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Free taxes Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. Free taxes A pension is generally a series of payments made to you after you retire from work. Free taxes Pension payments are made regularly and are for past services with an employer. Free taxes An annuity is a series of payments under a contract. Free taxes You can buy the contract alone or you can buy it with the help of your employer. Free taxes Annuity payments are made regularly for more than one full year. Free taxes Note. Free taxes Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. Free taxes Types of pensions and annuities. Free taxes   Particular types of pensions and annuities include: Fixed period annuities. Free taxes You receive definite amounts at regular intervals for a definite length of time. Free taxes Annuities for a single life. Free taxes You receive definite amounts at regular intervals for life. Free taxes The payments end at death. Free taxes Joint and survivor annuities. Free taxes The first annuitant receives a definite amount at regular intervals for life. Free taxes After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Free taxes The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Free taxes Variable annuities. Free taxes You receive payments that may vary in amount for a definite length of time or for life. Free taxes The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. Free taxes Disability pensions. Free taxes You are under minimum retirement age and receive payments because you retired on disability. Free taxes If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. Free taxes If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. Free 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. Free taxes This plan must meet Internal Revenue Code requirements. Free taxes It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. Free taxes However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. Free 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 taxes A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. Free taxes   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. Free taxes A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. Free taxes It does not qualify for most of the tax benefits of a qualified plan. Free taxes Annuity worksheets. Free taxes   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. Free taxes Request for a ruling. Free taxes   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. Free taxes This is treated as a request for a ruling. Free taxes See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free taxes Withholding tax and estimated tax. Free taxes   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. Free taxes If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. Free taxes Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. Free 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 taxes These payments are also known as amounts received as an annuity. Free taxes If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. Free taxes In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. Free taxes The amount of each payment that is more than the part that represents your net cost is taxable. Free taxes Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. Free taxes These terms are explained in the following discussions. Free taxes Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. Free taxes First, find your net cost of the contract as of the annuity starting date (defined later). Free taxes To find this amount, you must first figure the total premiums, contributions, or other amounts paid. Free taxes This includes the amounts your employer contributed if you were required to include these amounts in income. Free taxes It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). Free taxes From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. Free taxes Any additional premiums paid for double indemnity or disability benefits. Free taxes Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). Free taxes The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. Free taxes Example. Free 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 taxes The annuity starting date is July 1. Free taxes This is the date you use in figuring your investment in the contract and your expected return (discussed later). Free taxes Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. Free taxes Foreign employment. Free 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 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 (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. Free taxes Foreign employment contributions while a nonresident alien. Free taxes   In determining your cost, special rules apply if you are a U. Free taxes S. Free taxes citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Free taxes Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. Free taxes Death benefit exclusion. Free taxes   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. Free taxes The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. Free taxes How to adjust your total cost. Free taxes   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Free taxes Add it to the cost or unrecovered cost of the annuity at the annuity starting date. Free taxes See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. Free taxes Net cost. Free taxes   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. Free taxes This is the unrecovered investment in the contract as of the annuity starting date. Free taxes If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. Free taxes Refund feature. Free taxes   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Free taxes Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. Free taxes   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. Free taxes Zero value of refund feature. Free taxes   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. Free taxes   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). Free taxes   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. Free taxes Examples. Free taxes The first example shows how to figure the value of the refund feature when there is only one beneficiary. Free taxes Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. Free taxes In both examples, the taxpayer elects to use Tables V through VIII. Free taxes If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. Free taxes Example 1. Free taxes At age 65, Barbara bought for $21,053 an annuity with a refund feature. Free taxes She will get $100 a month for life. Free taxes Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. Free taxes In this case, the contract cost and the total guaranteed return are the same ($21,053). Free taxes Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. Free taxes 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. Free taxes For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). Free taxes In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. Free taxes Example 2. Free taxes John died while still employed. Free taxes His widow, Eleanor, age 48, receives $171 a month for the rest of her life. Free taxes John's son, Elmer, age 9, receives $50 a month until he reaches age 18. Free taxes John's contributions to the retirement fund totaled $7,559. Free taxes 45, with interest on those contributions of $1,602. Free taxes 53. Free taxes The guarantee or total refund feature of the contract is $9,161. Free taxes 98 ($7,559. Free taxes 45 plus $1,602. Free taxes 53). Free taxes The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. Free taxes 9 $71,614. Free taxes 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. Free taxes 0 5,400. Free taxes 00   3) Total expected return   $77,014. Free taxes 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. Free taxes 45   2) Guaranteed amount (contributions of $7,559. Free taxes 45 plus interest of $1,602. Free taxes 53) $9,161. Free taxes 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. Free taxes 00   4) Net guaranteed amount $3,761. Free taxes 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. Free taxes 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. Free taxes 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free taxes See the discussion of expected return, later in this publication. Free taxes Free IRS