Medicare.Medicare:Benefits
Medicare benefits received under title XVIII of the Social Security Act are not includible in the gross income of the individuals for whom they are
paid. This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary (part B (Supplementary Medical Insurance Benefits for
the Aged)).
Old-age, survivors, and disability insurance benefits (OASDI).Old-age, survivors, and disability insurance benefits (OASDI)
OASDI payments under section 202 of title II of the Social Security Act are not includible in the gross income of the individuals for whom they are
paid. This applies to old-age insurance benefits, and insurance benefits for wives, husbands, children, widows, widowers, mothers and fathers, and
parents, as well as the lump-sum death payment.
Nutrition Program for the Elderly.Elderly persons:Nutrition Program for the ElderlyFood benefits:Nutrition Program for the ElderlyNutrition Program for the Elderly
Meals:Nutrition Program for the ElderlyFood 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 are also eligible for food
benefits.
Payments to reduce cost of winter energy.Energy:AssistanceWinter energy payments
Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable.
Other IncomeIncome:Other
The following brief discussions are arranged in alphabetical order. Income items that are discussed in greater detail in another publication
include a reference to that publication.
Activity not for profit.Not-for-profit activitiesActivity not for profit
You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a
hobby or a farm you operate mostly for recreation and pleasure. Enter this income on Form 1040, line 21. Deductions for expenses related to the
activity are limited. They cannot total more than the income you report, and can be taken only if you itemize deductions on Schedule A (Form 1040).
See Not-for-Profit Activities in chapter 1 of Publication 535, for information on whether an activity is considered carried on for a
profit.
Alaska Permanent Fund dividend.Alaska Permanent Fund dividend
If you received a payment from Alaska's mineral income fund (Alaska Permanent Fund dividend), report it as income on line 21 of Form 1040, line 13
of Form 1040A, or line 3 of Form 1040EZ. The state of Alaska sends each recipient a document that shows the amount of the payment with the check. The
amount is also reported to the IRS.
Alimony.Alimony
Include in your income on Form 1040, line 11, any alimony payments you receive. Amounts you receive for child support are not income to you. For
complete information, see Publication 504, Divorced or Separated Individuals.
A below-market loan is a loan on which no interest is charged or on which the interest is charged at a rate below the applicable federal rate. If
you make a below-market gift or demand loan, you must include the forgone interest (at the federal rate) as interest income on your return. These
loans are considered a transaction in which you, the lender, are treated as having made:
A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and
An additional payment to the borrower, which the borrower transfers back to you as interest.
Depending on the transaction, the additional payment to the borrower is treated as a:
Gift,
Dividend,
Contribution to capital,
Payment of compensation, or
Another type of payment.
The borrower may have to report this payment as income, depending on its classification.
For more information on below-market loans, see chapter 1 of Publication 550.
Bribes.Bribes
If you receive a bribe, include it in your income.
Campaign contributions.Campaign contributions
Form 1120-POL:Political organizationsThese contributions are not income to a candidate unless they are diverted to his or her personal
use. To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. However, interest
earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities are taxable and must
be reported on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations. Excess campaign funds transferred to an office account must
be included in the officeholder's income on Form 1040, line 21, in the year transferred.
Canceled sales contract.Cancellation of sales contractsSales contracts:Cancellation of
If you sell property (such as land or a residence) under a contract, but the contract is canceled and you return the buyer's money in the same tax
year as the original sale, you have no income from the sale. If the contract is canceled and you return the buyer's money in a later tax year, you
must include your gain in your income for the year of the sale. When you return the money and take back the property in the later year, you treat the
transaction as a purchase that gives you a new basis in the property equal to the funds you return to the buyer.
RepossessionSpecial rules apply to the reacquisition of real property where a secured indebtedness (mortgage) to the original
seller is involved. For further information, see Repossession in Publication 537, Installment Sales.
Car pools.Car pools
Do not include in your income amounts you receive from the passengers for driving a car in a car pool to and from work. These amounts are
considered reimbursement for your expenses. However, this rule does not apply if you have developed car pool arrangements into a profit-making
business of transporting workers for hire.
Cash rebates.Cash rebatesRebates:Cash
A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the
rebate.
Example.
You buy a new car for $9,000 cash and receive a $400 rebate check from the manufacturer. The $400 is not income to you. Your basis in the car is
$8,600. This is your basis on which you figure gain or loss if you sell the car, and depreciation if you use it for business.
Casualty insurance and other reimbursements.Casualty insurance:Reimbursements fromReimbursements:Casualty losses
You generally should not report these reimbursements on your return, unless you are figuring gain or loss from the casualty or theft. See
Publication 547, Casualties, Disasters, and Thefts, for more information.
Charitable gift annuities.Charitable gift annuitiesAnnuities:Charitable giftForm 1099-R:Charitable gift annuities
If you are the beneficiary of a charitable gift annuity, you must include the yearly annuity or fixed percentage payment in your income.
The payer will report the types of income you received on Form 1099-R. Report the gross distribution from box 1 on Form 1040, line 16a, or on Form
1040A, line 12a, and the part taxed as ordinary income (box 2a minus box 3) on Form 1040, line 16b, or on Form 1040A, line 12b. Report the portion
taxed as capital gain (box 3) on Schedule D, line 8.
