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2009 turbotax download 6. 2009 turbotax download   Tip Income Table of Contents Introduction Useful Items - You may want to see: Keeping a Daily Tip RecordElectronic tip record. 2009 turbotax download Reporting Tips to Your EmployerElectronic tip statement. 2009 turbotax download Final report. 2009 turbotax download Reporting Tips on Your Tax Return Allocated Tips Introduction This chapter is for employees who receive tips. 2009 turbotax download All tips you receive are income and are subject to federal income tax. 2009 turbotax download You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement. 2009 turbotax download The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax. 2009 turbotax download Reporting your tip income correctly is not difficult. 2009 turbotax download You must do three things. 2009 turbotax download Keep a daily tip record. 2009 turbotax download Report tips to your employer. 2009 turbotax download Report all your tips on your income tax return. 2009 turbotax download  This chapter will explain these three things and show you what to do on your tax return if you have not done the first two. 2009 turbotax download This chapter will also show you how to treat allocated tips. 2009 turbotax download For information on special tip programs and agreements, see Publication 531. 2009 turbotax download Useful Items - You may want to see: Publication 531 Reporting Tip Income 1244 Employee's Daily Record of Tips and Report to Employer Form (and Instructions) 4137 Social Security and Medicare Tax on Unreported Tip Income 4070 Employee's Report of Tips to Employer Keeping a Daily Tip Record Why keep a daily tip record. 2009 turbotax download   You must keep a daily tip record so you can: Report your tips accurately to your employer, Report your tips accurately on your tax return, and Prove your tip income if your return is ever questioned. 2009 turbotax download How to keep a daily tip record. 2009 turbotax download   There are two ways to keep a daily tip record. 2009 turbotax download You can either: Write information about your tips in a tip diary, or Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips. 2009 turbotax download You should keep your daily tip record with your tax or other personal records. 2009 turbotax download You must keep your records for as long as they are important for administration of the federal tax law. 2009 turbotax download For information on how long to keep records, see How long to keep records in chapter 1. 2009 turbotax download    If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. 2009 turbotax download To get Form 4070A, ask the Internal Revenue Service (IRS) or your employer for Publication 1244. 2009 turbotax download Also, Publication 1244 is available online at www. 2009 turbotax download irs. 2009 turbotax download gov/pub/irs-pdf/p1244. 2009 turbotax download pdf. 2009 turbotax download Publication 1244 includes a 1-year supply of Form 4070A. 2009 turbotax download Each day, write in the information asked for on the form. 2009 turbotax download   In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. 2009 turbotax download Although you do not report these tips to your employer, you must report them on your tax return. 2009 turbotax download   If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it is different from your employer's name). 2009 turbotax download Then, each workday, write the date and the following information. 2009 turbotax download Cash tips you get directly from customers or from other employees. 2009 turbotax download Tips from credit and debit card charge customers that your employer pays you. 2009 turbotax download The value of any noncash tips you get, such as tickets, passes, or other items of value. 2009 turbotax download The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips. 2009 turbotax download Electronic tip record. 2009 turbotax download   You can use an electronic system provided by your employer to record your daily tips. 2009 turbotax download If you do, you must receive and keep a paper copy of this record. 2009 turbotax download Service charges. 2009 turbotax download    Do not write in your tip diary the amount of any service charge that your employer adds to a customer's bill and then pays to you and treats as wages. 2009 turbotax download This is part of your wages, not a tip. 2009 turbotax download See examples below. 2009 turbotax download Example 1. 2009 turbotax download Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. 2009 turbotax download Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. 2009 turbotax download Because Jane did not have an unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. 2009 turbotax download Do not include the 18% charge in your tip diary. 2009 turbotax download Service charges that are paid to you are considered wages, not tips. 2009 turbotax download Example 2. 2009 turbotax download Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. 2009 turbotax download David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. 2009 turbotax download Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. 2009 turbotax download Be sure to include this amount in your tip diary. 2009 turbotax download Reporting Tips to Your Employer Why report tips to your employer. 2009 turbotax download   You must report tips to your employer so that: Your employer can withhold federal income tax and social security, Medicare, Additional Medicare, or railroad retirement taxes, Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and You can avoid the penalty for not reporting tips to your employer (explained later). 2009 turbotax download What tips to report. 2009 turbotax download   Report to your employer only cash, check, and debit and credit card tips you receive. 2009 turbotax download   If your total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that employer. 2009 turbotax download   If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. 2009 turbotax download Do not report to your employer any portion of the tips you receive that you pass on to other employees. 2009 turbotax download However, you must report tips you receive from other employees. 2009 turbotax download    Do not report the value of any noncash tips, such as tickets or passes, to your employer. 2009 turbotax download You do not pay social security, Medicare, Additional Medicare or railroad retirement taxes on these tips. 2009 turbotax download How to report. 2009 turbotax download    If your employer does not give you any other way to report tips, you can use Form 4070. 