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Free Federal And State Taxes

Free federal and state taxes 6. Free federal and state taxes   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Free federal and state taxes Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Free federal and state taxes Also use basis to figure depreciation, amortization, depletion, and casualty losses. Free federal and state taxes If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Free federal and state taxes Only the basis allocated to the business or investment use of the property can be depreciated. Free federal and state taxes Your original basis in property is adjusted (increased or decreased) by certain events. Free federal and state taxes For example, if you make improvements to the property, increase your basis. Free federal and state taxes If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Free federal and state taxes Keep accurate records of all items that affect the basis of your assets. Free federal and state taxes For information on keeping records, see chapter 1. Free federal and state taxes Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Free federal and state taxes Cost Basis The basis of property you buy is usually its cost. Free federal and state taxes Cost is the amount you pay in cash, debt obligations, other property, or services. Free federal and state taxes Your cost includes amounts you pay for sales tax, freight, installation, and testing. Free federal and state taxes The basis of real estate and business assets will include other items, discussed later. Free federal and state taxes Basis generally does not include interest payments. Free federal and state taxes However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Free federal and state taxes You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Free federal and state taxes Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Free federal and state taxes Loans with low or no interest. Free federal and state taxes   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Free federal and state taxes You generally have unstated interest if your interest rate is less than the applicable federal rate. Free federal and state taxes See the discussion of unstated interest in Publication 537, Installment Sales. Free federal and state taxes Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Free federal and state taxes If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Free federal and state taxes Some of these expenses are discussed next. Free federal and state taxes Lump sum purchase. Free federal and state taxes   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Free federal and state taxes Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Free federal and state taxes Figure the basis of each asset by multiplying the lump sum by a fraction. Free federal and state taxes The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Free federal and state taxes Fair market value (FMV). Free federal and state taxes   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Free federal and state taxes Sales of similar property on or about the same date may help in figuring the FMV of the property. Free federal and state taxes If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Free federal and state taxes Real estate taxes. Free federal and state taxes   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Free federal and state taxes   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Free federal and state taxes Whether or not you reimburse the seller, do not include that amount in the basis of your property. Free federal and state taxes Settlement costs. Free federal and state taxes   Your basis includes the settlement fees and closing costs for buying the property. Free federal and state taxes See Publication 551 for a detailed list of items you can and cannot include in basis. Free federal and state taxes   Do not include fees and costs for getting a loan on the property. Free federal and state taxes Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free federal and state taxes Points. Free federal and state taxes   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Free federal and state taxes You may be able to deduct the points currently or over the term of the loan. Free federal and state taxes For more information about deducting points, see Points in chapter 4 of Publication 535. Free federal and state taxes Assumption of a mortgage. Free federal and state taxes   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Free federal and state taxes Example. Free federal and state taxes If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Free federal and state taxes Constructing assets. Free federal and state taxes   If you build property or have assets built for you, your expenses for this construction are part of your basis. Free federal and state taxes Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Free federal and state taxes   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Free federal and state taxes You must capitalize them (include them in the asset's basis). Free federal and state taxes Employee wages paid for the construction work, reduced by any employment credits allowed. Free federal and state taxes Depreciation on equipment you own while it is used in the construction. Free federal and state taxes Operating and maintenance costs for equipment used in the construction. Free federal and state taxes The cost of business supplies and materials used in the construction. Free federal and state taxes    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Free federal and state taxes Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Free federal and state taxes To determine the basis of these assets or separate items, there must be an allocation of basis. Free federal and state taxes Group of assets acquired. Free federal and state taxes   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Free federal and state taxes Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Free federal and state taxes You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Free federal and state taxes If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Free federal and state taxes Farming business acquired. Free federal and state taxes   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Free federal and state taxes Generally, reduce the purchase price by any cash received. Free federal and state taxes Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Free federal and state taxes See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Free federal and state taxes Transplanted embryo. Free federal and state taxes   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Free federal and state taxes Allocate the rest of the purchase price to the basis of the calf. Free federal and state taxes Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Free federal and state taxes Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Free federal and state taxes You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free federal and state taxes Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Free federal and state taxes However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Free federal and state taxes You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Free federal and state taxes You are not subject to the uniform capitalization rules if the property is produced for personal use. Free federal and state taxes In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Free federal and state taxes Plants. Free federal and state taxes   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Free federal and state taxes Animals. Free federal and state taxes   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Free federal and state taxes The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Free federal and state taxes Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Free federal and state taxes For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Free federal and state taxes For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Free federal and state taxes Exceptions. Free federal and state taxes   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Free federal and state taxes   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Free federal and state taxes See Accrual Method Required under Accounting Methods in chapter 2. Free federal and state taxes   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Free federal and state taxes If you make this election, special rules apply. Free federal and state taxes This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Free federal and state taxes This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Free federal and state taxes    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Free federal and state taxes See chapter 7, for additional information on depreciation. Free federal and state taxes Example. Free federal and state taxes You grow trees that have a preproductive period of more than 2 years. Free federal and state taxes The trees produce an annual crop. Free federal and state taxes You are an individual and the uniform capitalization rules apply to your farming business. Free federal and state taxes You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Free federal and state taxes You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Free federal and state taxes Preproductive period of more than 2 years. Free federal and state taxes   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Free federal and state taxes Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Free federal and state taxes Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Free federal and state taxes More information. Free federal and state taxes   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Free federal and state taxes 263A-4. Free federal and state taxes Table 6-1. Free federal and state taxes Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Free federal and state taxes Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Free federal and state taxes The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Free federal and state taxes Increases to Basis Increase the basis of any property by all items properly added to a capital account. Free federal and state taxes These include the cost of any improvements having a useful life of more than 1 year. Free federal and state taxes The following costs increase the basis of property. Free federal and state taxes The cost of extending utility service lines to property. Free federal and state taxes Legal fees, such as the cost of defending and perfecting title. Free federal and state taxes Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Free federal and state taxes Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Free federal and state taxes Do not deduct these expenses as taxes. Free federal and state taxes However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Free federal and state taxes If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Free federal and state taxes See chapter 7. Free federal and state taxes Deducting vs. Free federal and state taxes capitalizing costs. Free federal and state taxes   Do not add to your basis costs you can deduct as current expenses. Free federal and state taxes For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Free federal and state taxes However, you can elect either to deduct or to capitalize certain other costs. Free federal and state taxes See chapter 7 in Publication 535. Free federal and state taxes Decreases to Basis The following are some items that reduce the basis of property. Free federal and state taxes Section 179 deduction. Free federal and state taxes Deductions previously allowed or allowable for amortization, depreciation, and depletion. Free federal and state taxes Alternative motor vehicle credit. Free federal and state taxes See Form 8910. Free federal and state taxes Alternative fuel vehicle refueling property credit. Free federal and state taxes See Form 8911. Free federal and state taxes Residential energy efficient property credits. Free federal and state taxes See Form 5695. Free federal and state taxes Investment credit (part or all) taken. Free federal and state taxes Casualty and theft losses and insurance reimbursements. Free federal and state taxes Payments you receive for granting an easement. Free federal and state taxes Exclusion from income of subsidies for energy conservation measures. Free federal and state taxes Certain canceled debt excluded from income. Free federal and state taxes Rebates from a manufacturer or seller. Free federal and state taxes Patronage dividends received from a cooperative association as a result of a purchase of property. Free federal and state taxes See Patronage Dividends in chapter 3. Free federal and state taxes Gas-guzzler tax. Free federal and state taxes See Form 6197. Free federal and state taxes Some of these items are discussed next. Free federal and state taxes For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Free federal and state taxes Depreciation and section 179 deduction. Free federal and state taxes   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Free federal and state taxes For more information on these deductions, see chapter 7. Free federal and state taxes Section 179 deduction. Free federal and state taxes   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Free federal and state taxes Depreciation. Free federal and state taxes   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Free federal and state taxes If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Free federal and state taxes If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Free federal and state taxes   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Free federal and state taxes   See chapter 7 for information on figuring the depreciation you should have claimed. Free federal and state taxes   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Free federal and state taxes Casualty and theft losses. Free federal and state taxes   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Free federal and state taxes Also, decrease it by any deductible loss not covered by insurance. Free federal and state taxes See chapter 11 for information about figuring your casualty or theft loss. Free federal and state taxes   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Free federal and state taxes To make this determination, compare the repaired property to the property before the casualty. Free federal and state taxes Easements. Free federal and state taxes   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Free federal and state taxes It reduces the basis of the affected part of the property. Free federal and state taxes If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Free federal and state taxes See Easements and rights-of-way in chapter 3. Free federal and state taxes Exclusion from income of subsidies for energy conservation measures. Free federal and state taxes   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Free federal and state taxes Reduce the basis of the property by the excluded amount. Free federal and state taxes Canceled debt excluded from income. Free federal and state taxes   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Free federal and state taxes A debt includes any indebtedness for which you are liable or which attaches to property you hold. Free federal and state taxes   You can exclude your canceled debt from income if the debt is any of the following. Free federal and state taxes Debt canceled in a bankruptcy case or when you are insolvent. Free federal and state taxes Qualified farm debt. Free federal and state taxes Qualified real property business debt (provided you are not a C corporation). Free federal and state taxes Qualified principal residence indebtedness. Free federal and state taxes Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Free federal and state taxes If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Free federal and state taxes If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Free federal and state taxes   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Free federal and state taxes For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Free federal and state taxes For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Free federal and state taxes For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Free federal and state taxes Basis Other Than Cost There are times when you cannot use cost as basis. Free federal and state taxes In these situations, the fair market value or the adjusted basis of property may be used. Free federal and state taxes Examples are discussed next. Free federal and