Child support payments.Child support payments
You should not report these payments on your return. See Publication 504 for more information.
Court awards and damages.AwardsDamages from lawsuitsCourt awards:Damages from lawsuitsCourt awardsDamages from lawsuits
To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the
settlement replaces. Include the following as ordinary income.
Interest on any award.
Compensation for lost wages or lost profits in most cases.
Punitive damages. It does not matter if they relate to a physical injury or physical sickness.
Damages from lawsuits:Punitive damagesPunitive damages
Amounts received in settlement of pension rights (if you did not contribute to the plan).
Breach of contract:Damages as incomeDamages from lawsuits:Breach of contract
Interference with business operations.
Interference with business operations:Damages as income
Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.
Civil Rights Act of 1964, Title VII:Back pay and damages for emotional distress underDamages from lawsuits:Emotional distress under Title VII, Civil Rights Act of 1964Title VII, Civil Rights Act of 1964:Back pay and damages for emotional distress under
Compensatory damagesDamages from lawsuits:Compensatory damagesDo not include in your income compensatory damages for personal physical injury or physical sickness
(whether received in a lump sum or installments).
Emotional distress.Emotional distress damages
Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or
sickness are treated as received for the physical injury or sickness. Do not include them in your income.
If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, unlawful discrimination or
injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional
distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.
Deduction for costs involved in unlawful discrimination suits.Unlawful discrimination suitsDeduction for costsDeductionCosts of discrimination suits
You may be able to deduct attorney fees and court costs paid to recover a judgement or settlement for a claim of unlawful discrimination under
various provisions of federal, state, and local law listed in Internal Revenue Code section 62(e), a claim against the United States government, or a
claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Form 1040, line 36. The
following rules apply.
The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim
against the United States government, or the claim under section 1862(b)(3)(A) of the Social Security Act.
The deduction you are claiming cannot be more than the amount of the judgement or settlement you are including in income for the tax
year.
The judgement or settlement to which your attorney fees and court costs apply must occur after October 22, 2004.
Pre-existing agreement.
If you receive damages under a written binding agreement, court decree, or mediation award that was in effect (or issued on or before) September
13, 1995, do not include in income any of those damages received on account of personal injuries or sickness.
Generally, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. These plans make
the minimum monthly payment on your credit card account if you cannot make the payment due to injury, illness, disability, or unemployment. Report on
Form 1040, line 21, the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year.
Employment agency fees.Employment:Agency fees
If you get a job through an employment agency, and the fee is paid by your employer, the fee is not includible in your income if you are not liable
for it. However, if you pay it and your employer reimburses you for it, it is includible in your income.
Energy conservation subsidies.Energy:Conservation:Subsidies
You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an
energy conservation measure for a dwelling unit.
Energy conservation measure.
This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the
management of energy demand.
Dwelling unit.
This includes a house, apartment, condominium, mobile home, boat, or similar property. If a building or structure contains both dwelling and other
units, any subsidy must be properly allocated.
Estate and trust income.Estate incomeIncome:Estate and trustTrusts:Income
Form 1041:Estates and trustsForm 1041, Schedule K-1:Beneficiary's share of income, deductions, credits, etc.An estate or trust, unlike a partnership, may have to pay federal
income tax. If you are a beneficiary of an estate or trust, you may be taxed on your share of its income distributed or required to be distributed to
you. However, there is never a double tax. Estates and trusts file their returns on Form 1041, U.S. Income Tax Return for Estates and Trusts, and your
share of the income is reported to you on Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc.
Current income required to be distributed.
If you are the beneficiary of an estate or trust that must distribute all of its current income, you must report your share of the distributable
net income, whether or not you actually received it.
Current income not required to be distributed.
If you are the beneficiary of an estate or trust and the fiduciary has the choice of whether to distribute all or part of the current income, you
must report:
All income that is required to be distributed to you, whether or not it is actually distributed, plus
All other amounts actually paid or credited to you,
up to the amount of your share of distributable net income.
How to report.
Treat each item of income the same way that the estate or trust would treat it. For example, if a trust's dividend income is distributed to you,
you report the distribution as dividend income on your return. The same rule applies to distributions of tax-exempt interest and capital gains.
The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you are
allowed on your individual income tax return.
Losses.
Losses of estates and trusts generally are not deductible by the beneficiaries.
Grantor trust.Grantor trustsTrusts:Grantor trusts
Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. (The grantor
is the one who transferred property to the trust.) This rule applies if the property (or income from the property) put into the trust will or may
revert (be returned) to the grantor or the grantor's spouse.
Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of
the transferred property.
Expenses paid by another.Expenses paid by another
If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship
with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position
you were in before the loss, the payment is not includible in your income.
Fees for services.Fees for servicesFiduciaries:Fees for services
Include all fees for your services in your income. Examples of these fees are amounts you receive for services you perform as:
A corporate director,
An executor, administrator, or personal representative of an estate,
A notary public, or
An election precinct official.
Form 1099–MISC:Services totaling $600 or moreIf you are not an employee and the fees for your services from the same payer total $600 or
more for the year, you may receive a Form 1099-MISC.
