Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Federal And State Taxes Free

Irs Gov Form 10401040x Electronically FileFile 2010 Taxes FreeHow Do I File 2011 Taxes OnlineWhere To E- File 2012 Federal Tax Return For FreeHow To File An Amended Tax Return For 20122012 Tax Form 8863How To File Only State Taxes For FreeIrs Web Page Income Tax Form 2012Irs 1040ez FormIrs1040ez1040ez BookIrs GovPrintable Tax Form 10401040nr Ez Online FilingState Tax Filing FormsWhere Can I File My 2010 Taxes For FreeH And R Block Free StateMyfreetaxes Com Baltimorecash2013 Amended Tax ReturnEfile Taxes Free1040 Easy1040ez Free FilingTaxes UnemployedWhere Can I File 2011 Tax ReturnDo Unemployed People Pay TaxesIrs 1040x FormState Taxes Free OnlineFree State Tax ReturnsEz File 10402011 Irs Form 8863Www Irs Gov Efile Index HtmlI Need To File My 2011 Federal Taxes2011 1040 Ez Tax FormsAarp Tax Aide LocationsH And R BlockHow To Amend 2011 Tax Return TurbotaxH & R Block1040nr Online Filing1040ez Tax Forms

Federal And State Taxes Free

Federal and state taxes free 4. Federal and state taxes free   Qualified Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Kinds of PlansDefined Contribution Plan Defined Benefit Plan Qualification RulesEarly retirement. Federal and state taxes free Loan secured by benefits. Federal and state taxes free Waiver of survivor benefits. Federal and state taxes free Waiver of 30-day waiting period before annuity starting date. Federal and state taxes free Involuntary cash-out of benefits not more than dollar limit. Federal and state taxes free Exception for certain loans. Federal and state taxes free Exception for QDRO. Federal and state taxes free SIMPLE and safe harbor 401(k) plan exception. Federal and state taxes free Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. Federal and state taxes free Installment percentage. Federal and state taxes free Extended period for making contributions. Federal and state taxes free ContributionsEmployer Contributions Employee Contributions When Contributions Are Considered Made Employer DeductionDeduction Limits Deduction Limit for Self-Employed Individuals Where To Deduct Contributions Carryover of Excess Contributions Excise Tax for Nondeductible (Excess) Contributions Elective Deferrals (401(k) Plans)Limit on Elective Deferrals Automatic Enrollment Treatment of Excess Deferrals Qualified Roth Contribution ProgramElective Deferrals Qualified Distributions Reporting Requirements DistributionsRequired Distributions Distributions From 401(k) Plans Tax Treatment of Distributions Tax on Early Distributions Tax on Excess Benefits Excise Tax on Reversion of Plan Assets Notification of Significant Benefit Accrual Reduction Prohibited TransactionsTax on Prohibited Transactions Reporting RequirementsOne-participant plan. Federal and state taxes free Caution: Form 5500-EZ not required. Federal and state taxes free Form 5500. Federal and state taxes free Electronic filing of Forms 5500 and 5500-SF. Federal and state taxes free Topics - This chapter discusses: Kinds of plans Qualification rules Setting up a qualified plan Minimum funding requirement Contributions Employer deduction Elective deferrals (401(k) plans) Qualified Roth contribution program Distributions Prohibited transactions Reporting requirements Useful Items - You may want to see: Publications 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 3066 Have you had your Check-up this year? for Retirement Plans 3998 Choosing A Retirement Solution for Your Small Business 4222 401(k) Plans for Small Businesses 4530 Designated Roth Accounts under a 401(k), 403(b), or governmental 457(b) plans 4531 401(k) Plan Checklist 4674 Automatic Enrollment 401(k) Plans for Small Businesses 4806 Profit Sharing Plans for Small Businesses Forms (and Instructions) www. Federal and state taxes free dol. Federal and state taxes free gov/ebsa/pdf/2013-5500. Federal and state taxes free pdf www. Federal and state taxes free dol. Federal and state taxes free gov/ebsa/pdf/2013-5500-SF. Federal and state taxes free pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Federal and state taxes free 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Federal and state taxes free 1040 U. Federal and state taxes free S. Federal and state taxes free Individual Income Tax Return Schedule C (Form 1040) Profit or Loss From Business Schedule F (Form 1040) Profit or Loss From Farming 5300 Application for Determination for Employee Benefit Plan 5310 Application for Determination for Terminating Plan 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans 5500 Annual Return/Report of Employee Benefit Plan. Federal and state taxes free For copies of this form, go to: 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. Federal and state taxes free For copies of this form, go to: 8717 User Fee for Employee Plan Determination Letter Request 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H. Federal and state taxes free R. Federal and state taxes free 10 plans. Federal and state taxes free A sole proprietor or a partnership can set up one of these plans. Federal and state taxes free A common-law employee or a partner cannot set up one of these plans. Federal and state taxes free The plans described here can also be set up and maintained by employers that are corporations. Federal and state taxes free All the rules discussed here apply to corporations except where specifically limited to the self-employed. Federal and state taxes free The plan must be for the exclusive benefit of employees or their beneficiaries. Federal and state taxes free These qualified plans can include coverage for a self-employed individual. Federal and state taxes free As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Federal and state taxes free The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Federal and state taxes free Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. Federal and state taxes free You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later. Federal and state taxes free Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. Federal and state taxes free It provides benefits to a participant largely based on the amount contributed to that participant's account. Federal and state taxes free Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. Federal and state taxes free A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. Federal and state taxes free Profit-sharing plan. Federal and state taxes free   Although it is called a “profit-sharing plan,” you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). Federal and state taxes free A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. Federal and state taxes free An employer may even make no contribution to the plan for a given year. Federal and state taxes free   The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. Federal and state taxes free   In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later). Federal and state taxes free Money purchase pension plan. Federal and state taxes free   Contributions to a money purchase pension plan are fixed and are not based on your business profits. Federal and state taxes free For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. Federal and state taxes free This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. Federal and state taxes free Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. Federal and state taxes free Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Federal and state taxes free Actuarial assumptions and computations are required to figure these contributions. Federal and state taxes free Generally, you will need continuing professional help to have a defined benefit plan. Federal and state taxes free Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Federal and state taxes free Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. Federal and state taxes free The following is a brief overview of important qualification rules that generally have not yet been discussed. Federal and state taxes free It is not intended to be all-inclusive. Federal and state taxes free See Setting Up a Qualified Plan , later. Federal and state taxes free Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. Federal and state taxes free A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan. Federal and state taxes free Plan assets must not be diverted. Federal and state taxes free   Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. Federal and state taxes free As a general rule, the assets cannot be diverted to the employer. Federal and state taxes free Minimum coverage requirement must be met. Federal and state taxes free   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. Federal and state taxes free 50 employees, or The greater of: 40% of all employees, or Two employees. Federal and state taxes free If there is only one employee, the plan must benefit that employee. Federal and state taxes free Contributions or benefits must not discriminate. Federal and state taxes free   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. Federal and state taxes free Contributions and benefits must not be more than certain limits. Federal and state taxes free   Your plan must not provide for contributions or benefits that are more than certain limits. Federal and state taxes free The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. Federal and state taxes free These limits are discussed later in this chapter under Contributions. Federal and state taxes free Minimum vesting standard must be met. Federal and state taxes free   Your plan must satisfy certain requirements regarding when benefits vest. Federal and state taxes free A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. Federal and state taxes free A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. Federal and state taxes free Special rules apply to forfeited benefit amounts. Federal and state taxes free In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions. Federal and state taxes free   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Federal and state taxes free Forfeitures must be used instead to reduce employer contributions. Federal and state taxes free Participation. Federal and state taxes free   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. Federal and state taxes free Has reached age 21. Federal and state taxes free Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit). Federal and state taxes free A plan cannot exclude an employee because he or she has reached a specified age. Federal and state taxes free Leased employee. Federal and state taxes free   A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. Federal and state taxes free These rules include those in all the following areas. Federal and state taxes free Nondiscrimination in coverage, contributions, and benefits. Federal and state taxes free Minimum age and service requirements. Federal and state taxes free Vesting. Federal and state taxes free Limits on contributions and benefits. Federal and state taxes free Top-heavy plan requirements. Federal and state taxes free Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. Federal and state taxes free Benefit payment must begin when required. Federal and state taxes free   Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods. Federal and state taxes free The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. Federal and state taxes free The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. Federal and state taxes free The plan year in which the participant separates from service. Federal and state taxes free Early retirement. Federal and state taxes free   Your plan can provide for payment of retirement benefits before the normal retirement age. Federal and state taxes free If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements. Federal and state taxes free Satisfies the service requirement for the early retirement benefit. Federal and state taxes free Separates from service with a nonforfeitable right to an accrued benefit. Federal and state taxes free The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. Federal and state taxes free Required minimum distributions. Federal and state taxes free   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. Federal and state taxes free See Required Distributions , under Distributions, later. Federal and state taxes free Survivor benefits. Federal and state taxes free   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. Federal and state taxes free A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. Federal and state taxes free A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. Federal and state taxes free   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. Federal and state taxes free The participant does not choose benefits in the form of a life annuity. Federal and state taxes free The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies. Federal and state taxes free The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. Federal and state taxes free Loan secured by benefits. Federal and state taxes free   If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan. Federal and state taxes free Waiver of survivor benefits. Federal and state taxes free   Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. Federal and state taxes free The plan also must allow the participant to withdraw the waiver. Federal and state taxes free The spouse's consent must be witnessed