state taxes Property changed from personal to business or rental use. Free federal and state taxes   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Free federal and state taxes An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Free federal and state taxes   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Free federal and state taxes   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Free federal and state taxes The basis for figuring a gain is your adjusted basis in the property when you sell the property. Free federal and state taxes Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Free federal and state taxes Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Free federal and state taxes Property received for services. Free federal and state taxes   If you receive property for services, include the property's FMV in income. Free federal and state taxes The amount you include in income becomes your basis. Free federal and state taxes If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Free federal and state taxes Example. Free federal and state taxes George Smith is an accountant and also operates a farming business. Free federal and state taxes George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Free federal and state taxes The accounting work and the cow are each worth $1,500. Free federal and state taxes George must include $1,500 in income for his accounting services. Free federal and state taxes George's basis in the cow is $1,500. Free federal and state taxes Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Free federal and state taxes A taxable gain or deductible loss also is known as a recognized gain or loss. Free federal and state taxes A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Free federal and state taxes If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Free federal and state taxes Example. Free federal and state taxes You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Free federal and state taxes You must report a taxable gain of $4,000 for the land. Free federal and state taxes The tractor has a basis of $6,000. Free federal and state taxes Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Free federal and state taxes Similar or related property. Free federal and state taxes   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Free federal and state taxes However, make the following adjustments. Free federal and state taxes Decrease the basis by the following amounts. Free federal and state taxes Any loss you recognize on the involuntary conversion. Free federal and state taxes Any money you receive that you do not spend on similar property. Free federal and state taxes Increase the basis by the following amounts. Free federal and state taxes Any gain you recognize on the involuntary conversion. Free federal and state taxes Any cost of acquiring the replacement property. Free federal and state taxes Money or property not similar or related. Free federal and state taxes   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Free federal and state taxes Allocating the basis. Free federal and state taxes   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Free federal and state taxes Basis for depreciation. Free federal and state taxes   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Free federal and state taxes For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Free federal and state taxes For more information about involuntary conversions, see chapter 11. Free federal and state taxes Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Free federal and state taxes A nontaxable gain or loss also is known as an unrecognized gain or loss. Free federal and state taxes If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Free federal and state taxes Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free federal and state taxes For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Free federal and state taxes There must also be an exchange of like-kind property. Free federal and state taxes For more information, see Like-Kind Exchanges in  chapter 8. Free federal and state taxes The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Free federal and state taxes Example 1. Free federal and state taxes You traded a truck you used in your farming business for a new smaller truck to use in farming. Free federal and state taxes The adjusted basis of the old truck was $10,000. Free federal and state taxes The FMV of the new truck is $30,000. Free federal and state taxes Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Free federal and state taxes Example 2. Free federal and state taxes You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Free federal and state taxes You use both the field cultivator and the planter in your farming business. Free federal and state taxes The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Free federal and state taxes   Exchange expenses generally are the closing costs that you pay. Free federal and state taxes They include such items as brokerage commissions, attorney fees, and deed preparation fees. Free federal and state taxes Add them to the basis of the like-kind property you receive. Free federal and state taxes Property plus cash. Free federal and state taxes   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Free federal and state taxes Example. Free federal and state taxes You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Free federal and state taxes Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Free federal and state taxes Special rules for related persons. Free federal and state taxes   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Free federal and state taxes Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Free federal and state taxes Each person reports it on the tax return filed for the year in which the later disposition occurred. Free federal and state taxes If this rule applies, the basis of the property received in the original exchange will be its FMV. Free federal and state taxes For more information, see chapter 8. Free federal and state taxes Exchange of business property. Free federal and state taxes   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Free federal and state taxes For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Free federal and state taxes Basis for depreciation. Free federal and state taxes   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Free federal and state taxes For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Free federal and state taxes Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Free federal and state taxes The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Free federal and state taxes Decrease the basis by the following amounts. Free federal and state taxes Any money you receive. Free federal and state taxes Any loss you recognize on the exchange. Free federal and state taxes Increase the basis by the following amounts. Free federal and state taxes Any additional costs you incur. Free federal and state taxes Any gain you recognize on the exchange. Free federal and state taxes If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Free federal and state taxes Example 1. Free federal and state taxes You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Free federal and state taxes You realize a gain of $40,000. Free federal and state taxes This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Free federal and state taxes Include your gain in income (recognize gain) only to the extent of the cash received. Free federal and state taxes Your basis in the land you received is figured as follows. Free federal and state taxes Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Free federal and state taxes You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Free federal and state taxes You realize a gain of $7,250. Free federal and state taxes This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Free federal and state taxes You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Free federal and state taxes Your basis in the truck you received is figured as follows. Free federal and state taxes Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Free federal and state taxes   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Free federal and state taxes The rest is the basis of the like-kind property. Free federal and state taxes Example. Free federal and state taxes You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Free federal and state taxes You also received $1,000 cash and a truck that had an FMV of $3,000. Free federal and state taxes The truck is unlike property. Free federal and state taxes You realized a gain of $1,500. Free federal and state taxes This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Free federal and state taxes You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Free federal and state taxes Your basis in the properties you received is figured as follows. Free federal and state taxes Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Free federal and state taxes This is the truck's FMV. Free federal and state taxes The rest ($12,500) is the basis of the tractor. Free federal and state taxes Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Free federal and state taxes Example. Free federal and state taxes You used a tractor on your farm for 3 years. Free federal and state taxes Its adjusted basis is $22,000 and its FMV is $40,000. Free federal and state taxes You are interested in a new tractor, which sells for $60,000. Free federal and state taxes Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Free federal and state taxes Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Free federal and state taxes However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Free federal and state taxes Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Free federal and state taxes Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Free federal and state taxes Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Free federal and state taxes You also must know its FMV at the time it was given to you and any gift tax paid on it. Free federal and state taxes FMV equal to or greater than donor's adjusted basis. Free federal and state taxes   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Free federal and state taxes Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Free federal and state taxes   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Free federal and state taxes See Adjusted Basis , earlier. Free federal and state taxes   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Free federal and state taxes Figure the increase by multiplying the gift tax paid by the following fraction. Free federal and state taxes Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Free federal and state taxes The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free federal and state taxes Example. Free federal and state taxes In 2013, you received a gift of property from your mother that had an FMV of $50,000. Free federal and state taxes Her adjusted basis was $20,000. Free federal and state taxes The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Free federal and state taxes She paid a gift tax of $7,320. Free federal and state taxes Your basis, $26,076, is figured as follows. Free federal and state taxes Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Free federal and state taxes 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Free federal and state taxes If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Free federal and state taxes However, your basis cannot exceed the FMV of the gift when it was given to you. Free federal and state taxes FMV less than donor's adjusted basis. Free federal and state taxes   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Free federal and state taxes Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Free federal and state taxes Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Free federal and state taxes (See Adjusted Basis , earlier. Free federal and state taxes )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Free federal and state taxes Example. Free federal and state taxes You received farmland as a gift from your parents when they retired from farming. Free federal and state taxes At the time of the gift, the land had an FMV of $80,000. Free federal and state taxes Your parents' adjusted basis was $100,000. Free federal and state taxes After you received the land, no events occurred that would increase or decrease your basis. Free federal and state taxes If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Free federal and state taxes If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Free federal and state taxes If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Free federal and state taxes For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Free federal and state taxes If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Free federal and state taxes Business property. Free federal and state taxes   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Free federal and state taxes Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Free federal and state taxes The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Free federal and state taxes However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Free federal and state taxes The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Free federal and state taxes For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Free federal and state taxes Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Free federal and state taxes If a federal estate return is filed, you can use its appraised value. Free federal and state taxes The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Free federal and state taxes For information on the alternate valuation, see the Instructions for Form 706. Free federal and state taxes The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Free federal and state taxes If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Free federal and state taxes Special-use valuation method. Free federal and state taxes   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Free federal and state taxes If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Free federal and state taxes If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Free federal and state taxes The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Free federal and state taxes   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Free federal and state taxes Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Free federal and state taxes Figure all FMVs without regard to the special-use valuation. Free federal and state taxes   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Free federal and state taxes This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Free federal and state taxes The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Free federal and state taxes   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Free federal and state taxes To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Free federal and state taxes If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Free federal and state taxes The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Free federal and state taxes   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Free federal and state taxes   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Free federal and state taxes Property inherited from a decedent who died in 2010. Free federal and state taxes   If you inherited property from a decedent who died in 2010, different rules may apply. Free federal and state taxes See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Free federal and state taxes Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Free federal and state taxes Partner's basis. Free federal and state taxes   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Free federal and state taxes However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Free federal and state taxes For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Free federal and state taxes Shareholder's basis. Free federal and state taxes   The basis of property distributed by a corporation to a shareholder is its fair market value. Free federal and state taxes For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 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The IRS is taking action to protect taxpayers from identity theft and helping victims of tax-related identity theft

Over the past several years, the IRS has taken numerous steps to combat identity theft and protect taxpayers. This is a top priority for the IRS. We have taken actions to be better prepared in both fraud prevention and victim assistance, and we are continuing our efforts in these areas.