Corporate director fees are self-employment income. Report these payments on Schedule C or Schedule C-EZ (Form 1040).
Personal representatives.Fiduciaries:Fees for servicesPersonal representativesFiduciaries
All personal representatives must include in their gross income fees paid to them from an estate. If you are not in the trade or business of being
an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on Form 1040, line 21. If you are in the trade
or business of being an executor, report these fees as self-employment income on Schedule C or Schedule C-EZ (Form 1040). The fee is not includible in
income if it is waived.
Notary public.Notary fees
Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). These payments are not subject to self-employment tax. (See the
separate instructions for Schedule SE (Form 1040) for details.)
You should receive a Form W-2 showing payments for services performed as an election official or election worker. Report these payments on line 7
of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
Food program payments to daycare providers.Child and Adult Care Food Program:Payments to daycare providersChildcare providersDaycare providers:Food program payments toFood benefits:Daycare providers, food program payments to
If you operate a daycare service and receive payments under the Child and Adult Care Food Program administered by the Department of Agriculture
that are not for your services, the payments generally are not included in your income. However, you must include in your income any part of the
payments you do not use to provide food to individuals eligible for help under the program.
If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your
income unless it is more than $200. If the gain is more than $200, report it as a capital gain.
Foster-care providers.Foster care
Payments you receive from a state, political subdivision, or a qualified foster care placement agency for providing care to qualified foster
individuals in your home generally are not included in your income. However, you must include in your income payments received for the care of more
than 5 individuals age 19 or older and certain difficulty-of-care payments.
A qualified foster individual is a person who:
Is living in a foster family home, and
Was placed there by:
An agency of a state or one of its political subdivisions, or
A qualified foster care placement agency.
Difficulty-of-care payments.
These are additional payments that are designated by the payer as compensation for providing the additional care that is required for physically,
mentally, or emotionally handicapped qualified foster individuals. A state must determine that the additional compensation is needed, and the care for
which the payments are made must be provided in your home.
You must include in your income difficulty-of-care payments received for more than:
10 qualified foster individuals under age 19, or
5 qualified foster individuals age 19 or older.
Maintaining space in home.
If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income.
Reporting taxable payments.
If you receive payments that you must include in your income, you are in business as a foster-care provider and you are self-employed. Report the
payments on Schedule C or Schedule C-EZ (Form 1040). See Publication 587, Business Use of Your Home (Including Use by Daycare Providers), to help you
determine the amount you can deduct for the use of your home.
Found property.Found property
If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market
value in the first year it is your undisputed possession.
Free tour.Tour guides, free tours forTravel agencies:Free tour to organizer of group of touristsTravel and transportation expenses:Free tours from travel agencies
If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. Report the fair
market value of the tour on Form 1040, line 21, if you are not in the trade or business of organizing tours. You cannot deduct your expenses in
serving as the voluntary leader of the group at the group's request. If you organize tours as a trade or business, report the tour's value on Schedule
C or Schedule C-EZ (Form 1040).
Gambling winnings.Gambling winnings and losses
You must include your gambling winnings in your income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can
deduct gambling losses you had during the year, but only up to the amount of your winnings.
Lotteries and raffles.Lotteries and rafflesRaffles
Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the fair market value of
bonds, cars, houses, and other noncash prizes. However, the difference between the fair market value and the cost of an oil and gas lease obtained
from the government through a lottery is not includible in income.
Installment payments.
Generally, if you win a state lottery prize payable in installments, you must include in your gross income the annual payments and any amounts you
receive designated as interest on the unpaid installments. If you sell future lottery payments for a lump sum, you must report the amount you receive
from the sale as ordinary income (Form 1040, line 21) in the year you receive it.
Form W-2G.Form W-2G:Gambling winnings
You may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any tax taken out of them. Include
the amount from box 1 on Form 1040, line 21. Include the amount shown in box 2 on Form 1040, line 64, as federal income tax withheld.
Gifts and inheritances.GiftsInheritance
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 is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income
is taxable to you.
Inherited pension or IRA.Individual retirement arrangements (IRAs):Inherited IRAInheritance:IRAPensions:Inherited pensions
If you inherited a pension or an individual retirement arrangement (IRA), you may have to include part of the inherited amount in your income. See
Survivors and Beneficiaries in Publication 575, if you inherited a pension. See What If You Inherit an IRA in Publication 590,
if you inherited an IRA.
Expected inheritance.Expected inheritance
If you sell an interest in an expected inheritance from a living person, include the entire amount you receive in gross income on Form 1040, line
21.
Bequest for services.Bequest for services
If you receive cash or other property as a bequest for services you performed while the decedent was alive, the value is taxable compensation.
Do not include in your income any payment you receive under the National Historic Preservation Act to preserve a historically significant property.
Hobby losses.Hobby losses
Losses from a hobby are not deductible from other income. A hobby is an activity from which you do not expect to make a profit. See Activity
not for profit, earlier under Other Income.
If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a
capital gain. However, if you sell items from your collection at a loss, you cannot deduct the loss.
Restitution payments you receive as a Holocaust victim (or the heir of a Holocaust victim) and interest earned on the payments, including interest
earned on amounts held in certain escrow accounts or funds, are not taxable. You also do not include them in any computations in which you would
ordinarily add excludable income to your adjusted gross income, such as the computation to determine the taxable part of social security benefits. If
the payments are made in property, your basis in the property is its fair market value when you receive it.
Excludable restitution payments are payments or distributions made by any country or any other entity because of persecution of an individual on
the basis of race, religion, physical or mental disability, or sexual orientation by Nazi Germany, any other Axis regime, or any other Nazi-controlled
or Nazi-allied country, whether the payments are made under a law or as a result of a legal action. They include compensation or reparation for
property losses resulting from Nazi persecution, including proceeds under insurance policies issued before and during World War II by European
insurance companies.
Illegal income.Illegal incomeIncome:Illegal
Illegal income, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ
(Form 1040) if from your self-employment activity.
Indian fishing rights.Indian fishing rights
If you are a member of a qualified Indian tribe that has fishing rights secured by treaty, executive order, or an Act of Congress as of March 17,
1988, do not include in your income amounts you receive from activities related to those fishing rights. The income is not subject to income tax,
self-employment tax, or employment taxes.
Interest on frozen deposits.Frozen deposits:Interest onInterest:Frozen deposits
In general, you exclude from your income the amount of interest earned on a frozen deposit. A deposit is frozen if, at the end of the calendar
year, you cannot withdraw any part of the deposit because:
The financial institution is bankrupt or insolvent, or
The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt
or insolvent.
Excludable amount.
The amount of interest you exclude from income for the year is the interest that was credited on the frozen deposit for that tax year minus the sum
of:
The net amount withdrawn from the deposit during that year, and
The amount that could have been withdrawn at the end of that tax year (not reduced by any penalty for premature withdrawals of a time
deposit).
The excluded part of the interest is included in your income in the tax year it becomes withdrawable.
Interest on qualified savings bonds.Savings bondsInterest:Savings bond
You may be able to exclude from income the interest from qualified U.S. savings bonds you redeem if you pay qualified higher educational expenses
in the same year. Qualified higher educational expenses are those you pay for tuition and required fees at an eligible educational institution for
you, your spouse, or your dependent. A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must have been
issued to you when you were 24 years of age or older. For more information on this exclusion, see Education Savings Bond Program in chapter
1 of Publication 550.
Interest on state and local government obligations.Interest:State and local government obligationsState or local governments:Interest on obligations of
This interest is usually exempt from federal tax. However, you must show the amount of any tax-exempt interest on your federal income tax return.
For more information, see State or Local Government Obligations in chapter 1 of Publication 550.
If a prospective employer asks you to appear for an interview and either pays you an allowance or reimburses you for your transportation and other
travel expenses, the amount you receive generally is not taxable. You include in income only the amount you receive that is more than your actual
expenses.
Jury duty.Jury duty pay
Jury duty pay you receive must be included in your income on Form 1040, line 21. If you must give the pay to your employer because your employer
continues to pay your salary while you serve on the jury, you can deduct the amount turned over to your employer as an adjustment to income. Include
the amount you repay your employer on Form 1040, line 36. Enter Jury Pay and the amount on the dotted line next to line 36.
Kickbacks.Kickbacks
You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Form 1040, line 21, or on Schedule C or
Schedule C-EZ (Form 1040) if from your self-employment activity.
Example.
You sell cars and help arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you for referring customers to
them. You must include the kickbacks in your income.
You must include as other income on Form 1040, line 21 (or Schedule C or Schedule C-EZ (Form 1040) if you are self-employed) incentive payments
from a manufacturer that you receive as a salesperson. This is true whether you receive the payment directly from the manufacturer or through your
employer.
Example.
You sell cars for an automobile dealership and receive incentive payments from the automobile manufacturer every time you sell a particular model
of car. You report the incentive payments on Form 1040, line 21.
Medical savings accounts (Archer MSAs and Medicare Advantage MSAs).Archer MSAsMedicareAdvantage MSAsMSAs (Medical savings accounts)Medical:Savings accounts
You generally do not include in income amounts you withdraw from your Archer MSA or Medicare Advantage MSA if you use the money to pay for
qualified medical expenses. Generally, qualified medical expenses are those you can deduct on Schedule A (Form 1040). For more information about
Archer MSAs or Medicare Advantage MSAs, see Publication 969.
You generally should not report these benefits on your return. See Publication 521 for more information.
Prizes and awards.AwardsPrizes and awardsPrizes and awards
If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income.
For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040, line 21. If you refuse to accept a prize, do
not include its value in your income.
Prizes and awards in goods or services must be included in your income at their fair market value.
Employee awards or bonuses.BonusesEmployee awards or bonusesPrizes and awards:Employee awards or bonuses
Cash awards or bonuses given to you by your employer for good work or suggestions generally must be included in your income as wages. However,
certain noncash employee achievement awards can be excluded from income. See Bonuses and awards under Miscellaneous Compensation,
earlier.
Prize points.
If you are a salesperson and receive prize points redeemable for merchandise, that are awarded by a distributor or manufacturer to employees of
dealers, you must include their fair market value in your income. The prize points are taxable in the year they are paid or made available to you,
rather than in the year you redeem them for merchandise.