by a plan representative or notary public. Federal and state taxes free Waiver of 30-day waiting period before annuity starting date. Federal and state taxes free    A plan may permit a participant to waive (with spousal consent) the 30-day minimum waiting period after a written explanation of the terms and conditions of a joint and survivor annuity is provided to each participant. Federal and state taxes free   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. Federal and state taxes free Involuntary cash-out of benefits not more than dollar limit. Federal and state taxes free   A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. Federal and state taxes free   However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. Federal and state taxes free If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit. Federal and state taxes free   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. Federal and state taxes free   A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. Federal and state taxes free A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. Federal and state taxes free See Section 402(f) Notice under Distributions, later, for more details. Federal and state taxes free Consolidation, merger, or transfer of assets or liabilities. Federal and state taxes free   Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. Federal and state taxes free (if the plan had then terminated). Federal and state taxes free Benefits must not be assigned or alienated. Federal and state taxes free   Your plan must provide that a participant's or beneficiary's benefits under the plan cannot be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules. Federal and state taxes free Exception for certain loans. Federal and state taxes free   A loan from the plan (not from a third party) to a participant or beneficiary is not treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. Federal and state taxes free A disqualified person is defined later in this chapter under Prohibited Transactions. Federal and state taxes free Exception for QDRO. Federal and state taxes free   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. Federal and state taxes free   Payments to an alternate payee under a QDRO before the participant attains age 59½ are not subject to the 10% additional tax that would otherwise apply under certain circumstances. Federal and state taxes free Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity. Federal and state taxes free No benefit reduction for social security increases. Federal and state taxes free   Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. Federal and state taxes free This rule also applies to plans supplementing the benefits provided by other federal or state laws. Federal and state taxes free Elective deferrals must be limited. Federal and state taxes free   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. Federal and state taxes free See Limit on Elective Deferrals later in this chapter. Federal and state taxes free Top-heavy plan requirements. Federal and state taxes free   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. Federal and state taxes free   A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Federal and state taxes free Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. Federal and state taxes free   Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. Federal and state taxes free These qualification requirements for top-heavy plans are explained in section 416 and its regulations. Federal and state taxes free SIMPLE and safe harbor 401(k) plan exception. Federal and state taxes free   The top-heavy plan requirements do not apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. Federal and state taxes free QACAs (discussed later) also are not subject to top-heavy requirements. Federal and state taxes free Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. Federal and state taxes free First you adopt a written plan. Federal and state taxes free Then you invest the plan assets. Federal and state taxes free You, the employer, are responsible for setting up and maintaining the plan. Federal and state taxes free If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. Federal and state taxes free If you have employees, see Participation, under Qualification Rules, earlier. Federal and state taxes free Set-up deadline. Federal and state taxes free   To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers). Federal and state taxes free Credit for startup costs. Federal and state taxes free   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2013. Federal and state taxes free For more information, see Credit for startup costs under Reminders, earlier. Federal and state taxes free Adopting a Written Plan You must adopt a written plan. Federal and state taxes free The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Federal and state taxes free Or it can be an individually designed plan. Federal and state taxes free Written plan requirement. Federal and state taxes free   To qualify, the plan you set up must be in writing and must be communicated to your employees. Federal and state taxes free The plan's provisions must be stated in the plan. Federal and state taxes free It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. Federal and state taxes free Master or prototype plans. Federal and state taxes free   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. Federal and state taxes free Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). Federal and state taxes free Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. Federal and state taxes free Under a prototype plan, a separate trust or custodial account is established for each employer. Federal and state taxes free Plan providers. Federal and state taxes free   The following organizations generally can provide IRS-approved master or prototype plans. Federal and state taxes free Banks (including some savings and loan associations and federally insured credit unions). Federal and state taxes free Trade or professional organizations. Federal and state taxes free Insurance companies. Federal and state taxes free Mutual funds. Federal and state taxes free Individually designed plan. Federal and state taxes free   If you prefer, you can set up an individually designed plan to meet specific needs. Federal and state taxes free Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. Federal and state taxes free You may need professional help for this. Federal and state taxes free See Rev. Federal and state taxes free Proc. Federal and state taxes free 2014-6, 2014-1 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 198, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2014-1_IRB/ar10. Federal and state taxes free html, as annually updated, that may help you decide whether to apply for approval. Federal and state taxes free Internal Revenue Bulletins are available on the IRS website at IRS. Federal and state taxes free gov They are also available at most IRS offices and at certain libraries. Federal and state taxes free User fee. Federal and state taxes free   The fee mentioned earlier for requesting a determination letter does not apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. Federal and state taxes free At least one of them must be a non-highly compensated employee participating in the plan. Federal and state taxes free The fee does not apply to requests made by the later of the following dates. Federal and state taxes free The end of the 5th plan year the plan is in effect. Federal and state taxes free The end of any remedial amendment period for the plan that begins within the first 5 plan years. Federal and state taxes free The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. Federal and state taxes free   For more information about whether the user fee applies, see Rev. Federal and state taxes free Proc. Federal and state taxes free 2014-8, 2014-1 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 242, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2014-1_IRB/ar12. Federal and state taxes free html, as may be annually updated; Notice 2003-49, 2003-32 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 294, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2003-32_IRB/ar13. Federal and state taxes free html; and Notice 2011-86, 2011-45 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 698, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2011-45_IRB/ar11. Federal and state taxes free html. Federal and state taxes free Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. Federal and state taxes free You can establish a trust or custodial account to invest the funds. Federal and state taxes free You, the trust, or the custodial account can buy an annuity contract from an insurance company. Federal and state taxes free Life insurance can be included only if it is incidental to the retirement benefits. Federal and state taxes free You set up a trust by a legal instrument (written document). Federal and state taxes free You may need professional help to do this. Federal and state taxes free You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. Federal and state taxes free You do not need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. Federal and state taxes free If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. Federal and state taxes free Other plan requirements. Federal and state taxes free   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. Federal and state taxes free Minimum Funding Requirement In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Federal and state taxes free Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. Federal and state taxes free For information on this funding requirement, see section 412 and its regulations. Federal and state taxes free Quarterly installments of required contributions. Federal and state taxes free   If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. Federal and state taxes free If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. Federal and state taxes free Due dates. Federal and state taxes free   The due dates for the installments are 15 days after the end of each quarter. Federal and state taxes free For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). Federal and state taxes free Installment percentage. Federal and state taxes free   Each quarterly installment must be 25% of the required annual payment. Federal and state taxes free Extended period for making contributions. Federal and state taxes free   Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year. Federal and state taxes free Contributions A qualified plan is generally funded by your contributions. Federal and state taxes free However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. Federal and state taxes free See Employee Contributions and Elective Deferrals later. Federal and state taxes free Contributions deadline. Federal and state taxes free   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. Federal and state taxes free Self-employed individual. Federal and state taxes free   You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Federal and state taxes free Your net earnings must be from your personal services, not from your investments. Federal and state taxes free If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation. Federal and state taxes free Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. Federal and state taxes free There are also limits on the amount you can deduct. Federal and state taxes free See Deduction Limits , later. Federal and state taxes free Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. Federal and state taxes free The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. Federal and state taxes free Defined benefit plan. Federal and state taxes free   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. Federal and state taxes free 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. Federal and state taxes free $205,000 ($210,000 for 2014). Federal and state taxes free Defined contribution plan. Federal and state taxes free   For 2013, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts. Federal and state taxes free 100% of the participant's compensation. Federal and state taxes free $51,000 ($52,000 for 2014). Federal and state taxes free   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. Federal and state taxes free Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Federal and state taxes free Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. Federal and state taxes free Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. Federal and state taxes free See Regulations sections 1. Federal and state taxes free 401(k)-2 and 1. Federal and state taxes free 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Federal and state taxes free When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. Federal and state taxes free But you can apply them to the previous year if all the following requirements are met. Federal and state taxes free You make them by the due date of your tax return for the previous year (plus extensions). Federal and state taxes free The plan was established by the end of the previous year. Federal and state taxes free The plan treats the contributions as though it had received them on the last day of the previous year. Federal and state taxes free You do either of the following. Federal and state taxes free