On the prevention side, this means putting in place new processes for handling tax returns, new compliance filters to detect fraud, new initiatives to partner with stakeholders and a continued commitment to investigate the criminals who perpetrate these crimes.

For victim assistance, the IRS is working to speed up case resolution, provide more training for our employees who assist victims of identity theft, and step up outreach to and education of taxpayers so they can prevent and resolve tax-related identity theft issues quickly.

The IRS has designed various new identity theft screening filters that will improve our ability to spot false returns before they are processed. Once a tax return is flagged, we will correspond with the sender before further processing the tax return to make sure we have the right taxpayer. Under an expanded pilot initiative, a group of victims with previously confirmed cases of identity theft will go through a supplementary verification process, which will give us an additional tool to help prevent further identity theft and detect fraud.

The identity theft landscape is constantly changing, as identity thieves continue to create new ways of stealing personal information and using it for their gain. The IRS is firmly committed to working with taxpayers to take care of these problems as quickly as possible.

 

 


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Page Last Reviewed or Updated: 06-Dec-2013

The Free Federal And State Taxes

Free federal and state taxes Publication 575 - Main Content Table of Contents General InformationPension. Free federal and state taxes Annuity. Free federal and state taxes Qualified employee plan. Free federal and state taxes Qualified employee annuity. Free federal and state taxes Designated Roth account. Free federal and state taxes Tax-sheltered annuity plan. Free federal and state taxes Fixed-period annuities. Free federal and state taxes Annuities for a single life. Free federal and state taxes Joint and survivor annuities. Free federal and state taxes Variable annuities. Free federal and state taxes Disability pensions. Free federal and state taxes Variable Annuities Section 457 Deferred Compensation Plans Disability Pensions Insurance Premiums for Retired Public Safety Officers Railroad Retirement Benefits Withholding Tax and Estimated Tax Cost (Investment in the Contract)Foreign employment contributions while a nonresident alien. Free federal and state taxes Taxation of Periodic PaymentsPeriod of participation. Free federal and state taxes Fully Taxable Payments Partly Taxable Payments Taxation of Nonperiodic PaymentsFiguring the Taxable Amount Loans Treated as Distributions Transfers of Annuity Contracts Lump-Sum Distributions RolloversExceptions. Free federal and state taxes No tax withheld. Free federal and state taxes Partial rollovers. Free federal and state taxes Frozen deposits. Free federal and state taxes Reasonable period of time. Free federal and state taxes 20% Mandatory withholding. Free federal and state taxes How to report. Free federal and state taxes How to report. Free federal and state taxes Special rule for Roth IRAs and designated Roth accounts. Free federal and state taxes Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and BeneficiariesGuaranteed payments. Free federal and state taxes How To Get Tax HelpLow Income Taxpayer Clinics General Information Definitions. Free federal and state taxes   Some of the terms used in this publication are defined in the following paragraphs. Free federal and state taxes Pension. Free federal and state taxes   A pension is generally a series of definitely determinable payments made to you after you retire from work. Free federal and state taxes Pension payments are made regularly and are based on such factors as years of service and prior compensation. Free federal and state taxes Annuity. Free federal and state taxes   An annuity is a series of payments under a contract made at regular intervals over a period of more than one full year. Free federal and state taxes They can be either fixed (under which you receive a definite amount) or variable (not fixed). Free federal and state taxes You can buy the contract alone or with the help of your employer. Free federal and state taxes Qualified employee plan. Free federal and state taxes   A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries and that meets Internal Revenue Code requirements. Free federal and state taxes It qualifies for special tax benefits, such as tax deferral for employer contributions and capital gain treatment or the 10-year tax option for lump-sum distributions (if participants qualify). Free federal and state taxes To determine whether your plan is a qualified plan, check with your employer or the plan administrator. Free federal and state taxes Qualified employee annuity. Free federal and state taxes   A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Free federal and state taxes Designated Roth account. Free federal and state taxes   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Free federal and state taxes Elective deferrals that are designated as Roth contributions are included in your income. Free federal and state taxes However, qualified distributions (explained later) are not included in your income. Free federal and state taxes You should check with your plan administrator to determine if your plan will accept designated Roth contributions. Free federal and state taxes Tax-sheltered annuity plan. Free federal and state taxes   A tax-sheltered annuity plan (often referred to as a 403(b) plan or a tax-deferred annuity plan) is a retirement plan for employees of public schools and certain tax-exempt organizations. Free federal and state taxes Generally, a tax-sheltered annuity plan provides retirement benefits by purchasing annuity contracts for its participants. Free federal and state taxes Types of pensions and annuities. Free federal and state taxes   Pensions and annuities include the following types. Free federal and state taxes Fixed-period annuities. Free federal and state taxes   You receive definite amounts at regular intervals for a specified length of time. Free federal and state taxes Annuities for a single life. Free federal and state taxes   You receive definite amounts at regular intervals for life. Free federal and state taxes The payments end at death. Free federal and state taxes Joint and survivor annuities. Free federal and state taxes   The first annuitant receives a definite amount at regular intervals for life. Free federal and state taxes After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Free federal and state taxes The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Free federal and state taxes Variable annuities. Free federal and state taxes   You receive payments that may vary in amount for a specified length of time or for life. Free federal and state taxes The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds, cost-of-living indexes, or earnings from a mutual fund. Free federal and state taxes Disability pensions. Free federal and state taxes   You receive disability payments because you retired on disability and have not reached minimum retirement age. Free federal and state taxes More than one program. Free federal and state taxes   You may receive employee plan benefits from more than one program under a single trust or plan of your employer. Free federal and state taxes If you participate in more than one program, you may have to treat each as a separate pension or annuity contract, depending upon the facts in each case. Free federal and state taxes Also, you may be considered to have received more than one pension or annuity. Free federal and state taxes Your former employer or the plan administrator should be able to tell you if you have more than one contract. Free federal and state taxes Example. Free federal and state taxes Your employer set up a noncontributory profit-sharing plan for its employees. Free federal and state taxes The plan provides that the amount held in the account of each participant will be paid when that participant retires. Free federal and state taxes Your employer also set up a contributory defined benefit pension plan for its employees providing for the payment of a lifetime pension to each participant after retirement. Free federal and state taxes The amount of any distribution from the profit-sharing plan depends on the contributions (including allocated forfeitures) made for the participant and the earnings from those contributions. Free federal and state taxes Under the pension plan, however, a formula determines the amount of the pension benefits. Free federal and state taxes The amount of contributions is the amount necessary to provide that pension. Free federal and state taxes Each plan is a separate program and a separate contract. Free federal and state taxes If you get benefits from these plans, you must account for each separately, even though the benefits from both may be included in the same check. Free federal and state taxes Distributions from a designated Roth account are treated separately from other distributions from the plan. Free federal and state taxes Qualified domestic relations order (QDRO). Free federal and state taxes   A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a retirement plan. Free federal and state taxes The QDRO must contain certain specific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant's benefits to be paid to each alternate payee. Free federal and state taxes A QDRO may not award an amount or form of benefit that is not available under the plan. Free federal and state taxes   A spouse or former spouse who receives part of the benefits from a retirement plan under a QDRO reports the payments received as if he or she were a plan participant. Free federal and state taxes The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. Free federal and state taxes The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. Free federal and state taxes The denominator is the present value of all benefits payable to the participant. Free federal and state taxes   A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant. Free federal and state taxes Variable Annuities The tax rules in this publication apply both to annuities that provide fixed payments and to annuities that provide payments that vary in amount based on investment results or other factors. Free federal and state taxes For example, they apply to commercial variable annuity contracts, whether bought by an employee retirement plan for its participants or bought directly from the issuer by an individual investor. Free federal and state taxes Under these contracts, the owner can generally allocate the purchase payments among several types of investment portfolios or mutual funds and the contract value is determined by the performance of those investments. Free federal and state taxes The earnings are not taxed until distributed either in a withdrawal or in annuity payments. Free federal and state taxes The taxable part of a distribution is treated as ordinary income. Free federal and state taxes Net investment income tax. Free federal and state taxes   Beginning in 2013, annuities under a nonqualified plan are included in calculating your net investment income for the net investment income tax (NIIT). Free federal and state taxes For information see the Instructions for Form 8960, Net Investment Income Tax — Individuals, Estates and Trusts. Free federal and state taxes For information on the tax treatment of a transfer or exchange of a variable annuity contract, see Transfers of Annuity Contracts under Taxation of Nonperiodic Payments, later. Free federal and state taxes Withdrawals. Free federal and state taxes   If you withdraw funds before your annuity starting date and your annuity is under a qualified retirement plan, a ratable part of the amount withdrawn is tax free. Free federal and state taxes The tax-free part is based on the ratio of your cost (investment in the contract) to your account balance under the plan. Free federal and state taxes   If your annuity is under a nonqualified plan (including a contract you bought directly from the