help. Free taxes   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. Free taxes Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free taxes The following discussions explain how to figure the expected return with each type of annuity. Free taxes A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. Free taxes Fixed period annuity. Free taxes   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. Free taxes It is the total amount you will get beginning at the annuity starting date. Free taxes You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). Free taxes To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. Free taxes Single life annuity. Free taxes   If you are to get annuity payments for the rest of your life, find your expected return as follows. Free taxes You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. Free taxes These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). Free taxes   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. Free taxes See Adjustments to Tables I, II, V, VI, and VIA following Table I. Free taxes Example. Free taxes Henry bought an annuity contract that will give him an annuity of $500 a month for his life. Free taxes If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. Free taxes 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. Free taxes 2 multiple by +. Free taxes 1. Free taxes His expected return would then be $115,800 ($6,000 × 19. Free taxes 3). Free taxes Annuity for shorter of life or specified period. Free taxes   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. Free taxes To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Free taxes Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. Free taxes Example. Free taxes Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. Free taxes She was age 65 at her birthday nearest the annuity starting date. Free taxes She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. Free taxes 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. Free taxes See Special Elections, later. Free taxes Joint and survivor annuities. Free taxes   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. Free taxes To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. Free taxes If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. Free taxes See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. Free taxes Example. Free taxes John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. Free taxes At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. Free taxes The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. Free taxes 0 Expected return $132,000 Different payments to survivor. Free taxes   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. Free taxes Example 1. Free taxes Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. Free taxes If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. Free taxes 0 Multiple for Gerald, age 70 (from Table V)   16. Free taxes 0 Difference: Multiple applicable to Mary   6. Free taxes 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. Free taxes 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. Free taxes 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. Free taxes Your husband died while still employed. Free taxes Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. Free taxes Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. Free taxes You were 50 years old at the annuity starting date. Free taxes Marie was 16 and Jean was 14. Free taxes Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. Free taxes 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. Free taxes 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. Free taxes 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. Free taxes Computation Under the General Rule Note. Free taxes Variable annuities use a different computation for determining the exclusion amounts. Free taxes See Variable annuities later. Free taxes Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. Free taxes   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. Free taxes See Death benefit exclusion , earlier. Free taxes Step 2. Free taxes   Figure your expected return. Free taxes Step 3. Free taxes   Divide Step 1 by Step 2 and round to three decimal places. Free taxes This will give you the exclusion percentage. Free taxes Step 4. Free taxes   Multiply the exclusion percentage by the first regular periodic payment. Free taxes The result is the tax-free part of each pension or annuity payment. Free taxes   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. Free taxes However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. Free taxes   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. Free taxes Step 5. Free taxes   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. Free taxes This will give you the tax-free part of the total payment for the year. Free taxes    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. Free taxes This fractional amount is multiplied by your exclusion percentage to get the tax-free part. Free taxes Step 6. Free taxes   Subtract the tax-free part from the total payment you received. Free taxes The rest is the taxable part of your pension or annuity. Free taxes Example 1. Free taxes You purchased an annuity with an investment in the contract of $10,800. Free taxes Under its terms, the annuity will pay you $100 a month for life. Free taxes The multiple for your age (age 65) is 20. Free taxes 0 as shown in Table V. Free taxes Your expected return is $24,000 (20 × 12 × $100). Free taxes Your cost of $10,800, divided by your expected return of $24,000, equals 45. Free taxes 0%. Free taxes This is the percentage you will not have to include in income. Free taxes Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. Free taxes If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). Free taxes Example 2. Free taxes Gerald bought a joint and survivor annuity. Free taxes Gerald's investment in the contract is $62,712 and the expected return is $121,200. Free taxes The exclusion percentage is 51. Free taxes 7% ($62,712 ÷ $121,200). Free taxes Gerald will receive $500 a month ($6,000 a year). Free taxes Each year, until his net cost is recovered, $3,102 (51. Free taxes 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. Free taxes If Gerald dies, his wife will receive $350 a month ($4,200 a year). Free taxes If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. Free taxes 7%). Free taxes Each year, until the entire net cost is recovered, his wife will receive $2,171. Free taxes 40 (51. Free taxes 7% of her payments received of $4,200) tax free. Free taxes She will include $2,028. Free taxes 60 ($4,200 − $2,171. Free taxes 40) in her income tax return. Free taxes Example 3. Free taxes Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. Free taxes Your two daughters each receive annual annuities of $1,800 until they reach age 18. Free taxes Your husband contributed $25,576 to the plan. Free taxes You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. Free taxes Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. Free taxes The exclusion percentage of 18. Free taxes 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. Free taxes Each full year $864 (18. Free taxes 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. Free taxes Each year, until age 18, $324 (18. Free taxes 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. Free taxes Part-year payments. Free taxes   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. Free taxes   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. Free taxes For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. Free taxes   If you received a fractional payment, follow Step 5, discussed earlier. Free taxes This gives you the tax-free part of your total payment. Free taxes Example. Free taxes On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. Free taxes The applicable multiple from Table V is 23. Free taxes 3 (age 61). Free taxes Her expected return is $34,950 ($125 × 12 × 23. Free taxes 3). Free taxes Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. Free taxes 1%. Free taxes Each payment received will consist of 63. Free taxes 1% return of cost and 36. Free taxes 9% taxable income, until her net cost of the contract is fully recovered. Free taxes During the first year, Mary received three payments of $125, or $375, of which $236. Free taxes 63 (63. Free taxes 1% × $375) is a return of cost. Free taxes The remaining $138. Free taxes 37 is included in income. Free taxes Increase in annuity payments. Free taxes   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. Free taxes All increases in the installment payments are fully taxable. Free taxes   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. Free taxes 72-5(a)(5) of the regulations. Free taxes Example. Free taxes Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. Free taxes In figuring the taxable part, Joe elects to use Tables V through VIII. Free taxes The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. Free taxes His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. Free taxes 0 × $1,764 annual payment). Free taxes The exclusion percentage is $7,938 ÷ $35,280, or 22. Free taxes 5%. Free taxes During the year he received 11 monthly payments of $147, or $1,617. Free taxes Of this amount, 22. Free taxes 5% × $147 × 11 ($363. Free taxes 83) is tax free as a return of cost and the balance of $1,253. Free taxes 17 is taxable. Free taxes Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). Free taxes The tax-free part is still only 22. Free taxes 5% of the annuity payments as of the annuity starting date (22. Free taxes 5% × $147 × 12 = $396. Free taxes 90 for a full year). Free taxes The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. Free taxes Variable annuities. Free taxes   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. Free taxes   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. Free taxes If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. Free taxes Example. Free taxes Frank purchased a variable annuity at age 65. Free taxes The total cost of the contract was $12,000. Free taxes The annuity starting date is January 1 of the year of purchase. Free taxes His annuity will be paid, starting July 1, in variable annual installments for his life. Free taxes The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. Free taxes   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. Free taxes Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. Free taxes The result is added to the previously figured periodic tax-free part. Free taxes The sum is the amount of each future payment that will be tax free. Free taxes Example. Free taxes Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. Free taxes Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Free taxes Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. Free taxes 00 Amount received in second year 500. Free taxes 00 Difference $100. Free taxes 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. Free taxes 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. Free taxes 4) $5. Free taxes 43 Revised annual tax-free part for third and later years ($600 + $5. Free taxes 43) $605. Free taxes 43 Amount taxable in third year ($1,200 − $605. Free taxes 43) $594. Free taxes 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. Free taxes 72–4(d)(3) of the Income Tax Regulations. Free taxes The statement must also show the following information: The annuity starting date and your age on that date. Free taxes The first day of the first period for which you received an annuity payment in the current year. Free taxes Your investment in the contract as originally figured. Free taxes The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. Free taxes Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. Free taxes Exclusion limited to net cost. Free taxes   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). Free taxes This is the unrecovered investment in the contract as of the annuity starting date. Free taxes   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Free taxes This deduction is not subject to the 2%-of-adjusted-gross-income limit. Free taxes Example 1. Free taxes Your annuity starting date is after 1986. Free taxes Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. Free taxes There is no refund feature. Free taxes Your monthly annuity payment is $833. Free taxes 33. Free taxes Your exclusion ratio is 12% and you exclude $100 a month. Free taxes Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Free taxes Thereafter, your annuity payments are fully taxable. Free taxes Example 2. Free taxes The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. Free taxes The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. Free taxes The exclusion ratio is 10. Free taxes 8%, and your monthly exclusion is $90. Free taxes After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). Free taxes An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. Free taxes Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. Free taxes Exclusion not limited to net cost. Free taxes   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. Free taxes If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. Free taxes The total exclusion may be more than your investment in the contract. Free taxes How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. Free taxes Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. Free taxes These tables correspond to the old Tables I through IV. Free taxes In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. Free taxes If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. Free taxes However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). Free taxes Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. Free taxes Contributions made both before July 1986 and after June 1986. Free taxes   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. Free taxes (See the examples below. Free taxes )    Making the election. Free taxes Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. Free taxes 72–6 of the Income Tax Regulations. Free taxes ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. Free taxes   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. Free taxes You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. Free taxes    Advantages of election. Free taxes In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. Free taxes    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. Free taxes If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. Free taxes   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. Free taxes Example 1. Free taxes Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. Free taxes Payment of the $42,000 contribution is guaranteed under a refund feature. Free taxes Bill is 55 years old as of the annuity starting date. Free taxes For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. Free taxes       Pre- July 1986   Post- June 1986 A. Free taxes Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. Free taxes of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. Free taxes Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. Free taxes Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. Free taxes 7   28. Free taxes 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. Free taxes Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . Free taxes 079   . Free taxes 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). Free taxes The taxable part of his annuity is $22,080 ($24,000 minus $1,920). Free taxes If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). Free taxes Example 2. Free taxes Al is age 62 at his nearest birthday to the annuity starting date. Free taxes Al's wife is age 60 at her nearest birthday to the annuity starting date. Free taxes The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. Free taxes The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. Free taxes Al makes the election described in Example 1 . Free taxes For purposes of this example, assume the refund feature adjustment is zero. Free taxes If an adjustment is required, IRS will figure the amount. Free taxes See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free taxes       Pre-  July 1986   Post-  June 1986 A. Free taxes Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. Free taxes Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. Free taxes Expected return         1) Multiple for both annuitants from Tables II and VI 25. Free taxes 4   28. Free taxes 8   2) Multiple for first annuitant from Tables I and V 16. Free taxes 9   22. Free taxes 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. Free taxes 5   6. Free taxes 