You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. Federal and state taxes free You deduct the contributions on your tax return for the previous year. Federal and state taxes free A partnership shows contributions for partners on Form 1065. Federal and state taxes free Employer's promissory note. Federal and state taxes free   Your promissory note made out to the plan is not a payment that qualifies for the deduction. Federal and state taxes free Also, issuing this note is a prohibited transaction subject to tax. Federal and state taxes free See Prohibited Transactions , later. Federal and state taxes free Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Federal and state taxes free The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Federal and state taxes free Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. Federal and state taxes free Defined contribution plans. Federal and state taxes free   The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. Federal and state taxes free If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. Federal and state taxes free See Deduction Limit for Self-Employed Individuals , later. Federal and state taxes free   When figuring the deduction limit, the following rules apply. Federal and state taxes free Elective deferrals (discussed later) are not subject to the limit. Federal and state taxes free Compensation includes elective deferrals. Federal and state taxes free The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). Federal and state taxes free Defined benefit plans. Federal and state taxes free   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Federal and state taxes free Consequently, an actuary must figure your deduction limit. Federal and state taxes free    In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits, earlier. Federal and state taxes free Table 4–1. Federal and state taxes free Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Year Participants' compensation Participants' share of required contribution (10% of annual profit) Deductible  limit for current year (25% of compensation) Contribution Excess contribution carryover used1 Total  deduction including carryovers Excess contribution carryover available at end of year 2010 $1,000 $100 $250 $100 $ 0 $100 $ 0 2011 400 165 100 165 0 100 65 2012 500 100 125 100 25 125 40 2013 600 100 150 100 40 140 0  1There were no carryovers from years before 2010. Federal and state taxes free Deduction Limit for Self-Employed Individuals If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Federal and state taxes free Compensation is your net earnings from self-employment, defined in chapter 1. Federal and state taxes free This definition takes into account both the following items. Federal and state taxes free The deduction for the deductible part of your self-employment tax. Federal and state taxes free The deduction for contributions on your behalf to the plan. Federal and state taxes free The deduction for your own contributions and your net earnings depend on each other. Federal and state taxes free For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. Federal and state taxes free To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Federal and state taxes free Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Federal and state taxes free Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Federal and state taxes free For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120, or Form 1120S. Federal and state taxes free Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Federal and state taxes free (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. Federal and state taxes free ) Carryover of Excess Contributions If you contribute more to the plans than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Federal and state taxes free Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. Federal and state taxes free For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. Federal and state taxes free However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. Federal and state taxes free See Deduction Limit for Self-Employed Individuals, earlier. Federal and state taxes free The amount you carry over and deduct may be subject to the excise tax discussed next. Federal and state taxes free Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. Federal and state taxes free Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. Federal and state taxes free In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. Federal and state taxes free Special rule for self-employed individuals. Federal and state taxes free   The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Federal and state taxes free Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. Federal and state taxes free See Minimum Funding Requirement , earlier. Federal and state taxes free Reporting the tax. Federal and state taxes free   You must report the tax on your nondeductible contributions on Form 5330. Federal and state taxes free Form 5330 includes a computation of the tax. Federal and state taxes free See the separate instructions for completing the form. Federal and state taxes free Elective Deferrals (401(k) Plans) Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. Federal and state taxes free A plan with this type of arrangement is popularly known as a “401(k) plan. Federal and state taxes free ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. Federal and state taxes free ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. Federal and state taxes free In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. Federal and state taxes free A profit-sharing plan. Federal and state taxes free A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. Federal and state taxes free Partnership. Federal and state taxes free   A partnership can have a 401(k) plan. Federal and state taxes free Restriction on conditions of participation. Federal and state taxes free   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. Federal and state taxes free Matching contributions. Federal and state taxes free   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. Federal and state taxes free For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Federal and state taxes free Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. Federal and state taxes free Nonelective contributions. Federal and state taxes free   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. Federal and state taxes free These are called nonelective contributions. Federal and state taxes free Employee compensation limit. Federal and state taxes free   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. Federal and state taxes free This limit is $260,000 in 2014. Federal and state taxes free SIMPLE 401(k) plan. Federal and state taxes free   If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. Federal and state taxes free A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. Federal and state taxes free For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. Federal and state taxes free Distributions. Federal and state taxes free   Certain rules apply to distributions from 401(k) plans. Federal and state taxes free See Distributions From 401(k) Plans , later. Federal and state taxes free Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. Federal and state taxes free This limit applies without regard to community property laws. Federal and state taxes free Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. Federal and state taxes free For 2013 and 2014, the basic limit on elective deferrals is $17,500. Federal and state taxes free This limit applies to all salary reduction contributions and elective deferrals. Federal and state taxes free If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. Federal and state taxes free Catch-up contributions. Federal and state taxes free   A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Federal and state taxes free The catch-up contribution limit for 2013 and 2014 is $5,500. Federal and state taxes free Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). Federal and state taxes free However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Federal and state taxes free The catch-up contribution limit. Federal and state taxes free The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Federal and state taxes free Treatment of contributions. Federal and state taxes free   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Federal and state taxes free Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Federal and state taxes free Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Federal and state taxes free Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Federal and state taxes free Forfeiture. Federal and state taxes free   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. Federal and state taxes free Reporting on Form W-2. Federal and state taxes free   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Federal and state taxes free You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Federal and state taxes free You must also include them in box 12. Federal and state taxes free Mark the “Retirement plan” checkbox in box 13. Federal and state taxes free For more information, see the Form W-2 instructions. Federal and state taxes free Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. Federal and state taxes free Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. Federal and state taxes free These contributions are elective deferrals. Federal and state taxes free An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). Federal and state taxes free For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. Federal and state taxes free Eligible automatic contribution arrangement. Federal and state taxes free   Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. Federal and state taxes free This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). Federal and state taxes free There is no required deferral percentage. Federal and state taxes free Withdrawals. Federal and state taxes free   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. Federal and state taxes free The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. Federal and state taxes free The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. Federal and state taxes free   If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. Federal and state taxes free The additional 10% tax on early distributions will not apply to the distribution. Federal and state taxes free Notice requirement. Federal and state taxes free   Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. Federal and state taxes free The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. Federal and state taxes free The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. Federal and state taxes free The notice also must explain how contributions will be invested in the absence of an investment election by the employee. Federal and state taxes free Qualified automatic contribution arrangement. Federal and state taxes free    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. Federal and state taxes free It contains an automatic enrollment feature, and mandatory employer contributions are required. Federal and state taxes free If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Federal and state taxes free Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. Federal and state taxes free Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. Federal and state taxes free In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). Federal and state taxes free If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. Federal and state taxes free It must be applied uniformly. Federal and state taxes free It must not exceed 10%. Federal and state taxes free It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. Federal and state taxes free It must increase to at least 4% in the following plan year. Federal and state taxes free It must increase to at least 5% in the following plan year. Federal and state taxes free It must increase to at least 6% in subsequent plan years. Federal and state taxes free Matching or nonelective contributions. Federal and state taxes free   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. Federal and state taxes free Matching contributions. Federal and state taxes free You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. Federal and state taxes free An amount equal to 100% of elective deferrals, up to 1% of compensation. Federal and state taxes free An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. Federal and state taxes free Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. Federal and state taxes free The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Federal and state taxes free Nonelective contributions. Federal and state taxes free You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation. Federal and state taxes free Vesting requirements. Federal and state taxes free   All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. Federal and state taxes free These contributions are subject to special withdrawal restrictions, discussed later. Federal and state taxes free Notice requirements. Federal and state taxes free   Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. Federal and state taxes free The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. Federal and state taxes free