issuer), the amount withdrawn is allocated first to earnings (the taxable part) and then to your cost (the tax-free part). Free federal and state taxes However, if you bought your annuity contract before August 14, 1982, a different allocation applies to the investment before that date and the earnings on that investment. Free federal and state taxes To the extent the amount withdrawn does not exceed that investment and earnings, it is allocated first to your cost (the tax-free part) and then to earnings (the taxable part). Free federal and state taxes   If you withdraw funds (other than as an annuity) on or after your annuity starting date, the entire amount withdrawn is generally taxable. Free federal and state taxes   The amount you receive in a full surrender of your annuity contract at any time is tax free to the extent of any cost that you have not previously recovered tax free. Free federal and state taxes The rest is taxable. Free federal and state taxes   For more information on the tax treatment of withdrawals, see Taxation of Nonperiodic Payments , later. Free federal and state taxes If you withdraw funds from your annuity before you reach age 59½, also see Tax on Early Distributions under Special Additional Taxes, later. Free federal and state taxes Annuity payments. Free federal and state taxes   If you receive annuity payments under a variable annuity plan or contract, you recover your cost tax free under either the Simplified Method or the General Rule, as explained under Taxation of Periodic Payments , later. Free federal and state taxes For a variable annuity paid under a qualified plan, you generally must use the Simplified Method. Free federal and state taxes For a variable annuity paid under a nonqualified plan (including a contract you bought directly from the issuer), you must use a special computation under the General Rule. Free federal and state taxes For more information, see Variable annuities in Publication 939 under Computation Under the General Rule. Free federal and state taxes Death benefits. Free federal and state taxes    If you receive a single-sum distribution from a variable annuity contract because of the death of the owner or annuitant, the distribution is generally taxable only to the extent it is more than the unrecovered cost of the contract. Free federal and state taxes If you choose to receive an annuity, the payments are subject to tax as described above. Free federal and state taxes If the contract provides a joint and survivor annuity and the primary annuitant had received annuity payments before death, you figure the tax-free part of annuity payments you receive as the survivor in the same way the primary annuitant did. Free federal and state taxes See Survivors and Beneficiaries , later. Free federal and state taxes Section 457 Deferred Compensation Plans If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Free federal and state taxes If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Free federal and state taxes You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Free federal and state taxes You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Free federal and state taxes Your 457(b) plan may have a designated Roth account option. Free federal and state taxes If so, you may be able to roll over amounts to the designated Roth account or make contributions. Free federal and state taxes Elective deferrals to a designated Roth account are included in your income. Free federal and state taxes Qualified distributions (explained later) are not included in your income. Free federal and state taxes See the Designated Roth accounts discussion under Taxation of Periodic Payments, later. Free federal and state taxes This publication covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Free federal and state taxes For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525. Free federal and state taxes Is your plan eligible?   To find out if your plan is an eligible plan, check with your employer. Free federal and state taxes Plans that are not eligible section 457 plans include the following: Bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plans. Free federal and state taxes Nonelective deferred compensation plans for nonemployees (independent contractors). Free federal and state taxes Deferred compensation plans maintained by churches. Free federal and state taxes Length of service award plans for bona fide volunteer firefighters and emergency medical personnel. Free federal and state taxes An exception applies if the total amount paid to a volunteer exceeds $3,000 for any year of service. Free federal and state taxes Disability Pensions If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Free federal and state taxes You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Free federal and state taxes Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Free federal and state taxes You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Free federal and state taxes For information on this credit, see Publication 524. Free federal and state taxes Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Free federal and state taxes Report the payments on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. Free federal and state taxes Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Free federal and state taxes For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Free federal and state taxes Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. Free federal and state taxes The premiums can be for coverage for you, your spouse, or dependents. Free federal and state taxes The distribution must be made directly from the plan to the insurance provider. Free federal and state taxes You can exclude from income the smaller of the amount of the insurance premiums or $3,000. Free federal and state taxes You can only make this election for amounts that would otherwise be included in your income. Free federal and state taxes The amount excluded from your income cannot be used to claim a medical expense deduction. Free federal and state taxes An eligible retirement plan is a governmental plan that is: a qualified trust, a section 403(a) plan, a section 403(b) annuity, or a section 457(b) plan. Free federal and state taxes If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. Free federal and state taxes The amount shown in box 2a of Form 1099-R does not reflect this exclusion. Free federal and state taxes Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Free federal and state taxes Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Free federal and state taxes Enter “PSO” next to the appropriate line on which you report the taxable amount. Free federal and state taxes If you are retired on disability and reporting your disability pension on line 7 of Form 1040 or Form 1040A, or line 8 of Form 1040NR, include only the taxable amount on that line and enter “PSO” and the amount excluded on the dotted line next to the applicable line. Free federal and state taxes Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. Free federal and state taxes These categories are treated differently for income tax purposes. Free federal and state taxes The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. Free federal and state taxes This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and you treat it for tax purposes like social security benefits. Free federal and state taxes If you received, repaid, or had tax withheld from the SSEB portion of tier 1 benefits during 2013, you will receive Form RRB-1099, Payments by the Railroad Retirement Board (or Form RRB-1042S, Statement for Nonresident Alien Recipients of Payments by the Railroad Retirement Board, if you are a nonresident alien) from the U. Free federal and state taxes S. Free federal and state taxes Railroad Retirement Board (RRB). Free federal and state taxes For more information about the tax treatment of the SSEB portion of tier 1 benefits and Forms RRB-1099 and RRB-1042S, see Publication 915. Free federal and state taxes The second category contains the rest of the tier 1 railroad retirement benefits, called the non-social security equivalent benefit (NSSEB). Free federal and state taxes It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Free federal and state taxes Treat this category of benefits, shown on Form RRB-1099-R, as an amount received from a qualified employee plan. Free federal and state taxes This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Free federal and state taxes (The NSSEB and tier 2 benefits, less certain repayments, are combined into one amount called the Contributory Amount Paid on Form RRB-1099-R. Free federal and state taxes ) Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. Free federal and state taxes See Taxation of Periodic Payments , later, for information on how to report your benefits and how to recover the employee contributions tax free. Free federal and state taxes Form RRB-1099-R is used for U. Free federal and state taxes S. Free federal and state taxes citizens, resident aliens, and nonresident aliens. Free federal and state taxes Nonresident aliens. Free federal and state taxes   A nonresident alien is an individual who is not a citizen or a resident alien of the United States. Free federal and state taxes Nonresident aliens are subject to mandatory U. Free federal and state taxes S. Free federal and state taxes tax withholding unless exempt under a tax treaty between the United States and their country of legal residency. Free federal and state taxes A tax treaty exemption may reduce or eliminate tax withholding from railroad retirement benefits. Free federal and state taxes See Tax withholding next for more information. Free federal and state taxes   If you are a nonresident alien and your tax withholding rate changed or your country of legal residence changed during the year, you may receive more than one Form RRB-1042S or Form RRB-1099-R. Free federal and state taxes To determine your total benefits paid or repaid and total tax withheld for the year, you should add the amounts shown on all forms you received for that year. Free federal and state taxes For information on filing requirements for aliens, see Publication 519, U. Free federal and state taxes S. Free federal and state taxes Tax Guide for Aliens. Free federal and state taxes For information on tax treaties between the United States and other countries that may reduce or eliminate U. Free federal and state taxes S. Free federal and state taxes tax on your benefits, see Publication 901, U. Free federal and state taxes S. Free federal and state taxes Tax Treaties. Free federal and state taxes Tax withholding. Free federal and state taxes   To request or change your income tax withholding from SSEB payments, U. Free federal and state taxes S. Free federal and state taxes citizens should contact the IRS for Form W-4V, Voluntary Withholding Request, and file it with the RRB. Free federal and state taxes To elect, revoke, or change your income tax withholding from NSSEB, tier 2, VDB, and supplemental annuity payments received, use Form RRB W-4P, Withholding Certificate for Railroad Retirement Payments. Free federal and state taxes If you are a nonresident alien or a U. Free federal and state taxes S. Free federal and state taxes citizen living abroad, you should provide Form RRB-1001, Nonresident Questionnaire, to the RRB to furnish citizenship and residency information and to claim any treaty exemption from U. Free federal and state taxes S. Free federal and state taxes tax withholding. Free federal and state taxes Nonresident U. Free federal and state taxes S. Free federal and state taxes citizens cannot elect to be exempt from withholding on payments delivered outside of the U. Free federal and state taxes S. Free federal and state taxes Help from the RRB. Free federal and state taxes   To request an RRB form or to get help with questions about an RRB benefit, you should contact your nearest RRB field office if you reside in the United States (call 1-877-772-5772 for the nearest field office) or U. Free federal and state taxes S. Free federal and state taxes consulate/Embassy if you reside outside the United States. Free federal and state