2009 turbotax download Fill in the information asked for on the form, sign and date the form, and give it to your employer. 2009 turbotax download To get a 1-year supply of the form, ask the IRS or your employer for Publication 1244. 2009 turbotax download   If you do not use Form 4070, give your employer a statement with the following information. 2009 turbotax download Your name, address, and social security number. 2009 turbotax download Your employer's name, address, and business name (if it is different from your employer's name). 2009 turbotax download The month (or the dates of any shorter period) in which you received tips. 2009 turbotax download The total tips required to be reported for that period. 2009 turbotax download You must sign and date the statement. 2009 turbotax download Be sure to keep a copy with your tax or other personal records. 2009 turbotax download   Your employer may require you to report your tips more than once a month. 2009 turbotax download However, the statement cannot cover a period of more than 1 calendar month. 2009 turbotax download Electronic tip statement. 2009 turbotax download   Your employer can have you furnish your tip statements electronically. 2009 turbotax download When to report. 2009 turbotax download   Give your report for each month to your employer by the 10th of the next month. 2009 turbotax download If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday. 2009 turbotax download Example. 2009 turbotax download You must report your tips received in September 2014 by October 10, 2014. 2009 turbotax download Final report. 2009 turbotax download   If your employment ends during the month, you can report your tips when your employment ends. 2009 turbotax download Penalty for not reporting tips. 2009 turbotax download   If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security, Medicare, and Additional Medicare taxes or railroad retirement tax you owe on the unreported tips. 2009 turbotax download (For information about these taxes, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later. 2009 turbotax download ) The penalty amount is in addition to the taxes you owe. 2009 turbotax download   You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. 2009 turbotax download To do so, attach a statement to your return explaining why you did not report them. 2009 turbotax download Giving your employer money for taxes. 2009 turbotax download   Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your reported tips. 2009 turbotax download If this happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes. 2009 turbotax download   If you do not give your employer enough money, your employer will apply your regular pay and any money you give in the following order. 2009 turbotax download All taxes on your regular pay. 2009 turbotax download Social security, Medicare, and Additional Medicare taxes or railroad retirement taxes on your reported tips. 2009 turbotax download Federal, state, and local income taxes on your reported tips. 2009 turbotax download    Any taxes that remain unpaid can be collected by your employer from your next paycheck. 2009 turbotax download If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. 2009 turbotax download See Publication 505, Tax Withholding and Estimated Tax, for more information. 2009 turbotax download    Uncollected taxes. 2009 turbotax download You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 2013. 2009 turbotax download These uncollected taxes will be shown on your 2013 Form W-2. 2009 turbotax download See Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later. 2009 turbotax download Reporting Tips on Your Tax Return How to report tips. 2009 turbotax download    Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; or Form 1040EZ, line 1. 2009 turbotax download What tips to report. 2009 turbotax download   You must report all tips you received in 2013 on your tax return, including both cash tips and noncash tips. 2009 turbotax download Any tips you reported to your employer for 2013 are included in the wages shown in box 1 of your Form W-2. 2009 turbotax download Add to the amount in box 1 only the tips you did not report to your employer. 2009 turbotax download    If you received $20 or more in cash and charge tips in a month and did not report all of those tips to your employer, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer, later. 2009 turbotax download    If you did not keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips, later. 2009 turbotax download   If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount in box 1 of your Form W-2. 2009 turbotax download Cash and charge tips you received that totaled less than $20 for any month. 2009 turbotax download The value of noncash tips, such as tickets, passes, or other items of value. 2009 turbotax download Example. 2009 turbotax download Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2013) on June 30 and received $10,000 in wages during the year. 2009 turbotax download Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. 2009 turbotax download He was not required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required. 2009 turbotax download Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. 2009 turbotax download He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return. 2009 turbotax download Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer. 2009 turbotax download    If you received $20 or more in cash and charge tips in a month from any one job and did not report all of those tips to your employer, you must report the social security, Medicare, and Additional Medicare taxes on the unreported tips as additional tax on your return. 2009 turbotax download To report these taxes, you must file a return even if you would not otherwise have to file. 2009 turbotax download You must use Form 1040. 2009 turbotax download (You cannot file Form 1040EZ or Form 1040A. 2009 turbotax download )    Use Form 4137 to figure social security and Medicare taxes. 2009 turbotax download Enter the tax on your return as instructed, and attach the completed Form 4137 to your return. 2009 turbotax download Use Form 8959 to figure Additional Medicare Tax. 2009 turbotax download    If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported tips. 2009 turbotax download To get railroad retirement credit, you must report tips to your employer. 2009 turbotax download Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer. 2009 turbotax download   You may have uncollected taxes if your regular pay was not enough for your employer to withhold all the taxes you owe and you did not give your employer enough money to pay the rest of the taxes. 