The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Federal and state taxes free Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. Federal and state taxes free The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA. Federal and state taxes free Treatment of Excess Deferrals If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. Federal and state taxes free He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. Federal and state taxes free The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. Federal and state taxes free Excess withdrawn by April 15. Federal and state taxes free   If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. Federal and state taxes free However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. Federal and state taxes free The distribution is not subject to the additional 10% tax on early distributions. Federal and state taxes free   If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income. Federal and state taxes free   Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. Federal and state taxes free Excess not withdrawn by April 15. Federal and state taxes free   If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. Federal and state taxes free In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Federal and state taxes free Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified. Federal and state taxes free Reporting corrective distributions on Form 1099-R. Federal and state taxes free   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. Federal and state taxes free For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. Federal and state taxes free Tax on excess contributions of highly compensated employees. Federal and state taxes free   The law provides tests to detect discrimination in a plan. Federal and state taxes free If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Federal and state taxes free Report the tax on Form 5330. Federal and state taxes free The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Federal and state taxes free Also, the ACP test does not apply to these plans if certain additional requirements are met. Federal and state taxes free   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Federal and state taxes free Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test. Federal and state taxes free   See Regulations sections 1. Federal and state taxes free 401(k)-2 and 1. Federal and state taxes free 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Federal and state taxes free    If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified. Federal and state taxes free Safe harbor 401(k) plan. Federal and state taxes free If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. Federal and state taxes free For your plan to be a safe harbor plan, you must meet the following conditions. Federal and state taxes free Matching or nonelective contributions. Federal and state taxes free You must make matching or nonelective contributions according to one of the following formulas. Federal and state taxes free Matching contributions. Federal and state taxes free You must make matching contributions according to the following rules. Federal and state taxes free You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. Federal and state taxes free You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. Federal and state taxes free The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Federal and state taxes free Nonelective contributions. Federal and state taxes free You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation. Federal and state taxes free These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. Federal and state taxes free Notice requirement. Federal and state taxes free You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year. Federal and state taxes free The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan. Federal and state taxes free Qualified Roth Contribution Program Under this program an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. Federal and state taxes free Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. Federal and state taxes free However, unlike other elective deferrals, designated Roth contributions are not excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income. Federal and state taxes free Elective Deferrals Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2013 and 2014, $17,500 if under age 50 and $23,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions. Federal and state taxes free Designated Roth deferrals are treated the same as pre-tax elective deferrals for most purposes, including: The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $17,500 for 2013 and 2014, with an additional $5,500 if age 50 or over for 2013 and 2014, Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $51,000 for 2013 ($52,000 for 2014), Nondiscrimination testing, Required distributions, and Elective deferrals not taken into account for purposes of deduction limits. Federal and state taxes free Qualified Distributions A qualified distribution is a distribution that is made after the employee's nonexclusion period and: On or after the employee attains age   59½, On account of the employee's being disabled, or On or after the employee's death. Federal and state taxes free An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. Federal and state taxes free The first tax year in which the employee made a contribution to his or her Roth account in the plan, or If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account. Federal and state taxes free Rollover. Federal and state taxes free   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. Federal and state taxes free For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 872, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2010-51_IRB/ar11. Federal and state taxes free html, and Notice 2013-74. Federal and state taxes free A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Federal and state taxes free Rollover amounts do not apply toward the annual deferral limit. Federal and state taxes free Reporting Requirements You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. Federal and state taxes free See the Form W-2 and 1099-R instructions for detailed information. Federal and state taxes free Distributions Amounts paid to plan participants from a qualified plan are called distributions. Federal and state taxes free Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Federal and state taxes free Also, certain loans may be treated as distributions. Federal and state taxes free See Loans Treated as Distributions in Publication 575. Federal and state taxes free Required Distributions A qualified plan must provide that each participant will either: Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period). Federal and state taxes free These distribution rules apply individually to each qualified plan. Federal and state taxes free You cannot satisfy the requirement for one plan by taking a distribution from another. Federal and state taxes free The plan must provide that these rules override any inconsistent distribution options previously offered. Federal and state taxes free Minimum distribution. Federal and state taxes free   If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. Federal and state taxes free This minimum is figured by dividing the account balance by the applicable life expectancy. Federal and state taxes free The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. Federal and state taxes free For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. Federal and state taxes free Required beginning date. Federal and state taxes free   Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date. Federal and state taxes free   A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years. Federal and state taxes free Calendar year in which he or she reaches age 70½. Federal and state taxes free Calendar year in which he or she retires from employment with the employer maintaining the plan. Federal and state taxes free However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70½ even if the participant has not retired. Federal and state taxes free   If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70½. Federal and state taxes free For more information, see Tax on Excess Accumulation in Publication 575. Federal and state taxes free Distributions after the starting year. Federal and state taxes free   The distribution required to be made by April 1 is treated as a distribution for the starting year. Federal and state taxes free (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. Federal and state taxes free ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. Federal and state taxes free If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). Federal and state taxes free Distributions after participant's death. Federal and state taxes free   See Publication 575 for the special rules covering distributions made after the death of a participant. Federal and state taxes free Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. Federal and state taxes free The employee retires, dies, becomes disabled, or otherwise severs employment. Federal and state taxes free The plan ends and no other defined contribution plan is established or continued. Federal and state taxes free In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. Federal and state taxes free For the rules on hardship distributions, including the limits on them, see Regulations section 1. Federal and state taxes free 401(k)-1(d). Federal and state taxes free The employee becomes eligible for a qualified reservist distribution (defined next). Federal and state taxes free Certain distributions listed above may be subject to the tax on early distributions discussed later. Federal and state taxes free Qualified reservist distributions. Federal and state taxes free   A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. Federal and state taxes free All or part of a qualified reservist distribution can be recontributed to an IRA. Federal and state taxes free The additional 10% tax on early distributions does not apply to a qualified reservist distribution. Federal and state taxes free Tax Treatment of Distributions Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Federal and state taxes free Since most recipients have no cost basis, a distribution is generally fully taxable. Federal and state taxes free An exception is a distribution that is properly rolled over as discussed under Rollover, next. Federal and state taxes free The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. Federal and state taxes free See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution. Federal and state taxes free Note. Federal and state taxes free A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. Federal and state taxes free Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. Federal and state taxes free See Qualified distributions under Qualified Roth Contribution Program, earlier. Federal and state taxes free Rollover. Federal and state taxes free   The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. Federal and state taxes free However, it may be subject to withholding as discussed under Withholding requirement, later. Federal and state taxes free A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account. Federal and state taxes free Eligible rollover distribution. Federal and state taxes free   This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following. Federal and state taxes free A required minimum distribution. Federal and state taxes free See Required Distributions , earlier. Federal and state taxes free Any of a series of substantially equal payments made at least once a year over any of the following periods. Federal and state taxes free The employee's life or life expectancy. Federal and state taxes free The joint lives or life expectancies of the employee and beneficiary. Federal and state taxes free A period of 10 years or longer. Federal and state taxes free A hardship distribution. Federal and state taxes free The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. Federal and state taxes free See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. Federal and state taxes free Loans treated as distributions. Federal and state taxes free Dividends on employer securities. Federal and state taxes free The cost of any life insurance coverage provided under a qualified retirement plan. Federal and state taxes free Similar items designated by the IRS in published guidance. Federal and state taxes free See, for example, the Instructions for Forms 1099-R and 5498. Federal and state taxes free Rollover of nontaxable amounts. Federal and state taxes free   You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. Federal and state taxes free If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. Federal and state taxes free If the rollover is to an IRA, the transfer can be made by any rollover method. Federal and state taxes free Note. Federal and state taxes free A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. Federal and state taxes free If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). Federal and state taxes free More information. Federal and state taxes free   For more information about rollovers, see Rollovers in Pubs. Federal and state taxes free 575 and 590. Federal and state taxes free Withholding requirement. Federal and state taxes free   If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax. Federal and state taxes free Exceptions. Federal and state taxes free   If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required. Federal and state taxes free   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. Federal and state taxes free Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). Federal and state taxes free However, the participant can choose not to have tax withheld from these distributions. Federal and state taxes free If the participant does not make this choice, the following withholding rules apply. Federal and state taxes free For periodic distributions, withholding is based on their treatment as wages. Federal and state taxes free For nonperiodic distributions, 10% of the taxable part is withheld. Federal and state taxes free Estimated tax payments. Federal and state taxes free   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. Federal and state taxes free For more information, see Withholding Tax and Estimated Tax in Publication 575. Federal and state taxes free Section 402(f) Notice. Federal and state taxes free   If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions. Federal and state taxes free That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. Federal and state taxes free That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. Federal and state taxes free That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution. Federal and state taxes free Certain other rules that may be applicable. Federal and state taxes free   Notice 2009-68, 2009-39 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 423, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2009-39_IRB/ar14. Federal and state taxes free html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. Federal and state taxes free If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. Federal and state taxes free Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. Federal and state taxes free Timing of notice. Federal and state taxes free   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. Federal and state taxes free Method of notice. Federal and state taxes free   The written notice must be provided individually to each distributee of an eligible rollover distribution. Federal and state taxes free Posting of the notice is not sufficient. Federal and state taxes free However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. Federal and state taxes free See Regulations section 1. Federal and state taxes free 401(a)-21. Federal and state taxes free Tax on failure to give notice. Federal and state taxes free   Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. Federal and state taxes free The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. Federal and state taxes free Tax on Early Distributions If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. Federal and state taxes free This tax applies to the amount received that the employee must include in income. Federal and state taxes free Exceptions. Federal and state taxes free   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. Federal and state taxes free Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. Federal and state taxes free Made due to the employee having a qualifying disability. Federal and state taxes free Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. Federal and state taxes free (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period. Federal and state taxes free ) Made to an employee after separation from service if the separation occurred during o
Español

U.S. Department of Health and Human Services (HHS)

The Department of Health and Human Services protects the health of all Americans and provides essential human services.

The Federal And State Taxes Free

Federal and state taxes free Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. Federal and state taxes free Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. Federal and state taxes free Method 2. Federal and state taxes free How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. Federal and state taxes free In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Federal and state taxes free You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. Federal and state taxes free Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. Federal and state taxes free If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. Federal and state taxes free These wages must be included on line 7 of Form 1040. Federal and state taxes free See Form 8919 for more information. Federal and state taxes free Childcare providers. Federal and state taxes free   If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. Federal and state taxes free If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Federal and state taxes free You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. Federal and state taxes free Babysitting. Federal and state taxes free   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Federal and state taxes free Bankruptcy. Federal and state taxes free   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. Federal and state taxes free Your W-2 will show your total wages and withheld income tax for the year. Federal and state taxes free On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. Federal and state taxes free Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. Federal and state taxes free If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. Federal and state taxes free   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. Federal and state taxes free For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. Federal and state taxes free   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. Federal and state taxes free The statement must show the allocation and describe the method used to make the allocation. Federal and state taxes free For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 596, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2006-40_IRB/ar12. Federal and state taxes free html. Federal and state taxes free Miscellaneous Compensation This section discusses many types of employee compensation. Federal and state taxes free The subjects are arranged in alphabetical order. Federal and state taxes free Advance commissions and other earnings. Federal and state taxes free   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. Federal and state taxes free    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. Federal and state taxes free If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. Federal and state taxes free See Repayments , later. Federal and state taxes free Allowances and reimbursements. Federal and state taxes free    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Federal and state taxes free If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. Federal and state taxes free Back pay awards. Federal and state taxes free   Include in income amounts you are awarded in a settlement or judgment for back pay. Federal and state taxes free These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. Federal and state taxes free They should be reported to you by your employer on Form W-2. Federal and state taxes free Bonuses and awards. Federal and state taxes free    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. Federal and state taxes free These include prizes such as vacation trips for meeting sales goals. Federal and state taxes free If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. Federal and state taxes free However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. Federal and state taxes free Employee achievement award. Federal and state taxes free   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. Federal and state taxes free However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Federal and state taxes free Your employer can tell you whether your award is a qualified plan award. Federal and state taxes free Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. Federal and state taxes free   However, the exclusion does not apply to the following awards. Federal and state taxes free A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. Federal and state taxes free A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. Federal and state taxes free Example. Federal and state taxes free Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Federal and state taxes free Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. Federal and state taxes free However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income. Federal and state taxes free Differential wage payments. Federal and state taxes free   This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. Federal and state taxes free These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. Federal and state taxes free The payments are reported as wages on Form W-2. Federal and state taxes free Government cost-of-living allowances. Federal and state taxes free   Most payments received by U. Federal and state taxes free S. Federal and state taxes free Government civilian employees for working abroad are taxable. Federal and state taxes free However, certain cost-of-living allowances are tax free. Federal and state taxes free Publication 516, U. Federal and state taxes free S. Federal and state taxes free Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. Federal and state taxes free Nonqualified deferred compensation plans. Federal and state taxes free   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. Federal and state taxes free This amount is shown on Form W-2, box 12, using code Y. Federal and state taxes free This amount is not included in your income. Federal and state taxes free   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. Federal and state taxes free This amount is included in your wages shown on Form W-2, box 1. Federal and state taxes free It is also shown on Form W-2, box 12, using code Z. Federal and state taxes free Nonqualified deferred compensation plans of nonqualified entities. Federal and state taxes free   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. Federal and state taxes free For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. Federal and state taxes free A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. Federal and state taxes free Note received for services. Federal and state taxes free   If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. Federal and state taxes free When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Federal and state taxes free Do not include that part again in your income. Federal and state taxes free Include the rest of the payment in your income in the year of payment. Federal and state taxes free   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. Federal and state taxes free Severance pay. Federal and state taxes free   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Federal and state taxes free Accrued leave payment. Federal and state taxes free   If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. Federal and state taxes free   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. Federal and state taxes free You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Federal and state taxes free Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2. Federal and state taxes free Outplacement services. Federal and state taxes free   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. Federal and state taxes free    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). Federal and state taxes free Sick pay. Federal and state taxes free   Pay you receive from your employer while you are sick or injured is part of your salary or wages. Federal and state taxes free In addition, you must include in your income sick pay benefits received from any of the following payers. Federal and state taxes free A welfare fund. Federal and state taxes free A state sickness or disability fund. Federal and state taxes free An association of employers or employees. Federal and state taxes free An insurance company, if your employer paid for the plan. Federal and state taxes free However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. Federal and state taxes free For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. Federal and state taxes free Social security and Medicare taxes paid by employer. Federal and state taxes free   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. Federal and state taxes free The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Federal and state taxes free However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Federal and state taxes free Stock appreciation rights. Federal and state taxes free   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. Federal and state taxes free When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. Federal and state taxes free You include the cash payment in income in the year you use the right. Federal and state taxes free Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Federal and state taxes free Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. Federal and state taxes free See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. Federal and state taxes free Recipient of fringe benefit. Federal and state taxes free   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. Federal and state taxes free You are considered to be the recipient even if