taxes You can visit the RRB on the Internet at www. Free federal and state taxes rrb. Free federal and state taxes gov. Free federal and state taxes Form RRB-1099-R. Free federal and state taxes   The following discussion explains the items shown on Form RRB-1099-R. Free federal and state taxes The amounts shown on this form are before any deduction for: Federal income tax withholding, Medicare premiums, Legal process garnishment payments, Recovery of a prior year overpayment of an NSSEB, tier 2 benefit, VDB, or supplemental annuity benefit, or Recovery of Railroad Unemployment Insurance Act benefits received while awaiting payment of your railroad retirement annuity. Free federal and state taxes   The amounts shown on this form are after any offset for: Social Security benefits, Age reduction, Public Service pensions or public disability benefits, Dual railroad retirement entitlement under another RRB claim number, Work deductions, Legal process partition deductions, Actuarial adjustment, Annuity waiver, or Recovery of a current-year overpayment of NSSEB, tier 2, VDB, or supplemental annuity benefits. Free federal and state taxes   The amounts shown on Form RRB-1099-R do not reflect any special rules, such as capital gain treatment or the special 10-year tax option for lump-sum payments, or tax-free rollovers. Free federal and state taxes To determine if any of these rules apply to your benefits, see the discussions about them later. Free federal and state taxes   Generally, amounts shown on your Form RRB-1099-R are considered a normal distribution. Free federal and state taxes Use distribution code “7” if you are asked for a distribution code. Free federal and state taxes Distribution codes are not shown on Form RRB-1099-R. Free federal and state taxes   There are three copies of this form. Free federal and state taxes Copy B is to be included with your income tax return if federal income tax is withheld. Free federal and state taxes Copy C is for your own records. Free federal and state taxes Copy 2 is filed with your state, city, or local income tax return, when required. Free federal and state taxes See the illustrated Copy B (Form RRB-1099-R) above. Free federal and state taxes       Each beneficiary will receive his or her own Form RRB-1099-R. Free federal and state taxes If you receive benefits on more than one railroad retirement record, you may get more than one Form RRB-1099-R. Free federal and state taxes So that you get your form timely, make sure the RRB always has your current mailing address. Free federal and state taxes Please click here for the text description of the image. Free federal and state taxes Form RRB-1099-R Box 1—Claim Number and Payee Code. Free federal and state taxes   Your claim number is a six- or nine-digit number preceded by an alphabetical prefix. Free federal and state taxes This is the number under which the RRB paid your benefits. Free federal and state taxes Your payee code follows your claim number and is the last number in this box. Free federal and state taxes It is used by the RRB to identify you under your claim number. Free federal and state taxes In all your correspondence with the RRB, be sure to use the claim number and payee code shown in this box. Free federal and state taxes Box 2—Recipient's Identification Number. Free federal and state taxes   This is the recipient's U. Free federal and state taxes S. Free federal and state taxes taxpayer identification number. Free federal and state taxes It is the social security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN), if known, for the person or estate listed as the recipient. Free federal and state taxes If you are a resident or nonresident alien who must furnish a taxpayer identification number to the IRS and are not eligible to obtain an SSN, use Form W-7, Application for IRS Individual Taxpayer Identification Number, to apply for an ITIN. Free federal and state taxes The Instructions for Form W-7 explain how and when to apply. Free federal and state taxes Box 3—Employee Contributions. Free federal and state taxes   This is the amount of taxes withheld from the railroad employee's earnings that exceeds the amount of taxes that would have been withheld had the earnings been covered under the social security system. Free federal and state taxes This amount is the employee's cost that you use to figure the tax-free part of the NSSEB and tier 2 benefit you received (the amount shown in box 4). Free federal and state taxes (For information on how to figure the tax-free part, see Partly Taxable Payments under Taxation of Periodic Payments, later. Free federal and state taxes ) The amount shown is the total employee contribution amount, not reduced by any amounts that the RRB calculated as previously recovered. Free federal and state taxes It is the latest amount reported for 2013 and may have increased or decreased from a previous Form RRB-1099-R. Free federal and state taxes If this amount has changed, the change is retroactive. Free federal and state taxes You may need to refigure the tax-free part of your NSSEB/tier 2 benefit for 2013 and prior tax years. Free federal and state taxes If this box is blank, it means that the amount of your NSSEB and tier 2 payments shown in box 4 is fully taxable. Free federal and state taxes    If you had a previous annuity entitlement that ended and you are figuring the tax-free part of your NSSEB/tier 2 benefit for your current annuity entitlement, you should contact the RRB for confirmation of your correct employee contribution amount. Free federal and state taxes Box 4—Contributory Amount Paid. Free federal and state taxes   This is the gross amount of the NSSEB and tier 2 benefit you received in 2013, less any 2013 benefits you repaid in 2013. Free federal and state taxes (Any benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Free federal and state taxes ) This amount is the total contributory pension paid in 2013. Free federal and state taxes It may be partly taxable and partly tax free or fully taxable. Free federal and state taxes If you determine you are eligible to compute a tax-free part as explained later in Partly Taxable Payments under Taxation of Periodic Payments, use the latest reported employee contribution amount shown in box 3 as the cost. Free federal and state taxes Box 5—Vested Dual Benefit. Free federal and state taxes   This is the gross amount of vested dual benefit (VDB) payments paid in 2013, less any 2013 VDB payments you repaid in 2013. Free federal and state taxes It is fully taxable. Free federal and state taxes VDB payments you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Free federal and state taxes Note. Free federal and state taxes The amounts shown in boxes 4 and 5 may represent payments for 2013 and/or other years after 1983. Free federal and state taxes Box 6—Supplemental Annuity. Free federal and state taxes   This is the gross amount of supplemental annuity benefits paid in 2013, less any 2013 supplemental annuity benefits you repaid in 2013. Free federal and state taxes It is fully taxable. Free federal and state taxes Supplemental annuity benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Free federal and state taxes Box 7—Total Gross Paid. Free federal and state taxes   This is the sum of boxes 4, 5, and 6. Free federal and state taxes The amount represents the total pension paid in 2013. Free federal and state taxes Include this amount on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Free federal and state taxes Box 8—Repayments. Free federal and state taxes   This amount represents any NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit you repaid to the RRB in 2013 for years before 2013 or for unknown years. Free federal and state taxes The amount shown in this box has not been deducted from the amounts shown in boxes 4, 5, and 6. Free federal and state taxes It only includes repayments of benefits that were taxable to you. Free federal and state taxes This means it only includes repayments in 2013 of NSSEB benefits paid after 1985, tier 2 and VDB benefits paid after 1983, and supplemental annuity benefits paid in any year. Free federal and state taxes If you included the benefits in your income in the year you received them, you may be able to deduct the repaid amount. Free federal and state taxes For more information about repayments, see Repayment of benefits received in an earlier year , later. Free federal and state taxes    You may have repaid an overpayment of benefits by returning a payment, by making a payment, or by having an amount withheld from your railroad retirement annuity payment. Free federal and state taxes Box 9—Federal Income Tax Withheld. Free federal and state taxes   This is the total federal income tax withheld from your NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit. Free federal and state taxes Include this on your income tax return as tax withheld. Free federal and state taxes If you are a nonresident alien and your tax withholding rate and/or country of legal residence changed during 2013, you will receive more than one Form RRB-1099-R for 2013. Free federal and state taxes Determine the total amount of U. Free federal and state taxes S. Free federal and state taxes federal income tax withheld from your 2013 RRB NSSEB, tier 2, VDB, and supplemental annuity payments by adding the amounts in box 9 of all original 2013 Forms RRB-1099-R, or the latest corrected or duplicate Forms RRB-1099-R you receive. Free federal and state taxes Box 10—Rate of Tax. Free federal and state taxes   If you are taxed as a U. Free federal and state taxes S. Free federal and state taxes citizen or resident alien, this box does not apply to you. Free federal and state taxes If you are a nonresident alien, an entry in this box indicates the rate at which tax was withheld on the NSSEB, tier 2, VDB, and supplemental annuity payments that were paid to you in 2013. Free federal and state taxes If you are a nonresident alien whose tax was withheld at more than one rate during 2013, you will receive a separate Form RRB-1099-R for each rate change during 2013. Free federal and state taxes Box 11—Country. Free federal and state taxes   If you are taxed as a U. Free federal and state taxes S. Free federal and state taxes citizen or resident alien, this box does not apply to you. Free federal and state taxes If you are a nonresident alien, an entry in this box indicates the country of which you were a resident for tax purposes at the time you received railroad retirement payments in 2013. Free federal and state taxes If you are a nonresident alien who was a resident of more than one country during 2013, you will receive a separate Form RRB-1099-R for each country of residence during 2013. Free federal and state taxes Box 12—Medicare Premium Total. Free federal and state taxes   This is for information purposes only. Free federal and state taxes The amount shown in this box represents the total amount of Part B Medicare premiums deducted from your railroad retirement annuity payments in 2013. Free federal and state taxes Medicare premium refunds are not included in the Medicare total. Free federal and state taxes The Medicare total is normally shown on Form RRB-1099 (if you are a citizen or resident alien of the United States) or Form RRB-1042S (if you are a nonresident alien). Free federal and state taxes However, if Form RRB-1099 or Form RRB-1042S is not required for 2013, then this total will be shown on Form RRB-1099-R. Free federal and state taxes If your Medicare premiums were deducted from your social security benefits, paid by a third party, refunded to you, and/or you paid the premiums by direct billing, your Medicare total will not be shown in this box. Free federal and state taxes Repayment of benefits received in an earlier year. Free federal and state taxes   If you had to repay any railroad retirement benefits that you had included in your income in an earlier year because at that time you thought you had an unrestricted right to it, you can deduct the amount you repaid in the year in which you repaid it. Free federal and state taxes   If you repaid $3,000 or less in 2013, deduct it on Schedule A (Form 1040), line 23. Free federal