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. Free taxes Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . Free taxes 209   . Free taxes 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). Free taxes The taxable part of his annuity is $9,216 ($12,000 − $2,784). Free taxes The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. Free taxes After Al's death, his widow will apply the same exclusion percentages (20. Free taxes 9% and 2. Free taxes 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. Free taxes Annuity received after June 30, 1986. Free taxes   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. Free taxes Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. Free taxes    Make the election by attaching the following statement to your income tax return. Free taxes    “I elect, under section 1. Free taxes 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. Free taxes ”   The statement must also include your name, address, and social security number. Free taxes   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. Free taxes Disqualifying form of payment or settlement. Free taxes   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. Free taxes See regulations section 1. Free taxes 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. Free taxes You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. Free taxes Worksheets for Determining Taxable Annuity Worksheets I and II. Free taxes   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. Free taxes 72–6(d)(6) Election. Free taxes Worksheet I For Determining Taxable Annuity Under Regulations Section 1. Free taxes 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free taxes   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free taxes )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free taxes If not, the IRS will calculate the refund feature percentage. Free taxes             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free taxes   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. Free taxes   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. Free taxes   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free taxes     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. Free taxes 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free taxes   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free taxes )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free taxes If not, the IRS will calculate the refund feature percentage. Free taxes             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free taxes   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. Free taxes   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. Free taxes Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. Free taxes   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free taxes   Actuarial Tables Please click here for the text description of the image. Free taxes Actuarial Tables Please click here for the text description of the image. Free taxes Actuarial Tables Please click here for the text description of the image. Free taxes Actuarial tables Please click here for the text description of the image. Free taxes Actuarial tables Please click here for the text description of the image. 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Free taxes Actuarial tables Please click here for the text description of the image. Free taxes Actuarial tables Please click here for the text description of the image. Free taxes Actuarial tables Please click here for the text description of the image. Free taxes Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. Free taxes If you make this request, you are asking for a ruling. Free taxes User fee. Free taxes   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. Free taxes You should call the IRS for the proper fee. Free taxes A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. Free taxes Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. Free taxes O. Free taxes Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. Free taxes When to make the request. Free taxes   Please note that requests sent between February 1 and April 15 may experience some delay. Free taxes We process requests in the order received, and we will reply to your request as soon as we can process it. Free taxes If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. Free taxes S. Free taxes Individual Income Tax Return, to get an extension of time to file. Free taxes Information you must furnish. Free taxes   You must furnish the information listed below so the IRS can comply with your request. Free taxes Failure to furnish the information will result in a delay in processing your request. Free taxes Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. Free taxes Copies of any documents showing distributions, annuity rates, and annuity options available to you. Free taxes A copy of any Form 1099–R you received since your annuity began. Free taxes A statement indicating whether you have filed your return for the year for which you are making the request. Free taxes If you have requested an extension of time to file that return, please indicate the extension date. Free taxes Your daytime phone number. Free taxes Your current mailing address. Free taxes A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. Free taxes Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. Free taxes A completed Tax Information Sheet (or facsimile) shown on the next page. Free taxes Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. Free taxes This statement must be signed by the retiree or the survivor annuitant. Free taxes It cannot be signed by a representative. Free taxes Tax Information Sheet Please click here for the text description of the image. Free taxes Tax Information Sheet Please click here for the text description of the image. Free taxes Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Free taxes Free help with your tax return. Free taxes   You can get free help preparing your return nationwide from IRS-certified volunteers. Free taxes The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Free taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Free taxes Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Free taxes In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Free taxes To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Free taxes gov, download the IRS2Go app, or call 1-800-906-9887. Free taxes   As part of the TCE program, AARP offers the Tax-Aide counseling program. Free taxes To find the nearest AARP Tax-Aide site, visit AARP's website at www. Free taxes aarp. Free taxes org/money/taxaide or call 1-888-227-7669. Free taxes For more information on these programs, go to IRS. Free taxes gov and enter “VITA” in the search box. Free taxes Internet. Free taxes    IRS. Free taxes gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Free taxes Download the free IRS2Go app from the iTunes app store or from Google Play. Free taxes Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Free taxes Check the status of your 2013 refund with the Where's My Refund? application on IRS. Free taxes gov or download the IRS2Go app and select the Refund Status option. Free taxes The IRS issues more than 9 out of 10 refunds in less than 21 days. Free taxes Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Free taxes You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Free taxes The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Free taxes Use the Interactive Tax Assistant (ITA) to research your tax questions. Free taxes No need to wait on the phone or stand in line. Free taxes The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Free taxes When you reach the response screen, you can print the entire interview and the final response for your records. Free taxes New subject areas are added on a regular basis. Free taxes  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Free taxes gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Free taxes You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Free taxes The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Free taxes When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Free taxes Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Free taxes You can also ask the IRS to mail a return or an account transcript to you. Free taxes Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Free taxes gov or by calling 1-800-908-9946. Free taxes Tax return and tax account transcripts are generally available for the current year and the past three years. Free taxes Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Free taxes Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Free taxes If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Free taxes Check the status of your amended return using Where's My Amended Return? Go to IRS. Free taxes gov and enter Where's My Amended Return? in the search box. Free taxes You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Free taxes It can take up to 3 weeks from the date you mailed it to show up in our system. Free taxes Make a payment using one of several safe and convenient electronic payment options available on IRS. Free taxes gov. Free taxes Select the Payment tab on the front page of IRS. Free taxes gov for more information. Free taxes Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Free taxes Figure your income tax withholding with the IRS Withholding Calculator on IRS. Free taxes gov. Free taxes Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Free taxes Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Free taxes gov. Free taxes Request an Electronic Filing PIN by going to IRS. Free taxes gov and entering Electronic Filing PIN in the search box. Free taxes Download forms, instructions and publications, including accessible versions for people with disabilities. Free taxes Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Free taxes gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Free taxes An employee can answer questions about your tax account or help you set up a payment plan. Free taxes Before you visit, check the Office Locator on IRS. Free taxes gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Free taxes If you have a special need, such as a disability, you can request an appointment. Free taxes Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Free taxes Apply for an Employer Identification Number (EIN). Free taxes Go to IRS. Free taxes gov and enter Apply for an EIN in the search box. Free taxes Read the Internal Revenue Code, regulations, or other official guidance. Free taxes Read Internal Revenue Bulletins. Free taxes Sign up to receive local and national tax news and more by email. Free taxes Just click on “subscriptions” above the search box on IRS. Free taxes gov and choose from a variety of options. Free taxes    Phone. Free taxes You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Free taxes Download the free IRS2Go app from the iTunes app store or from Google Play. Free taxes Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Free taxes gov, or download the IRS2Go app. Free taxes Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Free taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Free taxes Mos
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Free taxes 11. Free taxes   Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. Free taxes Kickbacks. Free taxes Form 1099-MISC. Free taxes Exception. Free taxes Tax preparation fees. Free taxes Covered executive branch official. Free taxes Exceptions to denial of deduction. Free taxes Indirect political contributions. Free taxes Type of deduction. Free taxes Repayment—$3,000 or less. Free taxes Repayment—over $3,000. Free taxes Method 1. Free taxes Method 2. Free taxes Repayment does not apply. Free taxes Year of deduction (or credit). Free taxes Telephone. Free taxes What's New Standard mileage rate. Free taxes  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. Free taxes 5 cents per mile. Free taxes For more information, see Car and truck expenses under Miscellaneous Expenses. Free taxes Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. Free taxes Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. Free taxes Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. Free taxes If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. Free taxes To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Free taxes Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. Free taxes For more information on travel, meals, and entertainment, including deductibility, see Publication 463. Free taxes Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. Free taxes If the expenses are substantiated, you can deduct the allowable amount on your tax return. Free taxes Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. Free taxes For example, you can deduct 100% of the cost of meals on your business books and records. Free taxes However, only 50% of these costs are allowed by law as a tax deduction. Free taxes How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. Free taxes If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. Free taxes If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. Free taxes If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. Free taxes See Table 11-1 , Reporting Reimbursements. Free taxes Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Free taxes Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. Free taxes An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. Free taxes The advance is reasonably calculated not to exceed the amount of anticipated expenses. Free taxes You make the advance within a reasonable period of time of your employee paying or incurring the expense. Free taxes If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Free taxes Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Free taxes Adequate accounting. Free taxes   Your employees must adequately account to you for their travel, meals, and entertainment expenses. Free taxes They must give you documentary evidence of their travel, mileage, and other employee business expenses. Free taxes This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. Free taxes Excess reimbursement or allowance. Free taxes   An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. Free taxes The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. Free taxes Reasonable period of time. Free taxes   A reasonable period of time depends on the facts and circumstances. Free taxes Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. Free taxes You give an advance within 30 days of the time the employee pays or incurs the expense. Free taxes Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. Free taxes Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. Free taxes You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. Free taxes How to deduct. Free taxes   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Free taxes Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. Free taxes If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). Free taxes   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. Free taxes S. Free taxes Corporation Income Tax Return. Free taxes If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Free taxes Table 11-1. Free taxes Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement:  Adequate accounting made and excess returned No amount. Free taxes Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Free taxes Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. Free taxes Per diem or mileage allowance up to the federal rate:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Free taxes The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Free taxes Per diem or mileage allowance exceeds the federal rate:  Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. Free taxes The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Free taxes A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. Free taxes No reimbursement plan The entire amount as wages in box 1. Free taxes Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. Free taxes In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Free taxes Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. Free taxes Federal rate. Free taxes   The federal rate can be figured using any one of the following methods. Free taxes For car expenses: The standard mileage rate. Free taxes A fixed and variable rate (FAVR). Free taxes For per diem amounts: The regular federal per diem rate. Free taxes The standard meal allowance. Free taxes The high-low rate. Free taxes Car allowance. Free taxes   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Free taxes Beginning in 2013, the standard business mileage rate is 56. Free taxes 5 cents per mile. Free taxes   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. Free taxes This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. Free taxes ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. Free taxes ). Free taxes For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. Free taxes irs. Free taxes gov/irb/2010-51_IRB/ar14. Free taxes html and Notice 2012-72, available at www. Free taxes irs. Free taxes gov/irb/2012-50_IRB/ar10. Free taxes html. Free taxes Per diem allowance. Free taxes   If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. Free taxes Regular federal per diem rate. Free taxes   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. Free taxes It has two components: Lodging expense, and Meal and incidental expense (M&IE). Free taxes The rates are different for different locations. Free taxes Publication 1542 lists the rates in the continental United States. Free taxes Standard meal allowance. Free taxes   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. Free taxes You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). Free taxes Internet access. Free taxes    Per diem rates are available on the Internet. Free taxes You can access per diem rates at www. Free taxes gsa. Free taxes gov/perdiemrates. Free taxes High-low method. Free taxes   This is a simplified method of computing the federal per diem rate for travel within the continental United States. Free taxes It eliminates the need to keep a current list of the per diem rate for each city. Free taxes   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. Free taxes All other areas have a per diem amount of $163 ($52 for M&IE). Free taxes The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. Free taxes   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). Free taxes The rate for all other locations increased to $170 ($52 for M&IE). Free taxes For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. Free taxes However, you must use the same rate for all employees reimbursed under the high-low method. Free taxes   For more information about the high-low method, see Notice 2013-65, available at www. Free taxes irs. Free taxes gov/irb/2013-44_IRB/ar13. Free taxes html. Free taxes See Publication 1542 (available on the Internet at IRS. Free taxes gov) for the current per diem rates for all locations. Free taxes Reporting per diem and car allowances. Free taxes   The following discussion explains how to report per diem and car allowances. Free taxes The manner in which you report them depends on how the allowance compares to the federal rate. Free taxes See Table 11-1. Free taxes Allowance less than or equal to the federal rate. Free taxes   If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. Free taxes Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). Free taxes See How to deduct under Accountable Plans, earlier. Free taxes Allowance more than the federal rate. Free taxes   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. Free taxes   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Free taxes Deduct it as travel expenses (as explained above). Free taxes This part of the allowance is treated as reimbursed under an accountable plan. Free taxes   Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Free taxes Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Free taxes This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Free taxes Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. Free taxes The deduction limit applies even if you reimburse them for 100% of the expenses. Free taxes Application of the 50% limit. Free taxes   The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. Free taxes It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. Free taxes The deduction limit may also apply to meals you furnish on your premises to your employees. Free taxes Related expenses. Free taxes   Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. Free taxes Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. Free taxes However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. Free taxes Amount subject to 50% limit. Free taxes   If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. Free taxes The per diem allowance. Free taxes The federal rate for M&IE. Free taxes   If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. Free taxes If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Free taxes Meal expenses when subject to “hours of service” limits. Free taxes   You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. Free taxes   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. Free taxes De minimis (minimal) fringe benefit. Free taxes   The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. Free taxes See Publication 15-B for additional information on de minimis fringe benefits. Free taxes Company cafeteria or executive dining room. Free taxes   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. Free taxes This includes the cost of maintaining the facilities for providing the food and beverages. Free taxes These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). Free taxes Employee activities. Free taxes   The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. Free taxes The benefit must be primarily for your employees who are not highly compensated. Free taxes   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. Free taxes Owned a 10% or more interest in the business during the year or the preceding year. Free taxes An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Free taxes Received more than $115,000 in pay for the preceding year. Free taxes You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. Free taxes   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. Free taxes Meals or entertainment treated as compensation. Free taxes   The 50% limit does not apply to either of the following. Free taxes Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. Free taxes Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. Free taxes Sales of meals or entertainment. Free taxes   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. Free taxes For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. Free taxes The 50% limit does not apply to this expense. Free taxes Providing meals or entertainment to general public to promote goodwill. Free taxes   You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Free taxes The 50% limit does not apply to this expense. Free taxes Director, stockholder, or employee meetings. Free taxes   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. Free taxes You can provide some minor social activities, but the main purpose of the meeting must be your company's business. Free taxes These expenses are subject to the 50% limit. Free taxes Trade association meetings. Free taxes   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. Free taxes These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Free taxes Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. Free taxes All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. Free taxes The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Free taxes You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Free taxes Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. Free taxes Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Free taxes Advertising expenses. Free taxes   You generally can deduct reasonable advertising expenses that are directly related to your business activities. Free taxes Generally, you cannot deduct amounts paid to influence legislation (i. Free taxes e. Free taxes , lobbying). Free taxes See Lobbying expenses , later. Free taxes   You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. Free taxes For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. Free taxes S. Free taxes Savings Bonds, or to participate in similar causes is usually deductible. Free taxes Anticipated liabilities. Free taxes   Anticipated liabilities or reserves for anticipated liabilities are not deductible. Free taxes For example, assume you sold 1-year TV service contracts this year totaling $50,000. Free taxes From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. Free taxes You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. Free taxes You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Free taxes Bribes and kickbacks. Free taxes   Engaging in the payment of bribes or kickbacks is a serious criminal matter. Free taxes Such activity could result in criminal prosecution. Free taxes Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. Free taxes   Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. Free taxes Meaning of “generally enforced. Free taxes ”   A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. Free taxes For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Free taxes Kickbacks. Free taxes   A kickback is a payment for referring a client, patient, or customer. Free taxes The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. Free taxes In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. Free taxes   For example, the Yard Corporation is in the business of repairing ships. Free taxes It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Free taxes Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. Free taxes These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Free taxes Form 1099-MISC. Free taxes   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. Free taxes See Form 1099-MISC for more information. Free taxes Car and truck expenses. Free taxes   The costs of operating a car, truck, or other vehicle in your business are deductible. Free taxes For more information on how to figure your deduction, see Publication 463. Free taxes Charitable contributions. Free taxes   Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Free taxes If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. Free taxes However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Free taxes See the Instructions for Form 1120 for more information. Free taxes Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Free taxes Example. Free taxes You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. Free taxes The purpose of the ad was to encourage readers to buy your products. Free taxes Your payment is not a charitable contribution. Free taxes You can deduct it as an advertising expense. Free taxes Example. Free taxes You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Free taxes Your payment is not a charitable contribution. Free taxes You can deduct it as a business expense. Free taxes See Publication 526 for a discussion of donated inventory, including capital gain property. Free taxes Club dues and membership fees. Free taxes   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. Free taxes This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Free taxes Exception. Free taxes   The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Free taxes Boards of trade. Free taxes Business leagues. Free taxes Chambers of commerce. Free taxes Civic or public service organizations. Free taxes Professional organizations such as bar associations and medical associations. Free taxes Real estate boards. Free taxes Trade associations. Free taxes Credit card convenience fees. Free taxes   Credit card companies charge a fee to businesses who accept their cards. Free taxes This fee when paid or incurred by the business can be deducted as a business expense. Free taxes Damages recovered. Free taxes   Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. Free taxes You must include this compensation in your income. Free taxes However, you may be able to take a special deduction. Free taxes The deduction applies only to amounts recovered for actual economic injury, not any additional amount. Free taxes The deduction is the smaller of the following. Free taxes The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. Free taxes Your losses from the injury you have not deducted. Free taxes Demolition expenses or losses. Free taxes   Amounts paid or incurred to demolish a structure are not deductible. Free taxes These amounts are added to the basis of the land where the demolished structure was located. Free taxes Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. Free taxes Education expenses. Free taxes   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. Free taxes See Education Expenses in chapter 2. Free taxes   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. Free taxes You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. Free taxes For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. Free taxes   Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. Free taxes This is true even if the education maintains or improves skills presently required in your business. Free taxes For more information on education expenses, see Publication 970. Free taxes Franchise, trademark, trade name. Free taxes   If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). Free taxes   When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. Free taxes   A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. Free taxes Impairment-related expenses. Free taxes   If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. Free taxes   You are disabled if you have either of the following. Free taxes A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. Free taxes A physical or mental impairment that substantially limits one or more of your major life activities. Free taxes   The expense qualifies as a business expense if all the following apply. Free taxes Your work clearly requires the expense for you to satisfactorily perform that work. Free taxes The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. Free taxes Their treatment is not specifically provided for under other tax law provisions. Free taxes Example. Free taxes You are blind. Free taxes You must use a reader to do your work, both at and away from your place of work. Free taxes The reader's services are only for your work. Free taxes You can deduct your expenses for the reader as a business expense. Free taxes Internet-related expenses. Free taxes   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. Free taxes If you are starting a business you may have to amortize these expenses as start-up costs. Free taxes For more information about amortizing start-up and organizational costs, see chapter 8. Free taxes Interview expense allowances. Free taxes   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. Free taxes You can deduct the reimbursements as a business expense. Free taxes However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. Free taxes Legal and professional fees. Free taxes   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. Free taxes However, usually legal fees you pay to acquire business assets are not deductible. Free taxes These costs are added to the basis of the property. Free taxes   Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. Free taxes If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. Free taxes The result is the portion of the invoice attributable to business expenses. Free taxes The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). Free taxes   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. Free taxes However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. Free taxes See Publication 529, Miscellaneous Deductions. Free taxes Tax preparation fees. Free taxes   The cost of hiring a tax professional, such as a C. Free taxes P. Free taxes A. Free taxes , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. Free taxes Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. Free taxes   You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. Free taxes Licenses and regulatory fees. Free taxes   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Free taxes Some licenses and fees may have to be amortized. Free taxes See chapter 8 for more information. Free taxes Lobbying expenses. Free taxes   Generally, lobbying expenses are not deductible. Free taxes Lobbying expenses include amounts paid or incurred for any of the following activities. Free taxes Influencing legislation. Free taxes Participating in or intervening in any political campaign for, or against, any candidate for public office. Free taxes Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. Free taxes Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. Free taxes Researching, preparing, planning, or coordinating any of the preceding activities. Free taxes   Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. Free taxes For information on making this allocation, see section 1. Free taxes 162-28 of the regulations. Free taxes   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. Free taxes The organization conducts lobbying activities on matters of direct financial interest to your business. Free taxes A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. Free taxes   If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. Free taxes Covered executive branch official. Free taxes   For purposes of this discussion, a covered executive branch official is any of the following. Free taxes The President. Free taxes The Vice President. Free taxes Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. Free taxes Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). Free taxes Exceptions to denial of deduction. Free taxes   The general denial of the deduction does not apply to the following. Free taxes Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. Free taxes An Indian tribal government is treated as a local council or similar governing body. Free taxes Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). Free taxes Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). Free taxes Moving machinery. Free taxes   Generally, the cost of moving machinery from one city to another is a deductible expense. Free taxes So is the cost of moving machinery from one plant to another, or from one part of your plant to another. Free taxes You can deduct the cost of installing the machinery in the new location. Free taxes However, you must capitalize the costs of installing or moving newly purchased machinery. Free taxes Outplacement services. Free taxes   The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. Free taxes are deductible. Free taxes   The costs of outplacement services may cover more than one deduction category. Free taxes For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. Free taxes   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. Free taxes Penalties and fines. Free taxes   Penalties paid for late performance or nonperformance of a contract are generally deductible. Free taxes For instance, you own and operate a construction company. Free taxes Under a contract, you are to finish construction of a building by a certain date. Free taxes Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. Free taxes You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. Free taxes These additional costs are deductible business expenses. Free taxes   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. Free taxes These fines or penalties include the following amounts. Free taxes Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. Free taxes Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. Free taxes Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. Free taxes Forfeited as collateral posted for a proceeding that could result in a fine or penalty. Free taxes   Examples of nondeductible penalties and fines include the following. Free taxes Fines for violating city housing codes. Free taxes Fines paid by truckers for violating state maximum highway weight laws. Free taxes Fines for violating air quality laws. Free taxes Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. Free taxes   A fine or penalty does not include any of the following. Free taxes Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. Free taxes Court costs or stenographic and printing charges. Free taxes Compensatory damages paid to a government. Free taxes Political contributions. Free taxes   Contributions or gifts paid to political parties or candidates are not deductible. Free taxes In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. Free taxes Indirect political contributions. Free taxes   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. Free taxes Examples of nondeductible expenses include the following. Free taxes Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. Free taxes Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. Free taxes Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. Free taxes Repairs. Free taxes   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Free taxes Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. Free taxes Otherwise, the cost must be capitalized and depreciated. Free taxes See Form 4562 and its instructions for how to compute and claim the depreciation deduction. Free taxes   The cost of repairs includes the costs of labor, supplies, and certain other items. Free taxes The value of your own labor is not deductible. Free taxes Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). Free taxes Repayments. Free taxes   If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Free taxes Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Free taxes Type of deduction. Free taxes   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Free taxes For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. Free taxes If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Free taxes   If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. Free taxes However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. Free taxes Repayment—$3,000 or less. Free taxes   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Free taxes Repayment—over $3,000. Free taxes   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. Free taxes However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. Free taxes ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. Free taxes If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. Free taxes Method 1. Free taxes   Figure your tax for 2013 claiming a deduction for the repaid amount. Free taxes Method 2. Free taxes   Figure your tax for 2013 claiming a credit for the repaid amount. Free taxes Follow these steps. Free taxes Figure your tax for 2013 without deducting the repaid amount. Free taxes Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Free taxes Subtract the tax in (2) from the tax shown on your return for the earlier year. Free taxes This is the amount of your credit. Free taxes Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). Free taxes   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. Free taxes   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. Free taxes R. Free taxes C. Free taxes 1341” next to line 71. Free taxes Example. Free taxes For 2012, you filed a return and reported your income on the cash method. Free taxes In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. Free taxes Your filing status in 2013 and 2012 is single. Free taxes Your income and tax for both years are as follows:   2012  With Income 2012  Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069   2013  Without Deduction 2013  With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. Free taxes Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. Free taxes Repayment does not apply. Free taxes   This discussion does not apply to the following. Free taxes Deductions for bad debts. Free taxes Deductions from sales to customers, such as returns and allowances, and similar items. Free taxes Deductions for legal and other expenses of contesting the repayment. Free taxes Year of deduction (or credit). Free taxes   If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. Free taxes If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. Free taxes For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. Free taxes Subscriptions. Free taxes   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. Free taxes Supplies and materials. Free taxes   Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. Free taxes   If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. Free taxes You do not keep a record of when they are used. Free taxes You do not take an inventory of the amount on hand at the beginning and end of the tax year. Free taxes This method does not distort your income. Free taxes   You can also deduct the cost of books, professional instruments, equipment, etc. Free taxes , if you normally use them within a year. Free taxes However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. Free taxes For more information regarding depreciation see Publication 946, How To Depreciate Property. Free taxes Utilities. Free taxes   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. Free taxes However, any part due to personal use is not deductible. Free taxes Telephone. Free taxes   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Free taxes However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. Free taxes Prev  Up  Next   Home   More Online Publications