2009 turbotax download For more information, see Giving your employer money for taxes , under Reporting Tips to Your Employer, earlier. 2009 turbotax download   If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2013, the uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). 2009 turbotax download You must report these amounts as additional tax on your return. 2009 turbotax download Unlike the uncollected portion of the regular (1. 2009 turbotax download 45%) Medicare tax, the uncollected Additional Medicare Tax is not reported in box 12 of Form W-2 with code B. 2009 turbotax download    To report these uncollected taxes, you must file a return even if you would not otherwise have to file. 2009 turbotax download You must report these taxes on Form 1040, line 60. 2009 turbotax download See the instructions for Form 1040, line 60. 2009 turbotax download (You cannot file Form 1040EZ or Form 1040A. 2009 turbotax download ) Allocated Tips If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. 2009 turbotax download They are not included in box 1 with your wages and reported tips. 2009 turbotax download If box 8 is blank, this discussion does not apply to you. 2009 turbotax download What are allocated tips. 2009 turbotax download   These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. 2009 turbotax download Your employer will have done this only if: You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees, and The tips you reported to your employer were less than your share of 8% of food and drink sales. 2009 turbotax download No income, social security, Medicare, Additional Medicare or railroad retirement taxes are withheld on allocated tips. 2009 turbotax download How were your allocated tips figured. 2009 turbotax download   The tips allocated to you are your share of an amount figured by subtracting the reported tips of all employees from 8% (or an approved lower rate) of food and drink sales (other than carryout sales and sales with a service charge of 10% or more). 2009 turbotax download Your share of that amount was figured using either a method provided by an employer-employee agreement or a method provided by IRS regulations based on employees' sales or hours worked. 2009 turbotax download For information about the exact allocation method used, ask your employer. 2009 turbotax download Must you report your allocated tips on your tax return. 2009 turbotax download   You must report all tips you received in 2013 on your tax return, including both cash tips and noncash tips. 2009 turbotax download Any tips you reported to your employer for 2013 are included in the wages shown in box 1 of your Form W-2. 2009 turbotax download Add to the amount in box 1 only the tips you did not report to your employer. 2009 turbotax download This should include any allocated tips shown in box 8 on your Form(s) W-2, unless you have adequate records to show that you received less tips in the year than the allocated figures. 2009 turbotax download   See What tips to report under Reporting Tips on Your Tax Return, and Keeping a Daily Tip Record , earlier. 2009 turbotax download How to report allocated tips. 2009 turbotax download   Report the amount in box 1 and the allocated tips in box 8 of your Form(s) W-2 as wages on Form 1040, line 7; Form 1040NR, line 8; or Form 1040NR-EZ, line 3. 2009 turbotax download (You cannot file Form 1040A or Form 1040EZ when you have allocated tips. 2009 turbotax download )    Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tips, you must report those taxes as additional tax on your return. 2009 turbotax download Complete Form 4137, and include the allocated tips on line 1 of the form. 2009 turbotax download See Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier. 2009 turbotax download Prev  Up  Next   Home   More Online Publications
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2009 turbotax download Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. 2009 turbotax download A pension is generally a series of payments made to you after you retire from work. 2009 turbotax download Pension payments are made regularly and are for past services with an employer. 2009 turbotax download An annuity is a series of payments under a contract. 2009 turbotax download You can buy the contract alone or you can buy it with the help of your employer. 2009 turbotax download Annuity payments are made regularly for more than one full year. 2009 turbotax download Note. 2009 turbotax download Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. 2009 turbotax download Types of pensions and annuities. 2009 turbotax download   Particular types of pensions and annuities include: Fixed period annuities. 2009 turbotax download You receive definite amounts at regular intervals for a definite length of time. 2009 turbotax download Annuities for a single life. 2009 turbotax download You receive definite amounts at regular intervals for life. 2009 turbotax download The payments end at death. 2009 turbotax download Joint and survivor annuities. 2009 turbotax download The first annuitant receives a definite amount at regular intervals for life. 2009 turbotax download After he or she dies, a second annuitant receives a definite amount at regular intervals for life. 2009 turbotax download The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. 2009 turbotax download Variable annuities. 2009 turbotax download You receive payments that may vary in amount for a definite length of time or for life. 2009 turbotax download The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. 2009 turbotax download Disability pensions. 2009 turbotax download You are under minimum retirement age and receive payments because you retired on disability. 2009 turbotax download If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. 2009 turbotax download If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. 2009 turbotax download A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. 2009 turbotax download This plan must meet Internal Revenue Code requirements. 2009 turbotax download It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. 2009 turbotax download However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. 2009 turbotax download A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. 2009 turbotax download A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. 2009 turbotax download   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. 2009 turbotax download A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. 2009 turbotax download It does not qualify for most of the tax benefits of a qualified plan. 2009 turbotax download Annuity worksheets. 2009 turbotax download   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. 2009 turbotax download Request for a ruling. 2009 turbotax download   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. 2009 turbotax download This is treated as a request for a ruling. 2009 turbotax download See Requesting a Ruling on Taxation of Annuity near the end of this publication. 2009 turbotax download Withholding tax and estimated tax. 2009 turbotax download   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. 2009 turbotax download If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. 2009 turbotax download Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. 2009 turbotax download Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). 2009 turbotax download These payments are also known as amounts received as an annuity. 2009 turbotax download If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. 2009 turbotax download In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. 2009 turbotax download The amount of each payment that is more than the part that represents your net cost is taxable. 2009 turbotax download Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. 2009 turbotax download These terms are explained in the following discussions. 2009 turbotax download Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. 2009 turbotax download First, find your net cost of the contract as of the annuity starting date (defined later). 2009 turbotax download To find this amount, you must first figure the total premiums, contributions, or other amounts paid. 2009 turbotax download This includes the amounts your employer contributed if you were required to include these amounts in income. 2009 turbotax download It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). 2009 turbotax download From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. 2009 turbotax download Any additional premiums paid for double indemnity or disability benefits. 2009 turbotax download Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). 2009 turbotax download The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. 2009 turbotax download Example. 2009 turbotax download On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. 2009 turbotax download The annuity starting date is July 1. 2009 turbotax download This is the date you use in figuring your investment in the contract and your expected return (discussed later). 2009 turbotax download Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. 2009 turbotax download Foreign employment. 2009 turbotax download   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. 2009 turbotax download The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. 2009 turbotax download Foreign employment contributions while a nonresident alien. 2009 turbotax download   In determining your cost, special rules apply if you are a U. 2009 turbotax download S. 2009 turbotax download citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. 2009 turbotax download Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. 2009 turbotax download Death benefit exclusion. 2009 turbotax download   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. 2009 turbotax download The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. 2009 turbotax download How to adjust your total cost. 2009 turbotax download   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. 2009 turbotax download Add it to the cost or unrecovered cost of the annuity at the annuity starting date. 2009 turbotax download See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. 2009 turbotax download Net cost. 2009 turbotax download   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. 2009 turbotax download This is the unrecovered investment in the contract as of the annuity starting date. 2009 turbotax download If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. 2009 turbotax download Refund feature. 2009 turbotax download   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. 2009 turbotax download Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. 2009 turbotax download   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. 2009 turbotax download Zero value of refund feature. 2009 turbotax download   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. 2009 turbotax download   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). 2009 turbotax download   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. 2009 turbotax download Examples. 2009 turbotax download The first example shows how to figure the value of the refund feature when there is only one beneficiary. 2009 turbotax download Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. 2009 turbotax download In both examples, the taxpayer elects to use Tables V through VIII. 2009 turbotax download If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. 2009 turbotax download Example 1. 2009 turbotax download At age 65, Barbara bought for $21,053 an annuity with a refund feature. 2009 turbotax download She will get $100 a month for life. 2009 turbotax download Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. 2009 turbotax download In this case, the contract cost and the total guaranteed return are the same ($21,053). 2009 turbotax download Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. 2009 turbotax download 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. 2009 turbotax download For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). 2009 turbotax download In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. 2009 turbotax download Example 2. 2009 turbotax download John died while still employed. 2009 turbotax download His widow, Eleanor, age 48, receives $171 a month for the rest of her life. 2009 turbotax download John's son, Elmer, age 9, receives $50 a month until he reaches age 18. 2009 turbotax download John's contributions to the retirement fund totaled $7,559. 2009 turbotax download 45, with interest on those contributions of $1,602. 2009 turbotax download 53. 2009 turbotax download The guarantee or total refund feature of the contract is $9,161. 2009 turbotax download 98 ($7,559. 2009 turbotax download 45 plus $1,602. 2009 turbotax download 53). 2009 turbotax download The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. 2009 turbotax download 9 $71,614. 2009 turbotax download 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. 2009 turbotax download 0 5,400. 2009 turbotax download 00   3) Total expected return   $77,014. 2009 turbotax download 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. 2009 turbotax download 45   2) Guaranteed amount (contributions of $7,559. 2009 turbotax download 45 plus interest of $1,602. 2009 turbotax download 53) $9,161. 2009 turbotax download 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. 2009 turbotax download 00   4) Net guaranteed amount $3,761. 2009 turbotax download 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. 2009 turbotax download 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. 2009 turbotax download 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. 2009 turbotax download See the discussion of expected return, later in this publication. 2009 turbotax download Free IRS help. 2009 turbotax download   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. 2009 turbotax download Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. 2009 turbotax download The following discussions explain how to figure the expected return with each type of annuity. 2009 turbotax download A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. 2009 turbotax download Fixed period annuity. 2009 turbotax download   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. 2009 turbotax download It is the total amount you will get beginning at the annuity starting date. 2009 turbotax download You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). 2009 turbotax download To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. 2009 turbotax download Single life annuity. 2009 turbotax download   If you are to get annuity payments for the rest of your life, find your expected return as follows. 2009 turbotax download You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. 2009 turbotax download These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). 2009 turbotax download   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. 2009 turbotax download See Adjustments to Tables I, II, V, VI, and VIA following Table I. 2009 turbotax download Example. 2009 turbotax download Henry bought an annuity contract that will give him an annuity of $500 a month for his life. 2009 turbotax download If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. 2009 turbotax download 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. 2009 turbotax download 2 multiple by +. 2009 turbotax download 1. 2009 turbotax download His expected return would then be $115,800 ($6,000 × 19. 2009 turbotax download 3). 2009 turbotax download Annuity for shorter of life or specified period. 2009 turbotax download   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. 2009 turbotax download To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. 2009 turbotax download Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. 2009 turbotax download Example. 2009 turbotax download Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. 2009 turbotax download She was age 65 at her birthday nearest the annuity starting date. 2009 turbotax download She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. 2009 turbotax download 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. 2009 turbotax download See Special Elections, later. 2009 turbotax download Joint and survivor annuities. 2009 turbotax download   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. 2009 turbotax download To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. 2009 turbotax download If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. 2009 turbotax download See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. 2009 turbotax download Example. 2009 turbotax download John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. 2009 turbotax download At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. 2009 turbotax download The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. 2009 turbotax download 0 Expected return $132,000 Different payments to survivor. 2009 turbotax download   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. 2009 turbotax download Example 1. 2009 turbotax download Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. 2009 turbotax download If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. 2009 turbotax download 0 Multiple for Gerald, age 70 (from Table V)   16. 2009 turbotax download 0 Difference: Multiple applicable to Mary   6. 2009 turbotax download 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. 2009 turbotax download 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. 2009 turbotax download 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. 2009 turbotax download Your husband died while still employed. 2009 turbotax download Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. 2009 turbotax download Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. 2009 turbotax download You were 50 years old at the annuity starting date. 2009 turbotax download Marie was 16 and Jean was 14. 2009 turbotax download Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. 2009 turbotax download 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. 2009 turbotax download 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. 2009 turbotax download 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. 2009 turbotax download Computation Under the General Rule Note. 2009 turbotax download Variable annuities use a different computation for determining the exclusion amounts. 2009 turbotax download See Variable annuities later. 2009 turbotax download Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. 2009 turbotax download   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. 2009 turbotax download See Death benefit exclusion , earlier. 2009 turbotax download Step 2. 2009 turbotax download   Figure your expected return. 2009 turbotax download Step 3. 2009 turbotax download   Divide Step 1 by Step 2 and round to three decimal places. 2009 turbotax download This will give you the exclusion percentage. 2009 turbotax download Step 4. 2009 turbotax download   Multiply the exclusion percentage by the first regular periodic payment. 2009 turbotax download The result is the tax-free part of each pension or annuity payment. 2009 turbotax download   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. 2009 turbotax download However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. 2009 turbotax download   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. 2009 turbotax download Step 5. 2009 turbotax download   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. 2009 turbotax download This will give you the tax-free part of the total payment for the year. 2009 turbotax download    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. 2009 turbotax download This fractional amount is multiplied by your exclusion percentage to get the tax-free part. 2009 turbotax download Step 6. 2009 turbotax download   Subtract the tax-free part from the total payment you received. 2009 turbotax download The rest is the taxable part of your pension or annuity. 2009 turbotax download Example 1. 2009 turbotax download You purchased an annuity with an investment in the contract of $10,800. 2009 turbotax download Under its terms, the annuity will pay you $100 a month for life. 2009 turbotax download The multiple for your age (age 65) is 20. 2009 turbotax download 0 as shown in Table V. 2009 turbotax download Your expected return is $24,000 (20 × 12 × $100). 2009 turbotax download Your cost of $10,800, divided by your expected return of $24,000, equals 45. 2009 turbotax download 0%. 2009 turbotax download This is the percentage you will not have to include in income. 2009 turbotax download Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. 2009 turbotax download If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). 2009 turbotax download Example 2. 2009 turbotax download Gerald bought a joint and survivor annuity. 2009 turbotax download Gerald's investment in the contract is $62,712 and the expected return is $121,200. 2009 turbotax download The exclusion percentage is 51. 2009 turbotax download 7% ($62,712 ÷ $121,200). 2009 turbotax download Gerald will receive $500 a month ($6,000 a year). 2009 turbotax download Each year, until his net cost is recovered, $3,102 (51. 2009 turbotax download 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. 2009 turbotax download If Gerald dies, his wife will receive $350 a month ($4,200 a year). 2009 turbotax download If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. 2009 turbotax download 7%). 2009 turbotax download Each year, until the entire net cost is recovered, his wife will receive $2,171. 2009 turbotax download 40 (51. 2009 turbotax download 7% of her payments received of $4,200) tax free. 2009 turbotax download She will include $2,028. 2009 turbotax download 60 ($4,200 − $2,171. 2009 turbotax download 40) in her income tax return. 2009 turbotax download Example 3. 2009 turbotax download Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. 2009 turbotax download Your two daughters each receive annual annuities of $1,800 until they reach age 18. 2009 turbotax download Your husband contributed $25,576 to the plan. 2009 turbotax download You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. 2009 turbotax download Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. 2009 turbotax download The exclusion percentage of 18. 2009 turbotax download 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. 2009 turbotax download Each full year $864 (18. 2009 turbotax download 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. 2009 turbotax download Each year, until age 18, $324 (18. 2009 turbotax download 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. 2009 turbotax download Part-year payments. 2009 turbotax download   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. 2009 turbotax download   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. 2009 turbotax download For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. 2009 turbotax download   If you received a fractional payment, follow Step 5, discussed earlier. 2009 turbotax download This gives you the tax-free part of your total payment. 2009 turbotax download Example. 2009 turbotax download On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. 2009 turbotax download The applicable multiple from Table V is 23. 2009 turbotax download 3 (age 61). 2009 turbotax download Her expected return is $34,950 ($125 × 12 × 23. 2009 turbotax download 3). 2009 turbotax download Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. 2009 turbotax download 1%. 2009 turbotax download Each payment received will consist of 63. 2009 turbotax download 1% return of cost and 36. 2009 turbotax download 9% taxable income, until her net cost of the contract is fully recovered. 2009 turbotax download During the first year, Mary received three payments of $125, or $375, of which $236. 2009 turbotax download 63 (63. 2009 turbotax download 1% × $375) is a return of cost. 2009 turbotax download The remaining $138. 2009 turbotax download 37 is included in income. 2009 turbotax download Increase in annuity payments. 2009 turbotax download   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. 2009 turbotax download All increases in the installment payments are fully taxable. 2009 turbotax download   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. 2009 turbotax download 72-5(a)(5) of the regulations. 2009 turbotax download Example. 2009 turbotax download Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. 2009 turbotax download In figuring the taxable part, Joe elects to use Tables V through VIII. 2009 turbotax download The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. 2009 turbotax download His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. 2009 turbotax download 0 × $1,764 annual payment). 2009 turbotax download The exclusion percentage is $7,938 ÷ $35,280, or 22. 2009 turbotax download 5%. 2009 turbotax download During the year he received 11 monthly payments of $147, or $1,617. 2009 turbotax download Of this amount, 22. 2009 turbotax download 5% × $147 × 11 ($363. 2009 turbotax download 83) is tax free as a return of cost and the balance of $1,253. 2009 turbotax download 17 is taxable. 2009 turbotax download Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). 2009 turbotax download The tax-free part is still only 22. 2009 turbotax download 5% of the annuity payments as of the annuity starting date (22. 2009 turbotax download 5% × $147 × 12 = $396. 2009 turbotax download 90 for a full year). 2009 turbotax download The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. 2009 turbotax download Variable annuities. 2009 turbotax download   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. 2009 turbotax download   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. 2009 turbotax download If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. 2009 turbotax download Example. 2009 turbotax download Frank purchased a variable annuity at age 65. 2009 turbotax download The total cost of the contract was $12,000. 2009 turbotax download The annuity starting date is January 1 of the year of purchase. 2009 turbotax download His annuity will be paid, starting July 1, in variable annual installments for his life. 2009 turbotax download The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. 2009 turbotax download   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. 2009 turbotax download Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. 2009 turbotax download The result is added to the previously figured periodic tax-free part. 2009 turbotax download The sum is the amount of each future payment that will be tax free. 2009 turbotax download Example. 2009 turbotax download Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. 2009 turbotax download Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. 2009 turbotax download Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. 2009 turbotax download 00 Amount received in second year 500. 2009 turbotax download 00 Difference $100. 2009 turbotax download 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. 2009 turbotax download 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. 2009 turbotax download 4) $5. 2009 turbotax download 43 Revised annual tax-free part for third and later years ($600 + $5. 2009 turbotax download 43) $605. 2009 turbotax download 43 Amount taxable in third year ($1,200 − $605. 2009 turbotax download 43) $594. 2009 turbotax download 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. 2009 turbotax download 72–4(d)(3) of the Income Tax Regulations. 2009 turbotax download The statement must also show the following information: The annuity starting date and your age on that date. 2009 turbotax download The first day of the first period for which you received an annuity payment in the current year. 2009 turbotax download Your investment in the contract as originally figured. 2009 turbotax download The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. 2009 turbotax download Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. 2009 turbotax download Exclusion limited to net cost. 2009 turbotax download   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). 2009 turbotax download This is the unrecovered investment in the contract as of the annuity starting date. 2009 turbotax download   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. 2009 turbotax download This deduction is not subject to the 2%-of-adjusted-gross-income limit. 2009 turbotax download Example 1. 2009 turbotax download Your annuity starting date is after 1986. 2009 turbotax download Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. 2009 turbotax download There is no refund feature. 2009 turbotax download Your monthly annuity payment is $833. 2009 turbotax download 33. 2009 turbotax download Your exclusion ratio is 12% and you exclude $100 a month. 2009 turbotax download Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. 2009 turbotax download Thereafter, your annuity payments are fully taxable. 2009 turbotax download Example 2. 2009 turbotax download The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. 2009 turbotax download The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. 2009 turbotax download The exclusion ratio is 10. 2009 turbotax download 8%, and your monthly exclusion is $90. 2009 turbotax download After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). 2009 turbotax download An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. 2009 turbotax download Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. 2009 turbotax download Exclusion not limited to net cost. 2009 turbotax download   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. 2009 turbotax download If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. 2009 turbotax download The total exclusion may be more than your investment in the contract. 2009 turbotax download How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. 2009 turbotax download Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. 2009 turbotax download These tables correspond to the old Tables I through IV. 2009 turbotax download In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. 2009 turbotax download If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. 2009 turbotax download However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). 2009 turbotax download Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. 2009 turbotax download Contributions made both before July 1986 and after June 1986. 2009 turbotax download   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. 2009 turbotax download (See the examples below. 2009 turbotax download )    Making the election. 2009 turbotax download Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. 2009 turbotax download 72–6 of the Income Tax Regulations. 2009 turbotax download ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. 2009 turbotax download   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. 2009 turbotax download You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. 2009 turbotax download    Advantages of election. 2009 turbotax download In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. 2009 turbotax download    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. 2009 turbotax download If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. 2009 turbotax download   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. 2009 turbotax download Example 1. 2009 turbotax download Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. 2009 turbotax download Payment of the $42,000 contribution is guaranteed under a refund feature. 2009 turbotax download Bill is 55 years old as of the annuity starting date. 2009 turbotax download For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. 2009 turbotax download       Pre- July 1986   Post- June 1986 A. 2009 turbotax download Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. 2009 turbotax download of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. 2009 turbotax download Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. 2009 turbotax download Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. 2009 turbotax download 7   28. 2009 turbotax download 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. 2009 turbotax download Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . 2009 turbotax download 079   . 2009 turbotax download 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). 2009 turbotax download The taxable part of his annuity is $22,080 ($24,000 minus $1,920). 2009 turbotax download If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). 2009 turbotax download Example 2. 2009 turbotax download Al is age 62 at his nearest birthday to the annuity starting date. 2009 turbotax download Al's wife is age 60 at her nearest birthday to the annuity starting date. 2009 turbotax download The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. 2009 turbotax download The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. 2009 turbotax download Al makes the election described in Example 1 . 2009 turbotax download For purposes of this example, assume the refund feature adjustment is zero. 2009 turbotax download If an adjustment is required, IRS will figure the amount. 2009 turbotax download See Requesting a Ruling on Taxation of Annuity near the end of this publication. 2009 turbotax download       Pre-  July 1986   Post-  June 1986 A. 2009 turbotax download Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. 2009 turbotax download Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. 2009 turbotax download Expected return         1) Multiple for both annuitants from Tables II and VI 25. 2009 turbotax download 4   28. 2009 turbotax download 8   2) Multiple for first annuitant from Tables I and V 16. 2009 turbotax download 9   22. 2009 turbotax download 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. 2009 turbotax download 5   6. 2009 turbotax download 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. 2009 turbotax download Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . 2009 turbotax download 209   . 2009 turbotax download 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). 2009 turbotax download The taxable part of his annuity is $9,216 ($12,000 − $2,784). 2009 turbotax download The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. 2009 turbotax download After Al's death, his widow will apply the same exclusion percentages (20. 2009 turbotax download 9% and 2. 2009 turbotax download 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. 2009 turbotax download Annuity received after June 30, 1986. 2009 turbotax download   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. 2009 turbotax download Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. 2009 turbotax download    Make the election by attaching the following statement to your income tax return. 2009 turbotax download    “I elect, under section 1. 2009 turbotax download 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. 2009 turbotax download ”   The statement must also include your name, address, and social security number. 2009 turbotax download   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. 2009 turbotax download Disqualifying form of payment or settlement. 2009 turbotax download   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. 2009 turbotax download See regulations section 1. 2009 turbotax download 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. 2009 turbotax download You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. 2009 turbotax download Worksheets for Determining Taxable Annuity Worksheets I and II. 2009 turbotax download   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. 2009 turbotax download 72–6(d)(6) Election. 2009 turbotax download Worksheet I For Determining Taxable Annuity Under Regulations Section 1. 2009 turbotax download 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. 2009 turbotax download   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. 2009 turbotax download )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. 2009 turbotax download If not, the IRS will calculate the refund feature percentage. 2009 turbotax download             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. 2009 turbotax download   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. 2009 turbotax download   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. 2009 turbotax download   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. 2009 turbotax download     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. 2009 turbotax download 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. 2009 turbotax download   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. 2009 turbotax download )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. 2009 turbotax download If not, the IRS will calculate the refund feature percentage. 2009 turbotax download             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. 2009 turbotax download   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. 2009 turbotax download   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. 2009 turbotax download Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. 2009 turbotax download   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)       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2009 turbotax download Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. 2009 turbotax download O. 2009 turbotax download Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. 2009 turbotax download When to make the request. 2009 turbotax download   Please note that requests sent between February 1 and April 15 may experience some delay. 2009 turbotax download We process requests in the order received, and we will reply to your request as soon as we can process it. 2009 turbotax download If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. 2009 turbotax download S. 2009 turbotax download Individual Income Tax Return, to get an extension of time to file. 2009 turbotax download Information you must furnish. 2009 turbotax download   You must furnish the information listed below so the IRS can comply with your request. 2009 turbotax download Failure to furnish the information will result in a delay in processing your request. 2009 turbotax download Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. 2009 turbotax download Copies of any documents showing distributions, annuity rates, and annuity options available to you. 2009 turbotax download A copy of any Form 1099–R you received since your annuity began. 2009 turbotax download A statement indicating whether you have filed your return for the year for which you are making the request. 2009 turbotax download If you have requested an extension of time to file that return, please indicate the extension date. 2009 turbotax download Your daytime phone number. 2009 turbotax download Your current mailing address. 2009 turbotax download A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. 2009 turbotax download Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. 2009 turbotax download A completed Tax Information Sheet (or facsimile) shown on the next page. 2009 turbotax download Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. 2009 turbotax download This statement must be signed by the retiree or the survivor annuitant. 2009 turbotax download It cannot be signed by a representative. 2009 turbotax download Tax Information Sheet Please click here for the text description of the image. 2009 turbotax download Tax Information Sheet Please click here for the text description of the image. 2009 turbotax download Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need 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