and state taxes The 2%-of-adjusted-gross-income limit applies to this deduction. Free federal and state taxes You cannot take this deduction if you file Form 1040A. Free federal and state taxes    If you repaid more than $3,000 in 2013, you can either take a deduction for the amount repaid on Schedule A (Form 1040), line 28 or you can take a credit against your tax. Free federal and state taxes For more information, see Repayments in Publication 525. Free federal and state taxes Withholding Tax and Estimated Tax Your retirement plan distributions are subject to federal income tax withholding. Free federal and state taxes However, you can choose not to have tax withheld on payments you receive unless they are eligible rollover distributions. Free federal and state taxes (These are distributions, described later under Rollovers, that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. Free federal and state taxes ) If you choose not to have tax withheld or if you do not have enough tax withheld, you may have to make estimated tax payments. Free federal and state taxes See Estimated tax , later. Free federal and state taxes The withholding rules apply to the taxable part of payments you receive from: An employer pension, annuity, profit-sharing, or stock bonus plan, Any other deferred compensation plan, A traditional individual retirement arrangement (IRA), or A commercial annuity. Free federal and state taxes For this purpose, a commercial annuity means an annuity, endowment, or life insurance contract issued by an insurance company. Free federal and state taxes There will be no withholding on any part of a distribution where it is reasonable to believe that it will not be includible in gross income. Free federal and state taxes Choosing no withholding. Free federal and state taxes   You can choose not to have income tax withheld from retirement plan payments unless they are eligible rollover distributions. Free federal and state taxes You can make this choice on Form W-4P for periodic and nonperiodic payments. Free federal and state taxes This choice generally remains in effect until you revoke it. Free federal and state taxes   The payer will ignore your choice not to have tax withheld if: You do not give the payer your social security number (in the required manner), or The IRS notifies the payer, before the payment is made, that you gave an incorrect social security number. Free federal and state taxes   To choose not to have tax withheld, a U. Free federal and state taxes S. Free federal and state taxes citizen or resident alien must give the payer a home address in the United States or its possessions. Free federal and state taxes Without that address, the payer must withhold tax. Free federal and state taxes For example, the payer has to withhold tax if the recipient has provided a U. Free federal and state taxes S. Free federal and state taxes address for a nominee, trustee, or agent to whom the benefits are delivered, but has not provided his or her own U. Free federal and state taxes S. Free federal and state taxes home address. Free federal and state taxes   If you do not give the payer a home address in the United States or its possessions, you can choose not to have tax withheld only if you certify to the payer that you are not a U. Free federal and state taxes S. Free federal and state taxes citizen, a U. Free federal and state taxes S. Free federal and state taxes resident alien, or someone who left the country to avoid tax. Free federal and state taxes But if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. Free federal and state taxes This 30% rate will not apply if you are exempt or subject to a reduced rate by treaty. Free federal and state taxes For details, get Publication 519. Free federal and state taxes Periodic payments. Free federal and state taxes   Unless you choose no withholding, your annuity or similar periodic payments (other than eligible rollover distributions) will be treated like wages for withholding purposes. Free federal and state taxes Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Free federal and state taxes You should give the payer a completed withholding certificate (Form W-4P or a similar form provided by the payer). Free federal and state taxes If you do not, tax will be withheld as if you were married and claiming three withholding allowances. Free federal and state taxes   Tax will be withheld as if you were single and were claiming no withholding allowances if: You do not give the payer your social security number (in the required manner), or The IRS notifies the payer (before any payment is made) that you gave an incorrect social security number. Free federal and state taxes   You must file a new withholding certificate to change the amount of withholding. Free federal and state taxes Nonperiodic distributions. Free federal and state taxes    Unless you choose no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution is 10% of the distribution. Free federal and state taxes You can also ask the payer to withhold an additional amount using Form W-4P. Free federal and state taxes The part of any loan treated as a distribution (except an offset amount to repay the loan), explained later, is subject to withholding under this rule. Free federal and state taxes Eligible rollover distribution. Free federal and state taxes    If you receive an eligible rollover distribution, 20% of it generally will be withheld for income tax. Free federal and state taxes You cannot choose not to have tax withheld from an eligible rollover distribution. Free federal and state taxes However, tax will not be withheld if you have the plan administrator pay the eligible rollover distribution directly to another qualified plan or an IRA in a direct rollover. Free federal and state taxes For more information about eligible rollover distributions, see Rollovers , later. Free federal and state taxes Estimated tax. Free federal and state taxes   Your estimated tax is the total of your expected income tax, self-employment tax, and certain other taxes for the year, minus your expected credits and withheld tax. Free federal and state taxes Generally, you must make estimated tax payments for 2014 if you expect to owe at least $1,000 in tax (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your 2014 return, or 100% of the tax shown on your 2013 return. Free federal and state taxes If your adjusted gross income for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing separately), substitute 110% for 100% in (2) above. Free federal and state taxes For more information, get Publication 505, Tax Withholding and Estimated Tax. Free federal and state taxes In figuring your withholding or estimated tax, remember that a part of your monthly social security or equivalent tier 1 railroad retirement benefits may be taxable. Free federal and state taxes See Publication 915. Free federal and state taxes You can choose to have income tax withheld from those benefits. Free federal and state taxes Use Form W-4V to make this choice. Free federal and state taxes Cost (Investment in the Contract) Distributions from your pension or annuity plan may include amounts treated as a recovery of your cost (investment in the contract). Free federal and state taxes If any part of a distribution is treated as a recovery of your cost under the rules explained in this publication, that part is tax free. Free federal and state taxes Therefore, the first step in figuring how much of a distribution is taxable is to determine the cost of your pension or annuity. Free federal and state taxes In general, your cost is your net investment in the contract as of the annuity starting date (or the date of the distribution, if earlier). Free federal and state taxes To find this amount, you must first figure the total premiums, contributions, or other amounts you paid. Free federal and state taxes This includes the amounts your employer contributed that were taxable to you when paid. Free federal and state taxes (However, see Foreign employment contributions , later. Free federal and state taxes ) It does not include amounts withheld from your pay on a tax-deferred basis (money that was taken out of your gross pay before taxes were deducted). Free federal and state taxes It also does not include amounts you contributed for health and accident benefits (including any additional premiums paid for double indemnity or disability benefits). Free federal and state taxes From this total cost you must subtract the following amounts. Free federal and state taxes Any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income and that you received by the later of the annuity starting date or the date on which you received your first payment. Free federal and state taxes Any other tax-free amounts you received under the contract or plan by the later of the dates in (1). Free federal and state taxes If you must use the Simplified Method for your annuity payments, the tax-free part of any single-sum payment received in connection with the start of the annuity payments, regardless of when you received it. Free federal and state taxes (See Simplified Method , later, for information on its required use. Free federal and state taxes ) If you use the General Rule for your annuity payments, the value of the refund feature in your annuity contract. Free federal and state taxes (See General Rule , later, for information on its use. Free federal and state taxes ) Your annuity contract has a refund feature if the annuity payments are for your life (or the lives of you and your survivor) and payments in the nature of a refund of the annuity's cost will be made to your beneficiary or estate if all annuitants die before a stated amount or a stated number of payments are made. Free federal and state taxes For more information, see Publication 939. Free federal and state taxes The tax treatment of the items described in (1) through (3) is discussed later under Taxation of Nonperiodic Payments . Free federal and state taxes Form 1099-R. Free federal and state taxes If you began receiving periodic payments of a life annuity in 2013, the payer should show your total contributions to the plan in box 9b of your 2013 Form 1099-R. Free federal and state taxes Annuity starting date defined. Free federal and state taxes   Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Free federal and state taxes Example. Free federal and state taxes On January 1, you completed all your payments required under an annuity contract providing for monthly payments starting on August 1 for the period beginning July 1. Free federal and state taxes The annuity starting date is July 1. Free federal and state taxes This is the date you use in figuring the cost of the contract and selecting the appropriate number from Table 1 for line 3 of the Simplified Method Worksheet. Free federal and state taxes Designated Roth accounts. Free federal and state taxes   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Free federal and state taxes Your cost will also include any in-plan Roth rollovers you included in income. Free federal and state taxes Foreign employment contributions. Free federal and state taxes   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. Free federal and state taxes The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (not including the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) but only if the contributions would be excludible from your gross income had they been paid directly to you. Free federal and state taxes Foreign employment contributions while a nonresident alien. Free federal and state taxes   In determining your cost, special rules apply if you are a U. Free federal and state taxes S. Free federal and state taxes citizen or resident alien who received distributions in 2013 from a plan to which contributions were made while you were a nonresident alien. Free federal and state taxes Your contributions and your employer's contributions are not included in your cost if the contribution: Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed. Free federal and state taxes Taxation of Periodic Payments This section explains how the periodic payments you receive from a pension or annuity plan are taxed. Free federal and state taxes Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Free federal and state taxes These payments are also known as amounts received as an annuity. Free federal and state taxes If you receive an amount from your plan that is not a periodic payment, see Taxation of Nonperiodic Payments , later. Free federal and state taxes In general, you can recover the cost of your pension or annuity tax free over the period you are to receive the payments. Free federal and state taxes The amount of each payment that is more than the part that represents your cost is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Free federal and state taxes Designated Roth accounts. Free federal and state taxes   If you receive a qualified distribution from a designated Roth account, the distribution is not included in your gross income. Free federal and state taxes This applies to both your cost in the account and income earned on that account. Free federal and state taxes A qualified distribution is generally a distribution that is: Made after a 5-tax-year period of participation, and Made on or after the date you reach age 59½, made to a beneficiary or your estate on or after your death, or attributable to your being disabled. Free federal and state taxes   If the distribution is not a qualified distribution, the rules discussed in this section apply. Free federal and state taxes The designated Roth account is treated as a separate contract. Free federal and state taxes Period of participation. Free federal and state taxes   The 5-tax-year period of participation is the 5-tax-year period beginning with the first tax year for which the participant made a designated Roth contribution to the plan. Free federal and state taxes Therefore, for designated Roth contributions made for 2013, the first year for which a qualified distribution can be made is 2018. Free federal and state taxes   However, if a direct rollover is made to the plan from a designated Roth account under another plan, the 5-tax-year period for the recipient plan begins with the first tax year for which the participant first had designated Roth contributions made to the other plan. Free federal and state taxes   Your 401(k), 403(b), or 457(b) plan may permit you to roll over amounts from those plans to a designated Roth account within the same plan. Free federal and state taxes This is known as an in-plan Roth rollover. Free federal and state taxes For more details, see In-plan Roth rollovers , later. Free federal and state taxes Fully Taxable Payments The pension or annuity payments that you receive are fully taxable if you have no cost in the contract because any of the following situations applies to you (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Free federal and state taxes You did not pay anything or are not considered to have paid anything for your pension or annuity. Free federal and state taxes Amounts withheld from your pay on a tax-deferred basis are not considered part of the cost of the pension or annuity payment. Free federal and state taxes Your employer did not withhold contributions from your salary. Free federal and state taxes You got back all of your contributions tax free in prior years (however, see Exclusion not limited to cost under Partly Taxable Payments, later). Free federal and state taxes Report the total amount you got on Form 1040, line 16b; Form 1040A, line 12b; or on Form 1040NR, line 17b. Free federal and state taxes You should make no entry on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Free federal and state taxes Deductible voluntary employee contributions. Free federal and state taxes   Distributions you receive that are based on your accumulated deductible voluntary employee contributions are generally fully taxable in the year distributed to you. Free federal and state taxes Accumulated deductible voluntary employee contributions include net earnings on the contributions. Free federal and state taxes If distributed as part of a lump sum, they do not qualify for the 10-year tax option or capital gain treatment, explained later. Free federal and state taxes Partly Taxable Payments If you have a cost to recover from your pension or annuity plan (see Cost (Investment in the Contract) , earlier), you can exclude part of each annuity payment from income as a recovery of your cost. Free federal and state taxes This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. Free federal and state taxes The rest of each payment is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Free federal and state taxes You figure the tax-free part of the payment using one of the following methods. Free federal and state taxes Simplified Method. Free federal and state taxes You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). Free federal and state taxes You cannot use this method if your annuity is paid under a nonqualified plan. Free federal and state taxes General Rule. Free federal and state taxes You must use this method if your annuity is paid under a nonqualified plan. Free federal and state taxes You generally cannot use this method if your annuity is paid under a qualified plan. Free federal and state taxes You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Free federal and state taxes If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Free federal and state taxes Qualified plan annuity starting before November 19, 1996. Free federal and state taxes   If your annuity is paid under a qualified plan and your annuity starting date (defined earlier under Cost (Investment in the Contract) ) is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the Simplified Method or the General Rule. Free federal and state taxes If your annuity starting date is before July 2, 1986, you use the General Rule unless your annuity qualified for the Three-Year Rule. Free federal and state taxes If you used the Three-Year Rule (which was repealed for annuities starting after July 1, 1986), your annuity payments are generally now fully taxable. Free federal and state taxes Exclusion limit. Free federal and state taxes   Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years. Free federal and state taxes Once your annuity starting date is determined, it does not change. Free federal and state taxes If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Free federal and state taxes That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Free federal and state taxes Exclusion limited to cost. Free federal and state taxes   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Free federal and state taxes Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Free federal and state taxes This deduction is not subject to the 2%-of-adjusted-gross-income limit. Free federal and state taxes Example 1. Free federal and state taxes Your annuity starting date is after 1986, and you exclude $100 a month ($1,200 a year) under the Simplified Method. Free federal and state taxes The total cost of your annuity is $12,000. Free federal and state taxes Your exclusion ends when you have recovered your cost tax free, that is, after 10 years (120 months). Free federal and state taxes After that, your annuity payments are generally fully taxable. Free federal and state taxes Example 2. Free federal and state taxes The facts are the same as in Example 1, except you die (with no surviving annuitant) after the eighth year of retirement. Free federal and state taxes You have recovered tax free only $9,600 (8 × $1,200) of your cost. Free federal and state taxes An itemized deduction for your unrecovered cost of $2,400 ($12,000 – $9,600) can be taken on your final return. Free federal and state taxes Exclusion not limited to cost. Free federal and state taxes   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Free federal and state taxes If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Free federal and state taxes The total exclusion may be more than your cost. Free federal and state taxes Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Free federal and state taxes For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Free federal and state taxes For any other annuity, this number is the number of monthly annuity payments under the contract. Free federal and state taxes Who must use the Simplified Method. Free federal and state taxes   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you meet both of the following conditions. Free federal and state taxes You receive your pension or annuity payments from any of the following plans. Free federal and state taxes A qualified employee plan. Free federal and state taxes A qualified employee annuity. Free federal and state taxes A tax-sheltered annuity plan (403(b) plan). Free federal and state taxes On your annuity starting date, at least one of the following conditions applies to you. Free federal and state taxes You are under age 75. Free federal and state taxes You are entitled to less than 5 years of guaranteed payments. Free federal and state taxes Guaranteed payments. Free federal and state taxes   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Free federal and state taxes If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Free federal and state taxes Annuity starting before November 19, 1996. Free federal and state taxes   If your annuity starting date is after July 1, 1986, and before November 19, 1996, and you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. Free federal and state taxes You could have chosen to use the Simplified Method if your annuity is payable for your life (or the lives of you and your survivor annuitant) and you met both of the conditions listed earlier under Who must use the Simplified Method . Free federal and state taxes Who cannot use the Simplified Method. Free federal and state taxes   You cannot use the Simplified Method if you receive your pension or annuity from a nonqualified plan or otherwise do not meet the conditions described in the preceding discussion. Free federal and state taxes See General Rule , later. Free federal and state taxes How to use the Simplified Method. Free federal and state taxes    Complete Worksheet A in the back of this publication to figure your taxable annuity for 2013. Free federal and state taxes Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. Free federal and state taxes   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. Free federal and state taxes How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. Free federal and state taxes For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. Free federal and state taxes    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Free federal and state taxes Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Free federal and state taxes Single-life annuity. Free federal and state taxes   If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Free federal and state taxes Enter on line 3 the number shown for your age on your annuity starting date. Free federal and state taxes This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Free federal and state taxes Multiple-lives annuity. Free federal and state taxes   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Free federal and state taxes Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. Free federal and state taxes For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. Free federal and state taxes For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Free federal and state taxes Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. Free federal and state taxes   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Free federal and state taxes Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Free federal and state taxes This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Free federal and state taxes Fixed-period annuity. Free federal and state taxes   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Free federal and state taxes Line 6. Free federal and state taxes   The amount on line 6 should include all amounts that could have been recovered in prior years. Free federal and state taxes If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. Free federal and state taxes Example. Free federal and state taxes Bill Smith, age 65, began receiving retirement benefits in 2013 under a joint and survivor annuity. Free federal and state taxes Bill's annuity starting date is January 1, 2013. Free federal and state taxes The benefits are to be paid for the joint lives of Bill and his wife, Kathy, age 65. Free federal and state taxes Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Free federal and state taxes Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Free federal and state taxes Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Free federal and state taxes Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of Worksheet A in completing line 3 of the worksheet. Free federal and state taxes His completed worksheet is shown later. Free federal and state taxes Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Free federal and state taxes Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Free federal and state taxes The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Free federal and state taxes If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Free federal and state taxes This deduction is not subject to the 2%-of-adjusted-gross-income limit. Free federal and state taxes Worksheet A. Free federal and state taxes Simplified Method Worksheet for Bill Smith 1. Free federal and state taxes Enter the total pension or annuity payments received this year. Free federal and state taxes Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Free federal and state taxes $14,400 2. Free federal and state taxes Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion. Free federal and state taxes * See Cost (Investment in the Contract) , earlier 2. Free federal and state taxes 31,000   Note. Free federal and state taxes If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Free federal and state taxes Otherwise, go to line 3. Free federal and state taxes     3. Free federal and state taxes Enter the appropriate number from Table 1 below. Free federal and state taxes But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Free federal and state taxes 310 4. Free federal and state taxes Divide line 2 by the number on line 3 4. Free federal and state taxes 100 5. Free federal and state taxes Multiply line 4 by the number of months for which this year's payments were made. Free federal and state taxes If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Free federal and state taxes Otherwise, go to line 6 5. Free federal and state taxes 1,200 6. Free federal and state taxes Enter any amount previously recovered tax free in years after 1986. Free federal and state taxes This is the amount shown on line 10 of your worksheet for last year 6. Free federal and state taxes -0- 7. Free federal and state taxes Subtract line 6 from line 2 7. Free federal and state taxes 31,000 8. Free federal and state taxes Enter the smaller of line 5 or line 7 8. Free federal and state taxes 1,200 9. Free federal and state taxes Taxable amount for year. Free federal and state taxes Subtract line 8 from line 1. Free federal and state taxes Enter the result, but not less than zero. Free federal and state taxes Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Free federal and state taxes Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Free federal and state taxes If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers , earlier, before entering an amount on your tax return 9. Free federal and state taxes $13,200 10. Free federal and state taxes Was your annuity starting date before 1987? □ Yes. Free federal and state taxes STOP. Free federal and state taxes Do not complete the rest of this worksheet. Free federal and state taxes  ☑ No. Free federal and state taxes Add lines 6 and 8. Free federal and state taxes This is the amount you have recovered tax free through 2013. Free federal and state taxes You will need this number if you need to fill out this worksheet next year 10. Free federal and state taxes 1,200 11. Free federal and state taxes Balance of cost to be recovered. Free federal and state taxes Subtract line 10 from line 2. Free federal and state taxes If zero, you will not have to complete this worksheet next year. Free federal and state taxes The payments you receive next year will generally be fully taxable 11. Free federal and state taxes $29,800         * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Free federal and state taxes           Table 1 for Line 3 Above       AND your annuity starting date was—     IF the age at annuity starting date was. Free federal and state taxes . Free federal and state taxes . Free federal and state taxes BEFORE November 19, 1996, enter on line 3. Free federal and state taxes . Free federal and state taxes . Free federal and state taxes AFTER November 18, 1996, enter on line 3. Free federal and state taxes . Free federal and state taxes . Free federal and state taxes     55 or under 300 360     56-60 260 310     61-65 240 260     66-70 170 210     71 or older 120 160     Table 2 for Line 3 Above     IF the combined ages at  annuity starting date were. Free federal and state taxes . Free federal and state taxes . Free federal and state taxes THEN enter on line 3. Free federal and state taxes . Free federal and state taxes . Free federal and state taxes     110 or under   410     111-120   360     121-130   310     131-140   260     141 or older   210   Multiple annuitants. Free federal and state taxes   If you and one or more other annuitants receive payments at the same time, you exclude from each annuity payment a pro rata share of the monthly tax-free amount. Free federal and state taxes Figure your share by taking the following steps. Free federal and state taxes Complete your worksheet through line 4 to figure the monthly tax-free amount. Free federal and state taxes Divide the amount of your monthly payment by the total amount of the monthly payments to all annuitants. Free federal and state taxes Multiply the amount on line 4 of your worksheet by the amount figured in (2) above. Free federal and state taxes The result is your share of the monthly tax-free amount. Free federal and state taxes   Replace the amount on line 4 of the worksheet with the result in (3) above. Free federal and state taxes Enter that amount on line 4 of your worksheet each year. Free federal and state taxes General Rule Under the General Rule, you determine the tax-free part of each annuity payment based on the ratio of the cost of the contract to the total expected return. Free federal and state taxes Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free federal and state taxes To figure it, you must use life expectancy (actuarial) tables prescribed by the IRS. Free federal and state taxes Who must use the General Rule. Free federal and state taxes   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Free federal and state taxes Annuity starting before November 19, 1996. Free federal and state taxes   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Free federal and state taxes You also had to use it for any fixed-period annuity. Free federal and state taxes If you did not have to use the General Rule, you could have chosen to use it. Free federal and state taxes If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Free federal and state taxes   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Free federal and state taxes Who cannot use the General Rule. Free federal and state taxes   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Free federal and state taxes See Simplified Method , earlier. Free federal and state taxes More information. Free federal and state taxes   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Free federal and state taxes Taxation of Nonperiodic Payments This section of the publication explains how any nonperiodic distributions you receive under a pension or annuity plan are taxed. Free federal and state taxes Nonperiodic distributions are also known as amounts not received as an annuity. Free federal and state taxes They include all payments other than periodic payments and corrective distributions. Free federal and state taxes For example, the following items are treated as nonperiodic distributions. Free federal and state taxes Cash withdrawals. Free federal and state taxes Distributions of current earnings (dividends) on your investment. Free federal and state taxes However, do not include these distributions in your income to the extent the insurer keeps them to pay premiums or other consideration for the contract. Free federal and state taxes Certain loans. Free federal and state taxes See Loans Treated as Distributions , later. Free federal and state taxes The value of annuity contracts transferred without full and adequate consideration. Free federal and state taxes See Transfers of Annuity Contracts , later. Free federal and state taxes Corrective distributions of excess plan contributions. Free federal and state taxes   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Free federal and state taxes To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Free federal and state taxes Although the plan reports the corrective distributions on Form 1099-R, the distribution is not treated as a nonperiodic distribution from the plan. Free federal and state taxes It is not subject to the allocation rules explained in the following discussion, it cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Free federal and state taxes    If your retirement plan made a corrective distribution of excess amounts (excess deferrals, excess contributions, or excess annual additions), your Form 1099-R should have the code “8,” “B,” “P,” or “E” in box 7. Free federal and state taxes   For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Free federal and state taxes Figuring the Taxable Amount How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Free federal and state taxes If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Free federal and state taxes If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Free federal and state taxes You may be able to roll over the taxable amount of a nonperiodic distribution from a qualified retirement plan into another qualified retirement plan or a traditional IRA tax free. Free federal and state taxes See Rollovers, later. Free federal and state taxes If you do not make a tax-free rollover and the distribution qualifies as a lump-sum distribution, you may be able to elect an optional method of figuring the tax on the taxable amount. Free federal and state taxes See Lump-Sum Distributions, later. Free federal and state taxes Annuity starting date. Free federal and state taxes   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Free federal and state taxes Distributions of employer securities. Free federal and state taxes    If you receive a distribution of employer securities from a qualified retirement plan, you may be able to defer the tax on the net unrealized appreciation (NUA) in the securities. Free federal and state taxes The NUA is the net increase in the securities' value while they were in the trust. Free federal and state taxes This tax deferral applies to distributions of the employer corporation's stocks, bonds, registered debentures, and debentures with interest coupons attached. Free federal and state taxes   If the distribution is a lump-sum distribution, tax is deferred on all of the NUA unless you choose to include it in your income for the year of the distribution. Free federal and state taxes    A lump-sum distribution for this purpose is the distribution or payment of a plan participant's entire balance (within a single tax year) from all of the employer's qualified plans of one kind (pension, profit-sharing, or stock bonus plans), but only if paid: Because of the plan participant's death, After the participant reaches age 59½, Because the participant, if an employee, separates from service, or After the participant, if a self-employed individual, becomes totally and permanently disabled. Free federal and state taxes    If you choose to include NUA in your income for the year of the distribution and the participant was born before January 2, 1936, you may be able to figure the tax on the NUA using the optional methods described und