it is given to another person, such as a member of your family. Federal and state taxes free An example is a car your employer gives to your spouse for services you perform. Federal and state taxes free The car is considered to have been provided to you and not to your spouse. Federal and state taxes free   You do not have to be an employee of the provider to be a recipient of a fringe benefit. Federal and state taxes free If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. Federal and state taxes free Provider of benefit. Federal and state taxes free   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. Federal and state taxes free The provider can be a client or customer of an independent contractor. Federal and state taxes free Accounting period. Federal and state taxes free   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Federal and state taxes free Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Federal and state taxes free The general rule: benefits are reported for a full calendar year (January 1–December 31). Federal and state taxes free The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. Federal and state taxes free For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. Federal and state taxes free Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. Federal and state taxes free   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). Federal and state taxes free Form W-2. Federal and state taxes free   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Federal and state taxes free Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). Federal and state taxes free However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). Federal and state taxes free Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. Federal and state taxes free Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . Federal and state taxes free For information on the items covered in this section, other than Long-term care coverage , see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Federal and state taxes free Long-term care coverage. Federal and state taxes free   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. Federal and state taxes free However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. Federal and state taxes free This amount will be reported as wages in box 1 of your Form W-2. Federal and state taxes free Archer MSA contributions. Federal and state taxes free    Contributions by your employer to your Archer MSA generally are not included in your income. Federal and state taxes free Their total will be reported in box 12 of Form W-2, with code R. Federal and state taxes free You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Federal and state taxes free File the form with your return. Federal and state taxes free Health flexible spending arrangement (health FSA). Federal and state taxes free   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. Federal and state taxes free   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. Federal and state taxes free The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. Federal and state taxes free For more information, see Notice 2012-40, 2012-26 I. Federal and state taxes free R. Federal and state taxes free B. Federal and state taxes free 1046, available at www. Federal and state taxes free irs. Federal and state taxes free gov/irb/2012-26 IRB/ar09. Federal and state taxes free html. Federal and state taxes free Health reimbursement arrangement (HRA). Federal and state taxes free   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. Federal and state taxes free Health savings accounts (HSA). Federal and state taxes free   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Federal and state taxes free Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Federal and state taxes free Contributions made by your employer are not included in your income. Federal and state taxes free Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Federal and state taxes free Distributions not used for qualified medical expenses are included in your income. Federal and state taxes free See Publication 969 for the requirements of an HSA. Federal and state taxes free   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Federal and state taxes free The contributions are treated as a distribution of money and are not included in the partner's gross income. Federal and state taxes free Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. Federal and state taxes free In both situations, the partner can deduct the contribution made to the partner's HSA. Federal and state taxes free   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. Federal and state taxes free The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Federal and state taxes free Qualified HSA funding distribution. Federal and state taxes free   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. Federal and state taxes free See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. Federal and state taxes free Failure to maintain eligibility. Federal and state taxes free   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. Federal and state taxes free If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. Federal and state taxes free This income is also subject to an additional 10% tax. Federal and state taxes free Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. Federal and state taxes free See Instructions for Form 8839, Qualified Adoption Expenses, for more information. Federal and state taxes free Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. Federal and state taxes free They also are included as social security and Medicare wages in boxes 3 and 5. Federal and state taxes free However, they are not included as wages in box 1. Federal and state taxes free To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. Federal and state taxes free File the form with your return. Federal and state taxes free Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. Federal and state taxes free The gym must be used primarily by employees, their spouses, and their dependent children. Federal and state taxes free If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. Federal and state taxes free De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Federal and state taxes free In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. Federal and state taxes free Also see Employee Discounts , later. Federal and state taxes free Holiday gifts. Federal and state taxes free   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. Federal and state taxes free However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. Federal and state taxes free Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Federal and state taxes free Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. Federal and state taxes free The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Federal and state taxes free Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. Federal and state taxes free Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. Federal and state taxes free To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. Federal and state taxes free See the Instructions for Form 2441 for more information. Federal and state taxes free Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. Federal and state taxes free For more information, see Publication 970. Federal and state taxes free Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. Federal and state taxes free The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. Federal and state taxes free However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). Federal and state taxes free The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. Federal and state taxes free For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. Federal and state taxes free (Ask your employer for this percentage. Federal and state taxes free ) For a discount on services, 20%. Federal and state taxes free Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. Federal and state taxes free If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). Federal and state taxes free Qualified retirement planning services paid for you by your employer may be excluded from your income. Federal and state taxes free For more information, see Retirement Planning Services , later. Federal and state taxes free Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. Federal and state taxes free However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. Federal and state taxes free For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. Federal and state taxes free If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Federal and state taxes free Also, it is shown separately in box 12 with code C. Federal and state taxes free Group-term life insurance. Federal and state taxes free   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. Federal and state taxes free Permanent benefits. Federal and state taxes free   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Federal and state taxes free Your employer should be able to tell you the amount to include in your income. Federal and state taxes free Accidental death benefits. Federal and state taxes free   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. Federal and state taxes free Former employer. Federal and state taxes free   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Federal and state taxes free Also, it is shown separately in box 12 with code C. Federal and state taxes free Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. Federal and state taxes free You must pay these taxes with your income tax return. Federal and state taxes free Include them on line 60, Form 1040, and follow the instructions forline 60. Federal and state taxes free For more information, see the Instructions for Form 1040. Federal and state taxes free Two or more employers. Federal and state taxes free   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. Federal and state taxes free If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. Federal and state taxes free You must figure how much to include in your income. Federal and state taxes free Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. Federal and state taxes free Figuring the taxable cost. Federal and state taxes free    Use the following worksheet to figure the amount to include in your income. Federal and state taxes free   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. Federal and state taxes free However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . Federal and state taxes free Worksheet 1. Federal and state taxes free Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Federal and state taxes free Enter the total amount of your insurance coverage from your employer(s) 1. Federal and state taxes free   2. Federal and state taxes free Limit on exclusion for employer-provided group-term life insurance coverage 2. Federal and state taxes free 50,000 3. Federal and state taxes free Subtract line 2 from line 1 3. Federal and state taxes free   4. Federal and state taxes free Divide line 3 by $1,000. Federal and state taxes free Figure to the nearest tenth 4. Federal and state taxes free   5. Federal and state taxes free Go to Table 1. Federal and state taxes free Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Federal and state taxes free   6. Federal and state taxes free Multiply line 4 by line 5 6. Federal and state taxes free     7. Federal and state taxes free Enter the number of full months of coverage at this cost 7. Federal and state taxes free   8. Federal and state taxes free Multiply line 6 by line 7 8. Federal and state taxes free   9. Federal and state taxes free Enter the premiums you paid per month 9. Federal and state taxes free       10. Federal and state taxes free Enter the number of months you paid the  premiums 10. Federal and state taxes free       11. Federal and state taxes free Multiply line 9 by line 10. Federal and state taxes free 11. Federal and state taxes free   12. Federal and state taxes free Subtract line 11 from line 8. Federal and state taxes free Include this amount in your income as wages 12. Federal and state taxes free   Table 1. Federal and state taxes free Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . Federal and state taxes free 05     25 through 29 . Federal and state taxes free 06     30 through 34 . Federal and state taxes free 08     35 through 39 . Federal and state taxes free 09     40 through 44 . Federal and state taxes free 10     45 through 49 . Federal and state taxes free 15     50 through 54 . Federal and state taxes free 23     55 through 59 . Federal and state taxes free 43     60 through 64 . Federal and state taxes free 66     65 through 69 1. Federal and state taxes free 27     70 and older 2. Federal and state taxes free 06   Example. Federal and state taxes free You are 51 years old and work for employers A and B. Federal and state taxes free Both employers provide group-term life insurance coverage for you for the entire year. Federal and state taxes free Your coverage is $35,000 with employer A and $45,000 with employer B. Federal and state taxes free You pay premiums of $4. Federal and state taxes free 15 a month under the employer B group plan. Federal and state taxes free You figure the amount to include in your income as follows. Federal and state taxes free   Worksheet 1. Federal and state taxes free Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. Federal and state taxes free Enter the total amount of your insurance coverage from your employer(s) 1. Federal and state taxes free 80,000 2. Federal and state taxes free Limit on exclusion for employer-provided group-term life insurance coverage 2. Federal and state taxes free 50,000 3. Federal and state taxes free Subtract line 2 from line 1 3. Federal and state taxes free 30,000 4. Federal and state taxes free Divide line 3 by $1,000. Federal and state taxes free Figure to the nearest tenth 4. Federal and state taxes free 30. Federal and state taxes free 0 5. Federal and state taxes free Go to Table 1. Federal and state taxes free Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Federal and state taxes free . Federal and state taxes free 23 6. Federal and state taxes free Multiply line 4 by line 5 6. Federal and state taxes free 6. Federal and state taxes free 90 7. Federal and state taxes free Enter the number of full months of coverage at this cost. Federal and state taxes free 7. Federal and state taxes free 12 8. Federal and state taxes free Multiply line 6 by line 7 8. Federal and state taxes free 82. Federal and state taxes free 80 9. Federal and state taxes free Enter the premiums you paid per month 9. Federal and state taxes free 4. Federal and state taxes free 15     10. Federal and state taxes free Enter the number of months you paid the premiums 10. Federal and state taxes free 12     11. Federal and state taxes free Multiply line 9 by line 10. Federal and state taxes free 11. Federal and state taxes free 49. Federal and state taxes free 80 12. Federal and state taxes free Subtract line 11 from line 8. Federal and state taxes free Include this amount in your income as wages 12. Federal and state taxes free 33. Federal and state taxes free 00 The total amount to include in income for the cost of excess group-term life insurance is $33. Federal and state taxes free Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. Federal and state taxes free You must add it to the wages shown on your Forms W-2 and include the total on your return. Federal and state taxes free Entire cost excluded. Federal and state taxes free   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. Federal and state taxes free You are permanently and totally disabled and have ended your employment. Federal and state taxes free Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. Federal and state taxes free A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. Federal and state taxes free (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. Federal and state taxes free ) The plan existed on January 1, 1984, and: You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. Federal and state taxes free Entire cost taxed. Federal and state taxes free   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. Federal and state taxes free The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. Federal and state taxes free You are a key employee and your employer's plan discriminates in favor of key employees. Federal and state taxes free Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Federal and state taxes free The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. Federal and state taxes free The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. Federal and state taxes free (You must accept it in order to be able to properly perform your duties. Federal and state taxes free ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. Federal and state taxes free See De Minimis (Minimal) Benefits , earlier. Federal and state taxes free Faculty lodging. Federal and state taxes free   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. Federal and state taxes free However, the lodging must be qualified campus lodging, and you must pay an adequate rent. Federal and state taxes free Academic health center. Federal and state taxes free   This is an organization that meets the following conditions. Federal and state taxes free Its principal purpose or function is to provide medical or hospital care or medical education or research. Federal and state taxes free It receives payments for graduate medical education under the Social Security Act. Federal and state taxes free One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. Federal and state taxes free Qualified campus lodging. Federal and state taxes free   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. Federal and state taxes free The lodging must be located on or near a campus of the educational institution or academic health center. Federal and state taxes free Adequate rent. Federal and state taxes free   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. Federal and state taxes free If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. Federal and state taxes free   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. Federal and state taxes free Example. Federal and state taxes free Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. Federal and state taxes free The house is appraised at $200,000. Federal and state taxes free The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. Federal and state taxes free Carl pays an annual rent of $11,000. Federal and state taxes free Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). Federal and state taxes free If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). Federal and state taxes free Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. Federal and state taxes free See Publication 521 for more information. Federal and state taxes free No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). Federal and state taxes free In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. Federal and state taxes free Example. Federal and state taxes free You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Federal and state taxes free Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. Federal and state taxes free The value of the personal flight is not included in your income. Federal and state taxes free However, the value of the hotel room is included in your income because you do not work in the hotel business. Federal and state taxes free Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Federal and state taxes free Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. Federal and state taxes free You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Federal and state taxes free Also, see Financial Counseling Fees , earlier. Federal and state taxes free Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. Federal and state taxes free A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. Federal and state taxes free Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. Federal and state taxes free However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. Federal and state taxes free Exclusion limit. Federal and state taxes free   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. Federal and state taxes free   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. Federal and state taxes free   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. Federal and state taxes free   If the benefits have a value that is more than these limits, the excess must be included in your income. Federal and state taxes free You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. Federal and state taxes free Commuter highway vehicle. Federal and state taxes free   This is a highway vehicle that seats at least six adults (not including the driver). Federal and state taxes free At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). Federal and state taxes free Transit pass. Federal and state taxes free   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. Federal and state taxes free Qualified parking. Federal and state taxes free   This is parking provided to an employee at or near the employer's place of business. Federal and state taxes free It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. Federal and state taxes free It does not include parking at or near the employee's home. Federal and state taxes free Qualified bicycle commuting. Federal and state taxes free   This is reimbursement based on the number of qualified bicycle commuting months for the year. Federal and state taxes free A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. Federal and state taxes free The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Federal and state taxes free Tuition Reduction You can exclude a qualified tuition reduction from your income. Federal and state taxes free This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. Federal and state taxes free For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. Federal and state taxes free Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. Federal and state taxes free For more information, see Publication 970. Federal and state taxes free Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. Federal and state taxes free Example. Federal and state taxes free You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. Federal and state taxes free The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. Federal and state taxes free Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. Federal and state taxes free For an exception, see Group-Term Life Insurance , earlier. Federal and state taxes free General valuation rule. Federal and state taxes free   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. Federal and state taxes free If you pay fair market value for a fringe benefit, no amount is included in your income. Federal and state taxes free Fair market value. Federal and state taxes free   The fair market value of a fringe benefit is determined by all the facts and circumstances. Federal and state taxes free It is the amount you would have to pay a third party to buy or lease the benefit. Federal and state taxes free This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. Federal and state taxes free Employer-provided vehicles. Federal and state taxes free   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. Federal and state taxes free   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. Federal and state taxes free An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. Federal and state taxes free The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. Federal and state taxes free Flights on employer-provided aircraft. Federal and state taxes free   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. Federal and state taxes free   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. Federal and state taxes free The division must be based on all the facts, including which employee or employees control the use of the aircraft. Federal and state taxes free Special valuation rules. Federal and state taxes free   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. Federal and state taxes free If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. Federal and state taxes free You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. Federal and state taxes free   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. Federal and state taxes free The special valuation rules are the following. Federal and state taxes free The automobile lease rule. Federal and state taxes free The vehicle cents-per-mile rule. Federal and state taxes free The commuting rule. Federal and state taxes free The unsafe conditions commuting rule. Federal and state taxes free The employer-operated eating-facility rule. Federal and state taxes free   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Federal and state taxes free    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. Federal and state taxes free 61-21(g) and 1. Federal and state taxes free 61-21(h) of the regulations. Federal and state taxes free Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. Federal and state taxes free (Your employer can tell you whether your retirement plan is qualified. Federal and state taxes free ) However, the cost of life insurance coverage included in the plan may have to be included. Federal and state taxes free See Group-Term Life Insurance , earlier, under Fringe Benefits. Federal and state taxes free If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. Federal and state taxes free However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. Federal and state taxes free For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. Federal and state taxes free S. Federal and state taxes free Civil Service Retirement Benefits, if you are a federal employee or retiree). Federal and state taxes free Elective Deferrals If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. Federal and state taxes free The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. Federal and state taxes free An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. Federal and state taxes free However, it is included in wages subject to social security and Medicare taxes. Federal and state taxes free Elective deferrals include elective contributions to the following retirement plans. Federal and state taxes free Cash or deferred arrangements (section 401(k) plans). Federal and state taxes free The Thrift Savings Plan for federal employees. Federal and state taxes free Salary reduction simplified employee pension plans (SARSEP). Federal and state taxes free Savings incentive match plans for employees (SIMPLE plans). Federal and state taxes free Tax-sheltered annuity plans (403(b) plans). Federal and state taxes free Section 501(c)(18)(D) plans. Federal and state taxes free (But see Reporting by employer , later. Federal and state taxes free ) Section 457 plans. Federal and state taxes free Qualified automatic contribution arrangements. Federal and state taxes free   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. Federal and state taxes free You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. Federal and state taxes free The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. Federal and state taxes free   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. Federal and state taxes free Overall limit on deferrals. Federal and state taxes free   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3), earlier. Federal and state taxes free The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. Federal and state taxes free Amounts deferred under specific plan limits are part of the overall limit on deferrals. Federal and state taxes free   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. Federal and state taxes free However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Federal and state taxes free Catch-up contributions. Federal and state taxes free   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. Federal and state taxes free For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. Federal and state taxes free   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. Federal and state taxes free SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. Federal and state taxes free Section 457 plans, see Limit for deferrals under section 457 plans , later. Federal and state taxes free Limit for deferrals under SIMPLE plans. Federal and state taxes free   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. Federal and state taxes free Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. Federal and state taxes free Limit for tax-sheltered annuities. Federal and state taxes free   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. Federal and state taxes free However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. Federal and state taxes free $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. Federal and state taxes free   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. Federal and state taxes free   For more information, see Publication 571. Federal and state taxes free Limit for deferral under section 501(c)(18) plans. Federal and state taxes free   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. Federal and state taxes free Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. Federal and state taxes free Limit for deferrals under section 457 plans. Federal and state taxes free   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. Federal and state taxes free However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. Federal and state taxes free See Increased limit , later. Federal and state taxes free Includible compensation. Federal and state taxes free   This is the pay you received for the year from the employer who maintained the section 457 plan. Federal and state taxes free In most cases, it includes all the following payments. Federal and state taxes free Wages and salaries. Federal and state taxes free Fees for professional services. Federal and state taxes free The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. Federal and state taxes free Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. Federal and state taxes free Commissions and tips. Federal and state taxes free Fringe benefits. Federal and state taxes free Bonuses. Federal and state taxes free Employer contributions (elective deferrals) to: The section 457 plan. Federal and state taxes free Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. Federal and state taxes free A salary reduction simplified employee pension (SARSEP). Federal and state taxes free A tax-sheltered annuity (section 403(b) plan). Federal and state taxes free A savings incentive match plan for employees (SIMPLE plan). Federal and state taxes free A section 125 cafeteria plan. Federal and state taxes free   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. Federal and state taxes free Your wages as defined for income tax withholding purposes. Federal and state taxes free Your wages as reported in box 1 of Form W-2. Federal and state taxes free Your wages that are subject to social security withholding (including elective deferrals). Federal and state taxes free Increased limit. Federal and state taxes free   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). Federal and state taxes free Catch-up contributions. Federal and state taxes free   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. Federal and state taxes free If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. Federal and state taxes free However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. Federal and state taxes free Designated Roth contributions. Federal and state taxes free   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Federal and state taxes free Designated Roth contributions are treated as elective deferrals, except that they are included in income. Federal and state taxes free Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. Federal and state taxes free   Qualified distributions from a Roth plan are not included in income. Federal and state taxes free In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. Federal and state taxes free Reporting by employer. Federal and state taxes free   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. Federal and state taxes free Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. Federal and state taxes free Section 501(c)(18)(D) contributions. Federal and state taxes free   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. Federal and state taxes free The amount you contributed should be identified with code “H” in box 12. Federal and state taxes free You may deduct the amount deferred subject to the limits that apply. Federal and state taxes free Include your deduction in the total on Form 1040, line 36. Federal and state taxes free Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. Federal and state taxes free Designated Roth contributions. Federal and state taxes free    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. Federal and state taxes free Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. Federal and state taxes free Excess deferrals. Federal and state taxes free   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. Federal and state taxes free If the plan permits, the excess amount will be distributed to you. Federal and state taxes free If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. Federal and state taxes free You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. Federal and state taxes free The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. Federal and state taxes free   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. Federal and state taxes free File Form 1040 to add the excess deferral amount to your wages on line 7. Federal and state taxes free Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. Federal and state taxes free Excess not distributed. Federal and state taxes free   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. Federal and state taxes free Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. Federal and state taxes free Excess distributed to you. Federal and state taxes free   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. Federal and state taxes free If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Federal and state taxes free Any income on the excess deferral taken out is taxable in the tax year in which you take it out. Federal and state taxes free If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. Federal and state taxes free    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Federal and state taxes free Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. Federal and state taxes free If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. Federal and state taxes free Add the excess deferral amount to your wages on your 2013 tax return. Federal and state taxes free If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. Federal and state taxes free Do not add this amount to your wages on your 2013 return. Federal and state taxes free If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. Federal and state taxes free If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. Federal and state taxes free S. Federal and state taxes free Individual Income Tax Return. Federal and state taxes free If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. Federal and state taxes free If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. Federal and state taxes free Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. Federal and state taxes free Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Federal and state taxes free Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. Federal and state taxes free ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Federal and state taxes free It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Federal and state taxes free Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. Federal and state taxes free If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. Federal and state taxes free You must include the excess contributions in your income as wages on Form 1040, line 7. Federal and state taxes free You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. Federal and state taxes free If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. Federal and state taxes free The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. Federal and state taxes free You should receive a Form 1099-R for the year the excess contributions are distributed to you. Federal and state taxes free Add the distribution to your wages for that year. Federal and state taxes free Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Federal and state taxes free It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Federal and state taxes free Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. Federal and state taxes free Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. Federal and state taxes free A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. Federal and state taxes free A corrective payment consisting of your after-tax contributions is not taxable. Federal and state taxes free If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. Federal and state taxes free Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Federal and state taxes free Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. Federal and state taxes free Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Federal and state taxes free It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Federal and state taxes free Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. Federal and state taxes free The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Federal and state taxes free Your employer can tell you which kind of option you hold. Federal and state taxes free Nonstatutory Stock Options Grant of option. Federal and state taxes free   If you are granted a nonstatutory stock option, you may have income when you receive the option. Federal and state taxes free The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. Federal and state taxes free The fair market value of an option can be readily determined if it is actively traded on an established market. Federal and state taxes free    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. Federal and state taxes free You can transfer the option. Federal and state taxes free You can exercise the option immediately in full. Federal and state taxes free The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. Federal and state taxes free The fair market value of the option privilege can be readily determined. Federal and state taxes free The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. Federal and state taxes free For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. Federal and state taxes free The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. Federal and state taxes free If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. Federal and state taxes free For more information on the excise tax, see Internal Revenue Code section 4985. Federal and state taxes free Option with readily determinable value. Federal and state taxes free   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. Federal and state taxes free See Restricted Property , later, for rules on how much income to include and when to include it. Federal and state taxes free However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. Federal and state taxes free Option without readily determinable value. Federal and state taxes free   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. Federal and state taxes free    Exercise or transfer of option. Federal and state taxes free   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. Federal and state taxes free Option with readily determinable value. Federal and state taxes free   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. Federal and state taxes free Option without readily determinable value. Federal and state taxes free   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope