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E file 22. E file   Taxes Table of Contents IntroductionIndian tribal government. E file Useful Items - You may want to see: Tests To Deduct Any Tax Income TaxesState and Local Income Taxes Foreign Income Taxes General Sales TaxesMotor vehicles. E file Real Estate TaxesReal estate taxes for prior years. E file Examples. E file Form 1099-S. E file Real Estate-Related Items You Cannot Deduct Personal Property Taxes Taxes and Fees You Cannot Deduct Where To Deduct Introduction This chapter discusses which taxes you can deduct if you itemize deductions on Schedule A (Form 1040). E file It also explains which taxes you can deduct on other schedules or forms and which taxes you cannot deduct. E file This chapter covers the following topics. E file Income taxes (federal, state, local, and foreign). E file General sales taxes (state and local). E file Real estate taxes (state, local, and foreign). E file Personal property taxes (state and local). E file Taxes and fees you cannot deduct. E file Use Table 22-1 as a guide to determine which taxes you can deduct. E file The end of the chapter contains a section that explains which forms you use to deduct different types of taxes. E file Business taxes. E file   You can deduct certain taxes only if they are ordinary and necessary expenses of your trade or business or of producing income. E file For information on these taxes, see Publication 535, Business Expenses. E file State or local taxes. E file   These are taxes imposed by the 50 states, U. E file S. E file possessions, or any of their political subdivisions (such as a county or city), or by the District of Columbia. E file Indian tribal government. E file   An Indian tribal government recognized by the Secretary of the Treasury as performing substantial government functions will be treated as a state for purposes of claiming a deduction for taxes. E file Income taxes, real estate taxes, and personal property taxes imposed by that Indian tribal government (or by any of its subdivisions that are treated as political subdivisions of a state) are deductible. E file General sales taxes. E file   These are taxes imposed at one rate on retail sales of a broad range of classes of items. E file Foreign taxes. E file   These are taxes imposed by a foreign country or any of its political subdivisions. E file Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 530 Tax Information for Homeowners Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule E (Form 1040) Supplemental Income and Loss 1116 Foreign Tax Credit Tests To Deduct Any Tax The following two tests must be met for you to deduct any tax. E file The tax must be imposed on you. E file You must pay the tax during your tax year. E file The tax must be imposed on you. E file   In general, you can deduct only taxes imposed on you. E file   Generally, you can deduct property taxes only if you are an owner of the property. E file If your spouse owns the property and pays the real estate taxes, the taxes are deductible on your spouse's separate return or on your joint return. E file You must pay the tax during your tax year. E file   If you are a cash basis taxpayer, you can deduct only those taxes you actually paid during your tax year. E file If you pay your taxes by check, the day you mail or deliver the check is the date of payment, provided the check is honored by the financial institution. E file If you use a pay-by-phone account (such as a credit card or electronic funds withdrawal), the date reported on the statement of the financial institution showing when payment was made is the date of payment. E file If you contest a tax liability and are a cash basis taxpayer, you can deduct the tax only in the year you actually pay it (or transfer money or other property to provide for satisfaction of the contested liability). E file See Publication 538, Accounting Periods and Methods, for details. E file    If you use an accrual method of accounting, see Publication 538 for more information. E file Income Taxes This section discusses the deductibility of state and local income taxes (including employee contributions to state benefit funds) and foreign income taxes. E file State and Local Income Taxes You can deduct state and local income taxes. E file However, you can elect to deduct state and local general sales taxes instead of state and local income taxes. E file See General Sales Taxes , later. E file Exception. E file    You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income. E file For example, you cannot deduct the part of a state's income tax that is on a cost-of-living allowance exempt from federal income tax. E file What To Deduct Your deduction may be for withheld taxes, estimated tax payments, or other tax payments as follows. E file Withheld taxes. E file   You can deduct state and local income taxes withheld from your salary in the year they are withheld. E file Your Form(s) W-2 will show these amounts. E file Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and local income taxes withheld. E file Estimated tax payments. E file   You can deduct estimated tax payments you made during the year to a state or local government. E file However, you must have a reasonable basis for making the estimated tax payments. E file Any estimated state or local tax payments that are not made in good faith at the time of payment are not deductible. E file For example, you made an estimated state income tax payment. E file However, the estimate of your state tax liability shows that you will get a refund of the full amount of your estimated payment. E file You had no reasonable basis to believe you had any additional liability for state income taxes and you cannot deduct the estimated tax payment. E file Refund applied to taxes. E file   You can deduct any part of a refund of prior-year state or local income taxes that you chose to have credited to your 2013 estimated state or local income taxes. E file    Do not reduce your deduction by either of the following items. E file Any state or local income tax refund (or credit) you expect to receive for 2013. E file Any refund of (or credit for) prior-year state and local income taxes you actually received in 2013. E file   However, part or all of this refund (or credit) may be taxable. E file See Refund (or credit) of state or local income taxes , later. E file Separate federal returns. E file   If you and your spouse file separate state, local, and federal income tax returns, you each can deduct on your federal return only the amount of your own state and local income tax that you paid during the tax year. E file Joint state and local returns. E file   If you and your spouse file joint state and local returns and separate federal returns, each of you can deduct on your separate federal return a part of the total state and local income taxes paid during the tax year. E file You can deduct only the amount of the total taxes that is proportionate to your gross income compared to the combined gross income of you and your spouse. E file However, you cannot deduct more than the amount you actually paid during the year. E file You can avoid this calculation if you and your spouse are jointly and individually liable for the full amount of the state and local income taxes. E file If so, you and your spouse can deduct on your separate federal returns the amount you each actually paid. E file Joint federal return. E file   If you file a joint federal return, you can deduct the total of the state and local income taxes both of you paid. E file Contributions to state benefit funds. E file    As an employee, you can deduct mandatory contributions to state benefit funds withheld from your wages that provide protection against loss of wages. E file For example, certain states require employees to make contributions to state funds providing disability or unemployment insurance benefits. E file Mandatory payments made to the following state benefit funds are deductible as state income taxes on Schedule A (Form 1040), line 5. E file Alaska Unemployment Compensation Fund. E file California Nonoccupational Disability Benefit Fund. E file New Jersey Nonoccupational Disability Benefit Fund. E file New Jersey Unemployment Compensation Fund. E file New York Nonoccupational Disability Benefit Fund. E file Pennsylvania Unemployment Compensation Fund. E file Rhode Island Temporary Disability Benefit Fund. E file Washington State Supplemental Workmen's Compensation Fund. E file    Employee contributions to private or voluntary disability plans are not deductible. E file Refund (or credit) of state or local income taxes. E file   If you receive a refund of (or credit for) state or local income taxes in a year after the year in which you paid them, you may have to include the refund in income on Form 1040, line 10, in the year you receive it. E file This includes refunds resulting from taxes that were overwithheld, applied from a prior year return, not figured correctly, or figured again because of an amended return. E file If you did not itemize your deductions in the previous year, do not include the refund in income. E file If you deducted the taxes in the previous year, include all or part of the refund on Form 1040, line 10, in the year you receive the refund. E file For a discussion of how much to include, see Recoveries in chapter 12. E file Foreign Income Taxes Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. E file S. E file possession. E file However, you cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. E file S. E file tax under the foreign earned income exclusion or the foreign housing exclusion. E file For information on these exclusions, see Publication 54, Tax Guide for U. E file S. E file Citizens and Resident Aliens Abroad. E file For information on the foreign tax credit, see Publication 514. E file General Sales Taxes You can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction on Schedule A (Form 1040), line 5b. E file You can use either your actual expenses or the state and local sales tax tables to figure your sales tax deduction. E file Actual expenses. E file   Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) if the tax rate was the same as the general sales tax rate. E file However, sales taxes on food, clothing, medical supplies, and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. E file If you paid sales tax on a motor vehicle at a rate higher than the general sales tax rate, you can deduct only the amount of tax that you would have paid at the general sales tax rate on that vehicle. E file If you use the actual expenses method, you must have receipts to show the general sales taxes paid. E file Do not include sales taxes paid on items used in your trade or business. E file Motor vehicles. E file   For purposes of this section, motor vehicles include cars, motorcycles, motor homes, recreational vehicles, sport utility vehicles, trucks, vans, and off-road vehicles. E file This also includes sales taxes on a leased motor vehicle, but not on vehicles used in your trade or business. E file Optional sales tax tables. E file   Instead of using your actual expenses, you can figure your state and local general sales tax deduction using the state and local sales tax tables in the Instructions for Schedule A (Form 1040). E file You may also be able to add the state and local general sales taxes paid on certain specified items. E file   Your applicable table amount is based on the state where you live, your income, and the number of exemptions claimed on your tax return. E file Your income is your adjusted gross income plus any nontaxable items such as the following. E file Tax-exempt interest. E file Veterans' benefits. E file Nontaxable combat pay. E file Workers' compensation. E file Nontaxable part of social security and railroad retirement benefits. E file Nontaxable part of IRA, pension, or annuity distributions, excluding rollovers. E file Public assistance payments. E file If you lived in different states during the same tax year, you must prorate your applicable table amount for each state based on the days you lived in each state. E file See the Instructions for Schedule A (Form 1040), line 5, for details. E file Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. E file You can deduct these taxes only if they are based on the assessed value of the real property and charged uniformly against all property under the jurisdiction of the taxing authority. E file Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. E file They also do not include itemized charges for services (such as trash collection) assessed against specific property or certain people, even if the charge is paid to the taxing authority. E file For more information about taxes and charges that are not deductible, see Real Estate-Related Items You Cannot Deduct , later. E file Tenant-shareholders in a cooperative housing corporation. E file   Generally, if you are a tenant-stockholder in a cooperative housing corporation, you can deduct the amount paid to the corporation that represents your share of the real estate taxes the corporation paid or incurred for your dwelling unit. E file The corporation should provide you with a statement showing your share of the taxes. E file For more information, see Special Rules for Cooperatives in Publication 530. E file Division of real estate taxes between buyers and sellers. E file   If you bought or sold real estate during the year, the real estate taxes must be divided between the buyer and the seller. E file   The buyer and the seller must divide the real estate taxes according to the number of days in the real property tax year (the period to which the tax is imposed relates) that each owned the property. E file The seller is treated as paying the taxes up to, but not including, the date of sale. E file The buyer is treated as paying the taxes beginning with the date of sale. E file This applies regardless of the lien dates under local law. E file Generally, this information is included on the settlement statement provided at the closing. E file    If you (the seller) cannot deduct taxes until they are paid because you use the cash method of accounting, and the buyer of your property is personally liable for the tax, you are considered to have paid your part of the tax at the time of the sale. E file This lets you deduct the part of the tax to the date of sale even though you did not actually pay it. E file However, you must also include the amount of that tax in the selling price of the property. E file The buyer must include the same amount in his or her cost of the property. E file   You figure your deduction for taxes on each property bought or sold during the real property tax year as follows. E file Worksheet 22-1. E file Figuring Your Real Estate Tax Deduction 1. E file Enter the total real estate taxes for the real property tax year   2. E file Enter the number of days in the real property tax year that you owned the property   3. E file Divide line 2 by 365 (for leap years, divide line 2 by 366) . E file 4. E file Multiply line 1 by line 3. E file This is your deduction. E file Enter it on Schedule A (Form 1040), line 6   Note. E file Repeat steps 1 through 4 for each property you bought or sold during the real property tax year. E file Your total deduction is the sum of the line 4 amounts for all of the properties. E file Real estate taxes for prior years. E file   Do not divide delinquent taxes between the buyer and seller if the taxes are for any real property tax year before the one in which the property is sold. E file Even if the buyer agrees to pay the delinquent taxes, the buyer cannot deduct them. E file The buyer must add them to the cost of the property. E file The seller can deduct these taxes paid by the buyer. E file However, the seller must include them in the selling price. E file Examples. E file   The following examples illustrate how real estate taxes are divided between buyer and seller. E file Example 1. E file Dennis and Beth White's real property tax year for both their old home and their new home is the calendar year, with payment due August 1. E file The tax on their old home, sold on May 7, was $620. E file The tax on their new home, bought on May 3, was $732. E file Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the old home even though they did not actually pay them to the taxing authority. E file On the other hand, they can claim only a proportionate share of the taxes they paid on their new property even though they paid the entire amount. E file Dennis and Beth owned their old home during the real property tax year for 126 days (January 1 to May 6, the day before the sale). E file They figure their deduction for taxes on their old home as follows. E file Worksheet 22-1. E file Figuring Your Real Estate Tax Deduction — Taxes on Old Home 1. E file Enter the total real estate taxes for the real property tax year $620 2. E file Enter the number of days in the real property tax year that you owned the property 126 3. E file Divide line 2 by 365 (for leap years, divide line 2 by 366) . E file 3452 4. E file Multiply line 1 by line 3. E file This is your deduction. E file Enter it on Schedule A (Form 1040), line 6 $214 Since the buyers of their old home paid all of the taxes, Dennis and Beth also include the $214 in the selling price of the old home. E file (The buyers add the $214 to their cost of the home. E file ) Dennis and Beth owned their new home during the real property tax year for 243 days (May 3 to December 31, including their date of purchase). E file They figure their deduction for taxes on their new home as follows. E file Worksheet 22-1. E file Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. E file Enter the total real estate taxes for the real property tax year $732 2. E file Enter the number of days in the real property tax year that you owned the property 243 3. E file Divide line 2 by 365 (for leap years, divide line 2 by 366) . E file 6658 4. E file Multiply line 1 by line 3. E file This is your deduction. E file Enter it on Schedule A (Form 1040), line 6 $487 Since Dennis and Beth paid all of the taxes on the new home, they add $245 ($732 paid less $487 deduction) to their cost of the new home. E file (The sellers add this $245 to their selling price and deduct the $245 as a real estate tax. E file ) Dennis and Beth's real estate tax deduction for their old and new homes is the sum of $214 and $487, or $701. E file They will enter this amount on Schedule A (Form 1040), line 6. E file Example 2. E file George and Helen Brown bought a new home on May 3, 2013. E file Their real property tax year for the new home is the calendar year. E file Real estate taxes for 2012 were assessed in their state on January 1, 2013. E file The taxes became due on May 31, 2013, and October 31, 2013. E file The Browns agreed to pay all taxes due after the date of purchase. E file Real estate taxes for 2012 were $680. E file They paid $340 on May 31, 2013, and $340 on October 31, 2013. E file These taxes were for the 2012 real property tax year. E file The Browns cannot deduct them since they did not own the property until 2013. E file Instead, they must add $680 to the cost of their new home. E file In January 2014, the Browns receive their 2013 property tax statement for $752, which they will pay in 2014. E file The Browns owned their new home during the 2013 real property tax year for 243 days (May 3 to December 31). E file They will figure their 2014 deduction for taxes as follows. E file Worksheet 22-1. E file Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. E file Enter the total real estate taxes for the real property tax year $752 2. E file Enter the number of days in the real property tax year that you owned the property 243 3. E file Divide line 2 by 365 (for leap years, divide line 2 by 366) . E file 6658 4. E file Multiply line 1 by line 3. E file This is your deduction. E file Claim it on Schedule A (Form 1040), line 6 $501 The remaining $251 ($752 paid less $501 deduction) of taxes paid in 2014, along with the $680 paid in 2013, is added to the cost of their new home. E file Because the taxes up to the date of sale are considered paid by the seller on the date of sale, the seller is entitled to a 2013 tax deduction of $931. E file This is the sum of the $680 for 2012 and the $251 for the 122 days the seller owned the home in 2013. E file The seller must also include the $931 in the selling price when he or she figures the gain or loss on the sale. E file The seller should contact the Browns in January 2014 to find out how much real estate tax is due for 2013. E file Form 1099-S. E file   For certain sales or exchanges of real estate, the person responsible for closing the sale (generally the settlement agent) prepares Form 1099-S, Proceeds From Real Estate Transactions, to report certain information to the IRS and to the seller of the property. E file Box 2 of Form 1099-S is for the gross proceeds from the sale and should include the portion of the seller's real estate tax liability that the buyer will pay after the date of sale. E file The buyer includes these taxes in the cost basis of the property, and the seller both deducts this amount as a tax paid and includes it in the sales price of the property. E file   For a real estate transaction that involves a home, any real estate tax the seller paid in advance but that is the liability of the buyer appears on Form 1099-S, box 5. E file The buyer deducts this amount as a real estate tax, and the seller reduces his or her real estate tax deduction (or includes it in income) by the same amount. E file See Refund (or rebate) , later. E file Taxes placed in escrow. E file   If your monthly mortgage payment includes an amount placed in escrow (put in the care of a third party) for real estate taxes, you may not be able to deduct the total amount placed in escrow. E file You can deduct only the real estate tax that the third party actually paid to the taxing authority. E file If the third party does not notify you of the amount of real estate tax that was paid for you, contact the third party or the taxing authority to find the proper amount to show on your return. E file Tenants by the entirety. E file   If you and your spouse held property as tenants by the entirety and you file separate federal returns, each of you can deduct only the taxes each of you paid on the property. E file Divorced individuals. E file   If your divorce or separation agreement states that you must pay the real estate taxes for a home owned by you and your spouse, part of your payments may be deductible as alimony and part as real estate taxes. E file See Taxes and insurance in chapter 18 for more information. E file Ministers' and military housing allowances. E file   If you are a minister or a member of the uniformed services and receive a housing allowance that you can exclude from income, you still can deduct all of the real estate taxes you pay on your home. E file Refund (or rebate). E file   If you received a refund or rebate in 2013 of real estate taxes you paid in 2013, you must reduce your deduction by the amount refunded to you. E file If you received a refund or rebate in 2013 of real estate taxes you deducted in an earlier year (either as an itemized deduction or an increase to your standard deduction), you generally must include the refund or rebate in income in the year you receive it. E file However, the amount you include in income is limited to the amount of the deduction that reduced your tax in the earlier year. E file For more information, see Recoveries in chapter 12. E file Table 22-1. E file Which Taxes Can You Deduct? Type of Tax You Can Deduct You Cannot Deduct Fees and Charges Fees and charges that are expenses of your trade or business or of producing income. E file Fees and charges that are not expenses of your trade or business or of producing income, such as fees for driver's licenses, car inspections, parking, or charges for water bills (see Taxes and Fees You Cannot Deduct ). E file     Fines and penalties. E file Income Taxes State and local income taxes. E file Federal income taxes. E file   Foreign income taxes. E file     Employee contributions to state funds listed under Contributions to state benefit funds . E file Employee contributions to private or voluntary disability plans. E file     State and local general sales taxes if you choose to deduct state and local income taxes. E file General Sales Taxes State and local general sales taxes, including compensating use taxes. E file State and local income taxes if you choose to deduct state and local general sales taxes. E file Other Taxes Taxes that are expenses of your trade or business. E file Federal excise taxes, such as tax on gasoline, that are not expenses of your trade or business or of producing income. E file   Taxes on property producing rent or royalty income. E file Per capita taxes. E file   Occupational taxes. E file See chapter 28. E file     One-half of self-employment tax paid. E file   Personal Property Taxes State and local personal property taxes. E file Customs duties that are not expenses of your trade or business or of producing income. E file Real Estate Taxes State and local real estate taxes. E file Real estate taxes that are treated as imposed on someone else (see Division of real estate taxes between buyers and sellers ). E file   Foreign real estate taxes. E file Taxes for local benefits (with exceptions). E file See Real Estate-Related Items You Cannot Deduct . E file   Tenant's share of real estate taxes paid by  cooperative housing corporation. E file Trash and garbage pickup fees (with exceptions). E file See Real Estate-Related Items You Cannot Deduct . E file     Rent increase due to higher real estate taxes. E file     Homeowners' association charges. E file Real Estate-Related Items You Cannot Deduct Payments for the following items generally are not deductible as real estate taxes. E file Taxes for local benefits. E file Itemized charges for services (such as trash and garbage pickup fees). E file Transfer taxes (or stamp taxes). E file Rent increases due to higher real estate taxes. E file Homeowners' association charges. E file Taxes for local benefits. E file   Deductible real estate taxes generally do not include taxes charged for local benefits and improvements tending to increase the value of your property. E file These include assessments for streets, sidewalks, water mains, sewer lines, public parking facilities, and similar improvements. E file You should increase the basis of your property by the amount of the assessment. E file   Local benefit taxes are deductible only if they are for maintenance, repair, or interest charges related to those benefits. E file If only a part of the taxes is for maintenance, repair, or interest, you must be able to show the amount of that part to claim the deduction. E file If you cannot determine what part of the tax is for maintenance, repair, or interest, none of it is deductible. E file    Taxes for local benefits may be included in your real estate tax bill. E file If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. E file You should use the rules above to determine if the local benefit tax is deductible. E file Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. E file Itemized charges for services. E file    An itemized charge for services assessed against specific property or certain people is not a tax, even if the charge is paid to the taxing authority. E file For example, you cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged to each homeowner for trash collection), or A flat fee charged for a single service provided by your government (such as a $30 charge for mowing your lawn because it was allowed to grow higher than permitted under your local ordinance). E file    You must look at your real estate tax bill to determine if any nondeductible itemized charges, such as those listed above, are included in the bill. E file If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. E file Exception. E file   Service charges used to maintain or improve services (such as trash collection or police and fire protection) are deductible as real estate taxes if: The fees or charges are imposed at a like rate against all property in the taxing jurisdiction, The funds collected are not earmarked; instead, they are commingled with general revenue funds, and Funds used to maintain or improve services are not limited to or determined by the amount of these fees or charges collected. E file Transfer taxes (or stamp taxes). E file   Transfer taxes and similar taxes and charges on the sale of a personal home are not deductible. E file If they are paid by the seller, they are expenses of the sale and reduce the amount realized on the sale. E file If paid by the buyer, they are included in the cost basis of the property. E file Rent increase due to higher real estate taxes. E file   If your landlord increases your rent in the form of a tax surcharge because of increased real estate taxes, you cannot deduct the increase as taxes. E file Homeowners' association charges. E file   These charges are not deductible because they are imposed by the homeowners' association, rather than the state or local government. E file Personal Property Taxes Personal property tax is deductible if it is a state or local tax that is: Charged on personal property, Based only on the value of the personal property, and Charged on a yearly basis, even if it is collected more or less than once a year. E file A tax that meets the above requirements can be considered charged on personal property even if it is for the exercise of a privilege. E file For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways. E file If the tax is partly based on value and partly based on other criteria, it may qualify in part. E file Example. E file Your state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. E file You paid $32 based on the value ($1,500) and weight (3,400 lbs. E file ) of your car. E file You can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. E file The remaining $17 ($. E file 50 × 34), based on the weight, is not deductible. E file Taxes and Fees You Cannot Deduct Many federal, state, and local government taxes are not deductible because they do not fall within the categories discussed earlier. E file Other taxes and fees, such as federal income taxes, are not deductible because the tax law specifically prohibits a deduction for them. E file See Table 22-1. E file Taxes and fees that are generally not deductible include the following items. E file Employment taxes. E file This includes social security, Medicare, and railroad retirement taxes withheld from your pay. E file However, one-half of self-employment tax you pay is deductible. E file In addition, the social security and other employment taxes you pay on the wages of a household worker may be included in medical expenses that you can deduct or child care expenses that allow you to claim the child and dependent care credit. E file For more information, see chapters 21 and 32. E file Estate, inheritance, legacy, or succession taxes. E file However, you can deduct the estate tax attributable to income in respect of a decedent if you, as a beneficiary, must include that income in your gross income. E file In that case, deduct the estate tax as a miscellaneous deduction that is not subject to the 2%-of-adjusted-gross-income limit. E file For more information, see Publication 559, Survivors, Executors, and Administrators. E file Federal income taxes. E file This includes income taxes withheld from your pay. E file Fines and penalties. E file You cannot deduct fines and penalties paid to a government for violation of any law, including related amounts forfeited as collateral deposits. E file Gift taxes. E file License fees. E file You cannot deduct license fees for personal purposes (such as marriage, driver's, and dog license fees). E file Per capita taxes. E file You cannot deduct state or local per capita taxes. E file Many taxes and fees other than those listed above are also nondeductible, unless they are ordinary and necessary expenses of a business or income producing activity. E file For other nondeductible items, see Real Estate-Related Items You Cannot Deduct , earlier. E file Where To Deduct You deduct taxes on the following schedules. E file State and local income taxes. E file    These taxes are deducted on Schedule A (Form 1040), line 5, even if your only source of income is from business, rents, or royalties. E file Check box a on line 5. E file General sales taxes. E file   Sales taxes are deducted on Schedule A (Form 1040), line 5. E file You must check box b on line 5. E file If you elect to deduct sales taxes, you cannot deduct state and local income taxes on Schedule A (Form 1040), line 5, box a. E file Foreign income taxes. E file   Generally, income taxes you pay to a foreign country or U. E file S. E file possession can be claimed as an itemized deduction on Schedule A (Form 1040), line 8, or as a credit against your U. E file S. E file income tax on Form 1040, line 47. E file To claim the credit, you may have to complete and attach Form 1116. E file For more information, see chapter 37, the Form 1040 instructions, or Publication 514. E file Real estate taxes and personal property taxes. E file    Real estate and personal property taxes are deducted on Schedule A (Form 1040), lines 6 and 7, respectively, unless they are paid on property used in your business, in which case they are deducted on Schedule C, Schedule C-EZ, or Schedule F (Form 1040). E file Taxes on property that produces rent or royalty income are deducted on Schedule E (Form 1040). E file Self-employment tax. E file    Deduct one-half of your self-employment tax on Form 1040, line 27. E file Other taxes. E file    All other deductible taxes are deducted on Schedule A (Form 1040), line 8. 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Understanding your CP22E Notice

As a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes.

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice and audit report carefully ― these will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us if you disagree with the change(s) we made.
  • Correct the copy of your tax return that you kept for your records.

You may want to...


Answers to Common Questions

What should I do if I disagree with the changes you made?
If you've information relevant to your audit that we've not already considered and you've not already paid your bill in full, you may request an Audit Reconsideration. Refer to Publication 3598, What You Should Know About the Audit Reconsideration Process for additional information.

If you've already paid the amount due in full, you must file a formal claim using Form 1040X, Amended U.S. Individual Income Tax Return.

If you don't have additional information to provide, but you disagree with the results of your audit, you may appeal your case to the Appeals Office of the IRS. Refer to Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree for additional information.

What happens if I can't pay the full amount I owe?
You can arrange to make a payment plan with us if you can't pay the full amount you owe.

Am I charged interest on the money I owe?
If you don't full pay the amount you owe by the date on the payment coupon, interest will accrue on the unpaid balance after that date.

Will I receive a penalty if I can’t pay the full amount?
Yes, you'll receive a late payment penalty. You can contact us at the number listed on your notice if you’re unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

Can I set up a payment plan?
Yes. Call the toll-free number listed on the top right corner of your notice to discuss payment options or check out more information on payment options and how to make a payment arrangement.

There are other options, such as paying by credit card. Note: There may be a fee to pay by credit card.

What if I need to make another correction to my account?
You'll need to file Form 1040X, Amended U.S. Individual Income Tax Return.

What if I have tried to get answers and after contacting IRS several times have not been successful?
Call Taxpayer Advocate at 1-877-777-4778 or for TTY/TDD 1-800-829-4059.

The changes you have proposed are the result of actions by my spouse that I knew nothing about. Am I responsible for paying this bill?
You may qualify for innocent spouse relief. To request relief, you must file Form 8857, Request for Innocent Spouse Relief no later than 2 years after the date on which the IRS first attempted to collect the tax from you. Refer to Publication 971, Innocent Spouse Relief for additional information.

 

Page Last Reviewed or Updated: 03-Mar-2014

The E File

E file 10. E file   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. E file Individual retirement arrangements (IRAs). E file Civil service retirement benefits. E file Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. E file How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. E file Exclusion not limited to cost. E file Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. E file Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). E file However, these distributions are taken into account when determining the modified adjusted gross income threshold. E file Distributions from a nonqualified retirement plan are included in net investment income. E file See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. E file Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. E file For more information, see Designated Roth accounts discussed later. E file Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. E file What is not covered in this chapter. E file   The following topics are not discussed in this chapter. E file The General Rule. E file   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). E file For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. E file For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. E file Individual retirement arrangements (IRAs). E file   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. E file Civil service retirement benefits. E file    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. E file S. E file Civil Service Retirement Benefits. E file Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. E file Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. E file S. E file Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. E file 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. E file   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. E file Elective deferrals that are designated as Roth contributions are included in your income. E file However, qualified distributions are not included in your income. E file See Publication 575 for more information. E file In-plan rollovers to designated Roth accounts. E file   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. E file The rollover of any untaxed amounts must be included in income. E file See Publication 575 for more information. E file More than one program. E file   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. E file Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. E file Section 457 deferred compensation plans. E file    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. E file If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. E file You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. E file You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. E file   Your 457(b) plan may have a designated Roth account option. E file If so, you may be able to roll over amounts to the designated Roth account or make contributions. E file Elective deferrals to a designated Roth account are included in your income. E file Qualified distributions from a designated Roth account are not subject to tax. E file   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. E file For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. E file   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. E file Disability pensions. E file   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. E file You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. E file Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. E file    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. E file For information on the credit for the elderly or the disabled, see chapter 33. E file   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. E file Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. E file    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. E file For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. E file   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. E file Retired public safety officers. E file   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. E file See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. E file Railroad retirement benefits. E file   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. E file For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. E file For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. E file Withholding and estimated tax. E file   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. E file You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. E file If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. E file   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. E file Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. E file See Direct rollover option under Rollovers, later. E file   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. E file Qualified plans for self-employed individuals. E file   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. E file R. E file 10 plans. E file Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. E file They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. E file    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. E file If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. E file For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. E file Purchased annuities. E file   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. E file For more information about the General Rule, get Publication 939. E file Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. E file Loans. E file   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. E file This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. E file This means that you must include in income all or part of the amount borrowed. E file Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. E file For details, see Loans Treated as Distributions in Publication 575. E file For information on the deductibility of interest, see chapter 23. E file Tax-free exchange. E file   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. E file However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. E file See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. E file How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. E file If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. E file If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. E file If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. E file More than one annuity. E file   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. E file If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. E file Joint return. E file   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. E file Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. E file Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. E file This includes the amounts your employer contributed that were taxable to you when paid. E file Cost does not include any amounts you deducted or were excluded from your income. E file From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. E file Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. E file Designated Roth accounts. E file   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. E file Your cost will also include any in-plan Roth rollovers you included in income. E file Foreign employment contributions. E file   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. E file See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. E file Taxation of Periodic Payments Fully taxable payments. E file   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. E file You must report them on your income tax return. E file Partly taxable payments. E file   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. E file The rest of the amount you receive is generally taxable. E file You figure the tax-free part of the payment using either the Simplified Method or the General Rule. E file Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. E file   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. E file Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. E file   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. E file   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. E file Exclusion limit. E file   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. E file Once your annuity starting date is determined, it does not change. E file If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. E file That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. E file Exclusion limited to cost. E file   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. E file Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. E file This deduction is not subject to the 2%-of-adjusted-gross-income limit. E file Exclusion not limited to cost. E file   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. E file If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. E file The total exclusion may be more than your cost. E file Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. E file For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. E file For any other annuity, this number is the number of monthly annuity payments under the contract. E file Who must use the Simplified Method. E file   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. E file Guaranteed payments. E file   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. E file If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. E file How to use the Simplified Method. E file    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. E file Single-life annuity. E file    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. E file Enter on line 3 the number shown for your age at the annuity starting date. E file Multiple-lives annuity. E file   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. E file Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. E file   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. E file Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. E file    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. E file Example. E file Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. E file Bill's annuity starting date is January 1, 2013. E file The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. E file Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. E file Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. E file Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. E file Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. E file His completed worksheet is shown in Worksheet 10-A. E file Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. E file Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. E file The full amount of any annuity payments received after 310 payments are paid must be included in gross income. E file If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. E file This deduction is not subject to the 2%-of-adjusted- gross-income limit. E file Worksheet 10-A. E file Simplified Method Worksheet for Bill Smith 1. E file Enter the total pension or annuity payments received this year. E file Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. E file 14,400 2. E file Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. E file See Cost (Investment in the Contract) , earlier 2. E file 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). E file Otherwise, go to line 3. E file         3. E file Enter the appropriate number from Table 1 below. E file But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. E file 310     4. E file Divide line 2 by the number on line 3 4. E file 100     5. E file Multiply line 4 by the number of months for which this year's payments were made. E file If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. E file Otherwise, go to line 6 5. E file 1,200     6. E file Enter any amounts previously recovered tax free in years after 1986. E file This is the amount shown on line 10 of your worksheet for last year 6. E file -0-     7. E file Subtract line 6 from line 2 7. E file 31,000     8. E file Enter the smaller of line 5 or line 7 8. E file 1,200 9. E file Taxable amount for year. E file Subtract line 8 from line 1. E file Enter the result, but not less than zero. E file Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. E file 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. E file If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. E file     10. E file Was your annuity starting date before 1987? □ Yes. E file STOP. E file Do not complete the rest of this worksheet. E file  ☑ No. E file Add lines 6 and 8. E file This is the amount you have recovered tax free through 2013. E file You will need this number if you need to fill out this worksheet next year 10. E file 1,200 11. E file Balance of cost to be recovered. E file Subtract line 10 from line 2. E file If zero, you will not have to complete this worksheet next year. E file The payments you receive next year will generally be fully taxable 11. E file 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. E file . E file . E file before November 19, 1996, enter on line 3. E file . E file . E file after November 18, 1996, enter on line 3. E file . E file . E file 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. E file . E file . E file   THEN enter on line 3. E file . E file . E file 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. E file Who must use the General Rule. E file   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. E file Annuity starting before November 19, 1996. E file   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. E file You also had to use it for any fixed-period annuity. E file If you did not have to use the General Rule, you could have chosen to use it. E file If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. E file   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. E file Who cannot use the General Rule. E file   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. E file See Who must use the Simplified Method , earlier. E file More information. E file   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. E file Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. E file They include all payments other than periodic payments and corrective distributions. E file Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. E file Corrective distributions of excess plan contributions. E file   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. E file To correct an excess, your plan may distribute it to you (along with any income earned on the excess). E file For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. E file Figuring the taxable amount of nonperiodic payments. E file   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. E file If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. E file If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. E file Annuity starting date. E file   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. E file Distribution on or after annuity starting date. E file   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. E file Distribution before annuity starting date. E file   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. E file You exclude from your gross income the part that you allocate to the cost. E file You include the remainder in your gross income. E file   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). E file This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. E file    Distributions from nonqualified plans are subject to the net investment income tax. E file See the Instructions for Form 8960. E file   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. E file Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. E file If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. E file A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). E file A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. E file The participant's entire balance from a plan does not include certain forfeited amounts. E file It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. E file For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. E file If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. E file The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. E file The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. E file You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. E file Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. E file The tax figured on Form 4972 is added to the regular tax figured on your other income. E file This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. E file How to treat the distribution. E file   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. E file Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. E file Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). E file Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). E file Roll over all or part of the distribution. E file See Rollovers , later. E file No tax is currently due on the part rolled over. E file Report any part not rolled over as ordinary income. E file Report the entire taxable part of the distribution as ordinary income on your tax return. E file   The first three options are explained in the following discussions. E file Electing optional lump-sum treatment. E file   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. E file If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. E file Taxable and tax-free parts of the distribution. E file    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. E file You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. E file Cost. E file   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. E file You must reduce this cost by amounts previously distributed tax free. E file Net unrealized appreciation (NUA). E file   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. E file (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. E file ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. E file The amount treated as capital gain is taxed at a 20% rate. E file You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. E file Complete Part II of Form 4972 to choose the 20% capital gain election. E file For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. E file 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. E file You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. E file You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. E file The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. E file You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. E file Complete Part III of Form 4972 to choose the 10-year tax option. E file You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. E file Publication 575 illustrates how to complete Form 4972 to figure the separate tax. E file Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. E file For this purpose, the following plans are qualified retirement plans. E file A qualified employee plan. E file A qualified employee annuity. E file A tax-sheltered annuity plan (403(b) plan). E file An eligible state or local government section 457 deferred compensation plan. E file Eligible rollover distributions. E file   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. E file For information about exceptions to eligible rollover distributions, see Publication 575. E file Rollover of nontaxable amounts. E file   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. E file The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. E file   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. E file   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. E file To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. E file For more information, see the Form 8606 instructions. E file Direct rollover option. E file   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. E file If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. E file Payment to you option. E file   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. E file However, the full amount is treated as distributed to you even though you actually receive only 80%. E file You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. E file (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. E file )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. E file Time for making rollover. E file   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. E file (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. E file )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. E file   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. E file Qualified domestic relations order (QDRO). E file   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. E file If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. E file You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. E file See Rollovers in Publication 575 for more information on benefits received under a QDRO. E file Rollover by surviving spouse. E file   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. E file The rollover rules apply to you as if you were the employee. E file You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. E file For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. E file    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. E file However, see Rollovers by nonspouse beneficiary next. E file Rollovers by nonspouse beneficiary. E file   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. E file The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. E file The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. E file For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). E file Retirement bonds. E file   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. E file Designated Roth accounts. E file   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. E file If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. E file For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. E file In-plan rollovers to designated Roth accounts. E file   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. E file The rollover of any untaxed amounts must be included in income. E file See Designated Roth accounts under Rollovers in Publication 575 for more information. E file Rollovers to Roth IRAs. E file   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. E file   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. E file You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. E file In addition, the 10% tax on early distributions does not apply. E file More information. E file   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. E file Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. E file Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. E file These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). E file These taxes are discussed in the following sections. E file If you must pay either of these taxes, report them on Form 5329. E file However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. E file Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. E file Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. E file This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. E file Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. E file This tax applies to the part of the distribution that you must include in gross income. E file For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). E file 5% rate on certain early distributions from deferred annuity contracts. E file   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. E file A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. E file On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. E file Attach an explanation to your return. E file Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. E file   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. E file You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. E file The additional tax is figured on Form 5329. E file For more information, see Form 5329 and its instructions. E file For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. E file Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. E file   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. E file You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. E file The additional tax is figured on Form 5329. E file For more information, see Form 5329 and its instructions. E file For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. E file Exceptions to tax. E file    Certain early distributions are excepted from the early distribution tax. E file If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. E file If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. E file Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. E file On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. E file    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. E file Enter exception number “12” on line 2. E file General exceptions. E file   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. E file Additional exceptions for qualified retirement plans. E file   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. E file 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. E file See Pub. E file 721 for more information on the phased retirement program. E file Qualified public safety employees. E file   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. E file You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. E file Qualified reservist distributions. E file   A qualified reservist distribution is not subject to the additional tax on early distributions. E file A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. E file You must have been ordered or called to active duty after September 11, 2001. E file For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. E file Additional exceptions for nonqualified annuity contracts. E file   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). E file Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). E file The payments each year cannot be less than the required minimum distribution. E file Required distributions not made. E file   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. E file The tax equals 50% of the part of the required minimum distribution that was not distributed. E file   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). E file Waiver. E file   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. E file See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. E file State insurer delinquency proceedings. E file   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. E file If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. E file Under certain conditions, you will not have to pay the 50% excise tax. E file Required beginning date. E file   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. E file However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. E file   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. E file Your required distribution then must be made for 2014 by December 31, 2014. E file 5% owners. E file   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. E file   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. E file Age 70½. E file   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. E file   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. E file If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. E file Required distributions. E file   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). E file Additional information. E file   For more information on this rule, see Tax on Excess Accumulation in Publication 575. E file Form 5329. E file   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. E file Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. E file However, some special rules apply. E file See Publication 575 for more information. E file Survivors of employees. E file   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. E file You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. E file Survivors of retirees. E file   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. E file If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. E file    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. E file The resulting tax-free amount will then remain fixed. E file Any increases in the survivor annuity are fully taxable. E file    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. E file This amount remains fixed even if the annuity payments are increased or decreased. E file See Simplified Method , earlier. E file   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. E file Estate tax deduction. E file   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. E file You can deduct the part of the total estate tax that was based on the annuity. E file The deceased annuitant must have died after the annuity starting date. E file (For details, see section 1. E file 691(d)-1 of the regulations. E file ) Deduct it in equal amounts over your remaining life expectancy. E file   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. E file   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. E file This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. E file See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. E file Prev  Up  Next   Home   More Online Publications