Pulitzer, Nobel, and similar prizes.Nobel prizePrizes and awards:Pulitzer, Nobel, and similar prizesPulitzer prize
If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic
fields, you generally must include the value of the prize in your income. However, you do not include this prize in your income if you meet all of the
following requirements.
You were selected without any action on your part to enter the contest or proceeding.
You are not required to perform substantial future services as a condition for receiving the prize or award.
The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you.
The following conditions apply to the transfer.
You cannot use the prize or award before it is transferred.
You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should
contain:
The purpose of the designation by making a reference to section 74(b)(3) of the Internal Revenue Code,
A description of the prize or award,
The name and address of the organization to receive the prize or award,
Your name, address, and taxpayer identification number, and
Your signature and the date signed.
In the case of an unexpected presentation, you must return the prize or award before using it (or spending, depositing, investing it, etc.,
in the case of money) and then prepare the statement as described in (b).
After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred.
These rules do not apply to scholarship or fellowship awards. See Scholarships and fellowships, later.
Qualified tuition program (QTP).Qualified tuition program (QTP)Tuition program, qualified (QTP)529 program
A qualified tuition program (also known as a 529 program) is a program set up to allow you to either prepay, or contribute to an account
established for paying, a student's qualified higher education expenses at an eligible educational institution. A program can be established and
maintained by a state, an agency or instrumentality of a state, or an eligible educational institution.
The part of a distribution representing the amount paid or contributed to a QTP is not included in income. This is a return of the investment in
the program.
The beneficiary generally does not include in income any earnings distributed from a QTP if the total distribution is less than or equal to
adjusted qualified higher education expenses. See Publication 970, Tax Benefits for Education, for more information.
The following types of payments are treated as pension or annuity income and are taxable under the rules explained in Publication 575.
Tier 1 railroad retirement benefits that are more than the social security equivalent benefit.
Tier 2 benefits.
Vested dual benefits.
Rewards.Rewards
If you receive a reward for providing information, include it in your income.
Sale of home.Home, sale ofSale of home
You may be able to exclude from income all or part of any gain from the sale or exchange of a personal residence. See Publication 523.
Sale of personal items.Capital gains or losses:Sale of personal propertyPersonal property:Sale of
If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a
capital gain. Report it on Schedule D (Form 1040). You cannot deduct a loss.
However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital gain and any
loss is deductible as a capital loss.
Example.
You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report your $80 gain as a
capital gain on Schedule D (Form 1040).
Scholarships and fellowships.Colleges and universities:Scholarships and fellowshipsEducational assistance:Scholarships and fellowshipsFellowshipsScholarships and fellowships
A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount
you receive that is for:
Tuition and fees to enroll at or attend an educational institution, or
Fees, books, supplies, and equipment required for courses at the educational institution.
Amounts used for room and board do not qualify for the exclusion. See Publication 970 for more information on qualified scholarships and
fellowship grants.
Payment for services.
Generally, you must include in income the part of any scholarship or fellowship that represents payment for past, present, or future teaching,
research, or other services. This applies even if all candidates for a degree must perform the services to receive the degree.
Do not include in income the part of any scholarship or fellowship representing payment for teaching, research, or other services if you receive
the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance
Program.
For information about the rules that apply to a tax-free qualified tuition reduction provided to employees and their families by an educational
institution, see Publication 970.
VA payments.VA payments
Allowances paid by the Department of Veterans Affairs are not included in your income. These allowances are not considered scholarship or
fellowship grants.
Prizes.Prizes and awards:Scholarship prizes
Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for educational purposes. You must
include these amounts in your income on Form 1040, line 21, whether or not you use the amounts for educational purposes.
If you are an eligible individual who receives benefits under the Smallpox Emergency Personnel Protection Act of 2003 for a covered injury
resulting from a covered countermeasure, you can exclude the payment from your income (to the extent it is not allowed as a medical and dental expense
deduction on Schedule A (Form 1040)). Eligible individuals include health care workers, emergency personnel, and first responders in a smallpox
emergency, who have received a smallpox vaccination.
Social security and equivalent railroad retirement benefits.Railroads:Retirement benefitsSocial security benefits
Social security or equivalent railroad retirement benefits, if taxable, must be included in the income of the person who has the legal right to
receive the benefits. Whether any of your benefits are taxable, and the amount that is taxable, depends on the amount of the benefits and your other
income.
Supplemental security income (SSI) paymentsSocial security benefits include any monthly benefit under Title II of the Social
Security Act and any part of a tier I railroad retirement benefit treated as a social security benefit. Social security benefits do not include any
supplemental security income (SSI) payments.
Form SSA-1099.Form SSA-1099:Social security benefit statement
If you received social security benefits during the year, you will receive Form SSA-1099, Social Security Benefit Statement. An IRS Notice 703 will
be enclosed with your Form SSA-1099. This notice includes a worksheet you can use to figure whether any of your benefits are taxable.
For an explanation of the information found on your Form SSA-1099, see Publication 915.
Form RRB-1099.Form RRB-1099:Railroad retirement board payments
If you received equivalent railroad retirement or special guaranty benefits during the year, you will receive Form RRB-1099, Payments by the
Railroad Retirement Board.
For an explanation of the information found on your Form RRB-1099, see Publication 915.
If you received other railroad retirement benefits, see Railroad retirement annuities, earlier.
Joint return.Joint returns:Social security benefits or railroad retirement payments
If you are married and file a joint return, you and your spouse must combine your incomes and your social security and equivalent railroad
retirement benefits when figuring 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 when figuring if any of your benefits are taxable.
Taxable amount.
Use the worksheet in the Form 1040 or Form 1040A instruction package to determine the amount of your benefits to include in your income.
Publication 915 also has worksheets you can use. However, you must use the worksheets in Publication 915 if any of the following situations apply.
You received a lump-sum benefit payment during the year that is for one or more earlier years.
You exclude employer-provided adoption benefits or interest from qualified U.S. savings bonds.
You take the foreign earned income exclusion, the foreign housing exclusion or deduction, the exclusion of income from American Samoa, or
the exclusion of income from Puerto Rico by bona fide residents of Puerto Rico.
Benefits may affect your IRA deduction.Individual retirement arrangements (IRAs):DeductionIRAsIndividual retirement arrangements (IRAs)
You must use the special worksheets in appendix B of Publication 590 to figure your taxable benefits and your IRA deduction if all of the following
conditions apply.
You receive social security or equivalent railroad retirement benefits.
You have taxable compensation.
You contribute to your IRA.
You or your spouse is covered by a retirement plan at work.
How to report.
If any of your benefits are taxable, you must use either Form 1040 or Form 1040A to report the taxable part. You cannot use Form 1040EZ. Report
your net benefits (the amount in box 5 of your Forms SSA-1099 and RRB-1099) on line 20a of Form 1040 or line 14a of Form 1040A. Report the taxable
part (from the last line of the worksheet) on line 20b of Form 1040 or on line 14b of Form 1040A.
Stolen property.Stolen property
If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its
rightful owner.
Transporting school children.Travel and transportation expenses:School children, transporting of
Do not include in your income a school board mileage allowance for taking children to and from school if you are not in the business of taking
children to school. You cannot deduct expenses for providing this transportation.
Union benefits and dues.Labor unions:DuesUnionsLabor unions
Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union cannot be excluded from your income.
You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2% of AGI limit if they are related to your job and if
you itemize deductions on Schedule A (Form 1040). For more information, get Publication 529, Miscellaneous Deductions.
Strike and lockout benefits.Labor unions:Strike and lockout benefitsLockout benefitsStrike benefits
Benefits paid to you by a union as strike or lockout benefits, including both cash and the fair market value of other property, usually are
included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show that the union intended them
as gifts to you.
Reimbursed union convention expenses.Labor unions:Convention expenses, reimbursed
If you are a delegate of your local union chapter and you attend the annual convention of the international union, do not include in your income
amounts you receive from the international union to reimburse you for expenses of traveling away from home to attend the convention. You cannot deduct
the reimbursed expenses, even if you are reimbursed in a later year. If you are reimbursed for lost salary, you must include that reimbursement in
your income.
If you are a customer of an electric utility company and you participate in the utility's energy conservation program, you may receive on your
monthly electric bill either:
A reduction in the purchase price of electricity furnished to you (rate reduction), or
A nonrefundable credit against the purchase price of the electricity.
The amount of the rate reduction or nonrefundable credit is not included in your income.
RepaymentsRepayments
If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for
the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in
which you repaid it. Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or
business or in a for-profit transaction.
Type of deduction.
The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. You generally deduct
the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income,
deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it
as a capital loss on Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a
miscellaneous itemized deduction on Schedule A (Form 1040).
If you repaid social security or equivalent railroad retirement benefits, see Publication 915.
Repayment of $3,000 or less.
If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. If you must deduct it as a miscellaneous
itemized deduction, enter it on Schedule A (Form 1040), line 22.
Repayment over $3,000.
If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction). However, you
can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you
included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and
compare the results. Use the method (deduction or credit) that results in less tax.
Method 1.
Figure your tax for 2005 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on
Schedule A (Form 1040), line 27.
Method 2.
Figure your tax for 2005 claiming a credit for the repaid amount. Follow these steps.
Figure your tax for 2005 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2005.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for 2005 figured without the deduction (step 1).
If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040,
line 70, and enter I.R.C. 1341 next to line 70.
Example.
For 2004 you filed a return and reported your income on the cash method. In 2005 you repaid $5,000 included in your 2004 income under a claim of
right. Your filing status in 2005 and 2004 is single. Your income and tax for both years are as follows:
2004 With Income Without IncomeTaxable
Income $15,000 $10,000 Tax$ 1,896 $ 1,146 2005Without DeductionWith DeductionTaxable
Income $49,950 $44,950 Tax$ 9,159 $ 7,909
Your tax under method 1 is $7,909. Your tax under method 2 is $8,409, figured as follows:
Tax previously determined for 2004 $1,896 Less: Tax as refigured − 1,146 Decrease in 2004 tax $ 750 Regular tax liability for 2005$9,159Less: Decrease in 2004 tax − 750 Refigured tax for 2005$8,409
You pay less tax using method 1, so you should take a deduction for the repayment in 2005.
Repayment rules do not apply.
This discussion does not apply to:
Deductions for bad debts,
Deductions from sales to customers, such as returns and allowances, and similar items, or
Deductions for legal and other expenses of contesting the repayment.
Year of deduction (or credit).
RepaymentsIf you use the cash method, you can take the deduction (or credit, if applicable) for the tax year in
which you actually make the repayment. If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax
year in which it is a proper deduction under your accounting method. For example, if you use an accrual method, you are entitled to the deduction or
credit in the tax year in which the obligation for the repayment accrues.
How To Get Tax HelpMore informationTax helpFree tax servicesTax helpHelpTax helpAssistanceTax helpPublicationsTax helpTTY/TDD information
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Contacting your Taxpayer Advocate.Taxpayer Advocate
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.
The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that
have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up
problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.
To contact your Taxpayer Advocate:
Call the Taxpayer Advocate toll free at
1-877-777-4778.
Call, write, or fax the Taxpayer Advocate office in your area.
For more information, see Publication 1546, How To Get Help With Unresolved Tax Problems (now available in Chinese, Korean, Russian, and
Vietnamese, in addition to English and Spanish).
Free tax services.
To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. It contains a list of free tax publications and an
index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax
topics.
Internet. You can access the IRS website 24 hours a day, 7 days a week, at
www.irs.gov to:
E-file your return. Find out about commercial tax preparation and e-file services available free to eligible
taxpayers.
Check the status of your 2005 refund. Click on Where's My Refund. Be sure to wait at least 6 weeks from the date you filed your
return (3 weeks if you filed electronically). Have your 2005 tax return available because you will need to know your social security number, your
filing status, and the exact whole dollar amount of your refund.
Download forms, instructions, and publications.
Order IRS products online.
Research your tax questions online.
Search publications online by topic or keyword.
View Internal Revenue Bulletins (IRBs) published in the last few years.
Figure your withholding allowances using our Form W-4 calculator.
Sign up to receive local and national tax news by email.
Get information on starting and operating a small business.
Phone. Many services are available by phone.
Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications
and prior-year forms and instructions. You should receive your order within 10 days.
Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An
employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center
for an appointment. To find the number, go to
www.irs.gov/localcontacts or
look in the phone book under United States Government, Internal Revenue Service.
TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and
publications.
TeleTax topics. Call 1-800-829-4477 and press 2 to listen to pre-recorded messages covering various tax topics.
Refund information. If you would like to check the status of your 2005 refund, call 1-800-829-4477 and press 1 for automated
refund information or call 1-800-829-1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically).
Have your 2005 tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount
of your refund.
Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers,
we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to sometimes listen in on or
record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and
publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores
have a collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the
Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An
employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem,
have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit your
local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary,
but if you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will
call you back within 2 business days to schedule an in-person appointment at your convenience. To find the number, go to
www.irs.gov/localcontacts or
look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the address below and receive a response within 10 business
days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
CD-ROM for tax products. You can order Publication 1796, IRS Tax Products CD-ROM, and obtain:
A CD that is released twice so you have the latest products. The first release ships in late December and the final release ships in late
February.
Current-year forms, instructions, and publications.
Prior-year forms, instructions, and publications.
Tax Map: an electronic research tool and finding aid.
Tax law frequently asked questions (FAQs).
Tax Topics from the IRS telephone response system.
Fill-in, print, and save features for most tax forms.
Internal Revenue Bulletins.
Toll-free and email technical support.
Buy the CD-ROM from National Technical Information Service (NTIS) at
www.irs.gov/cdorders for $25 (no handling fee) or call 1-877-233-6767 toll free to buy the CD-ROM for $25 (plus a $5 handling fee).
CD-ROM for small businesses. Publication 3207, The Small Business Resource Guide CD-ROM for 2005, has a new look and enhanced navigation
features. This year's CD includes:
Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
All the business tax forms, instructions, and publications needed to successfully manage a business.
Tax law changes for 2005.
IRS Tax Map to help you find forms, instructions, and publications by searching on a keyword or topic.
Web links to various government agencies, business associations, and IRS organizations.
Rate the Product survey—your opportunity to suggest changes for future editions.
An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or by visiting
www.irs.gov/smallbiz.
Tax Publications for Individual Taxpayers and Commonly Used Tax FormsSummary: This is a listing of tax publications and commonly used tax forms. The text states:Tax Publications for Individual TaxpayersSee How to Get Tax Help for a variety of ways to get publications, including by computer, phone, and mail.General Guides1--Your Rights as a Taxpayer17--Your Federal Income Tax (For Individuals)334--Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)509--Tax Calendars for 2005553--Highlights of 2004 Tax Changes910-- IRS Guide to Free Tax ServicesSpecialized Publications3--Armed Forces' Tax Guide54--Tax Guide for U.S. Citizens and Residents Aliens Abroad225--Farmer's Tax Guide378--Fuel Tax Credits and Refunds463--Travel, Entertainment, Gift, and Car Expenses501--Exemptions, Standard Deduction, and Filing Information502--Medical and Dental Expenses (Including the Health Coverage Tax Credit)503--Child and Dependent Care Expenses504--Divorced or Separated Individuals505--Tax Withholding and Estimated Tax514--Foreign Tax Credit for Individuals516--U.S. Government Civilian Employees Stationed Abroad517--Social Security and Other Information for Members of the Clergy and Religious Workers519--U.S. Tax Guide for Aliens521--Moving Expenses523--Selling Your Home524--Credit for the Elderly or the Disabled525--Taxable and Nontaxable Income526--Charitable Contributions527--Residential Rental Property529--Miscellaneous Deductions530--Tax Information for First-Time Homeowners531--Reporting Tip Income533--Self-Employment Tax534--Depreciating Property Placed in Service Before 1987536--Net Operating Losses (NOLs) for Individuals, Estates, and Trusts537--Installment Sales541--Partnerships544--Sales and Other Dispositions of Assets547--Casualties, Disasters, and Thefts550--Investment Income and Expenses551--Basis of Assets552--Recordkeeping for Individuals554--Older Americans' Tax Guide555--Community Property556--Examination of Returns, Appeal Rights, and Claims for Refund559--Survivors, Executors, and Administrators561--Determining the Value of Donated Property564--Mutual Fund Distributions570--Tax Guide for Individuals With Income From U.S. Possessions571--Tax-Sheltered Annuity Plans (403(b) Plans)575--Pension and Annuity Income584--Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)587--Business Use of Your Home (Including Use by Day-Care Providers)590--Individual Retirement Arrangements (IRAs)593--Tax Highlights for U.S. Citizens and Residents Going Abroad594--What You Should Know About the IRS Collection Process595--Tax Highlights for Commercial Fishermen596--Earned Income Credit (EIC)721--Tax Guide to U.S. Civil Service Retirement Benefits901--U.S. Tax Treaties907--Tax Highlights for Persons with Disabilities908--Bankruptcy Tax Guide911--Direct Sellers915--Social Security and Equivalent Railroad Retirement Benefits919--How Do I Adjust My Tax Withholding?925--Passive Activity and At-Risk Rules926--Household Employer's Tax Guide929--Tax Rules for Children and Dependents936--Home Mortgage Interest Deduction946--How to Depreciate Property947--Practice Before the IRS and Power of Attorney950--Introduction to Estate and Gift Taxes967--The IRS Will Figure Your Tax968--Tax Benefits for Adoption969--Health Savings Accounts and Other Tax-Favored Health Plans970--Tax Benefits for Education971--Innocent Spouse Relief972--Child Tax Credit1542--Per Diem Rates1544--Reporting Cash Payments of Over $10,000 (Received in a Trade or Business)1546--The Taxpayer Advocate Service—How to Get Help With Unresolved ProblemsSpanish Language Publications1SP--Derechos del Contribuyente579SP Cómo Preparar la Declaración de Impuesto Federal594SP Comprendiendo el Proceso de Cobro596SP Crédito por Ingreso del Trabajo850 English-Spanish Glossary of Words and Phrases Used in Publications Issued by the Internal Revenue Service1544SP Informe de Pagos en Efectivo en Exceso de $10,000 (Recibidos en una Ocupación o Negocio)Commonly Used Tax FormsSee How To Get Tax Help for a variety of ways to get forms, including by computer, fax, phone, and mail. For fax orders only, use the catalog
number when ordering.
Form Number and Title
Catalog Number
1040--U.S. Individual Income Tax Return
11320
Schedule A&B--Itemized Deductions & Interest and Ordinary Dividends
11330
Schedule C--Profit or Loss From Business
11334
Schedule C-EZ--Net Profit From Business
14374
Schedule D--Capital Gains and Losses
11338
Schedule D-1--Continuation Sheet for Schedule D
10424
Schedule E--Supplemental Income and Loss
11344
Schedule EIC--Earned Income Credit
13339
Schedule F--Profit or Loss From Farming
11346
Schedule H--Household Employment Taxes
12187
Schedule J--Farm Income Averaging
25513
Schedule R--Credit for the Elderly or the Disabled
11359
Schedule SE--Self-Employment Tax
11358
1040A--U.S. Individual Income Tax Return
11327
Schedule 1--Interest and Ordinary Dividends for Form 1040A Filers
12075
Schedule 2--Child and Dependent Care Expenses for Form 1040A Filers
10749
Schedule 3--Credit for the Elderly or the Disabled for Form 1040A Filers
12064
1040EZ--Income Tax Return for Single and Joint Filers With No Dependents
11329
1040-ES--Estimated Tax for Individuals
11340
1040X--Amended U.S. Individual Income Tax Return
11360
2106--Employee Business Expenses
11700
2106-EZ--Unreimbursed Employee Business Expenses
20604
2210--Underpayment of Estimated Tax by Individuals, Estates, and Trusts
11744
2441--Child and Dependent Care Expenses
11862
2848--Power of Attorney and Declaration of Representative
11980
3903--Moving Expenses
12490
4562--Depreciation and Amortization
12906
4868--Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
13141
4952--Investment Interest Expense Deduction
13177
5329--Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts
