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Income Taxes By State

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Income Taxes By State

Income taxes by state 31. Income taxes by state   Tax on Unearned Income of Certain Children Table of Contents What's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Income taxes by state Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Income taxes by state Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Income taxes by state Figuring the Child's Tax (Form 8615, Part III) What's New Net Investment Income Tax. Income taxes by state . Income taxes by state  For tax years beginning after December 31, 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). Income taxes by state NIIT is a 3. Income taxes by state 8% tax on the lesser of the net investment income or the excess of the child's modified adjusted gross income (MAGI) over the threshold amount. Income taxes by state Use Form 8960, Net Investment Income Tax, to figure this tax. Income taxes by state For more information on NIIT, go to www. Income taxes by state irs. Income taxes by state gov and enter “Net Investment Income Tax” in the search box. Income taxes by state Introduction This chapter discusses the following two rules that may affect the tax on unearned income of certain children. Income taxes by state If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Income taxes by state (See Parent's Election To Report Child's Interest and Dividends , later. Income taxes by state ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Income taxes by state (See Tax for Certain Children Who Have Unearned Income , later. Income taxes by state ) For these rules, the term “child” includes a legally adopted child and a stepchild. Income taxes by state These rules apply whether or not the child is a dependent. Income taxes by state Useful Items - You may want to see: Publication 929 Tax Rules for Children and Dependents Form (and Instructions) 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Income taxes by state The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Income taxes by state Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Income taxes by state Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Income taxes by state Parents are married. Income taxes by state   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Income taxes by state Parents not living together. Income taxes by state   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Income taxes by state If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Income taxes by state   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2. Income taxes by state Parents are divorced. Income taxes by state   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Income taxes by state Custodial parent remarried. Income taxes by state   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Income taxes by state Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Income taxes by state Do not use the return of the noncustodial parent. Income taxes by state   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Income taxes by state If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Income taxes by state Parents never married. Income taxes by state   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Income taxes by state If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Income taxes by state Widowed parent remarried. Income taxes by state   If a widow or widower remarries, the new spouse is treated as the child's other parent. Income taxes by state The rules explained earlier under Custodial parent remarried apply. Income taxes by state Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Income taxes by state If you do, your child will not have to file a return. Income taxes by state You can make this election only if all the following conditions are met. Income taxes by state Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Income taxes by state Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Income taxes by state The child's gross income was less than $10,000. Income taxes by state The child is required to file a return unless you make this election. Income taxes by state The child does not file a joint return for the year. Income taxes by state No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Income taxes by state No federal income tax was taken out of your child's income under the backup withholding rules. Income taxes by state You are the parent whose return must be used when applying the special tax rules for children. Income taxes by state (See Which Parent's Return To Use , earlier. Income taxes by state ) These conditions are also shown in Figure 31-A. Income taxes by state Certain January 1 birthdays. Income taxes by state   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Income taxes by state You cannot make this election for such a child unless the child was a full-time student. Income taxes by state   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Income taxes by state You cannot make this election for such a child. Income taxes by state Full-time student. Income taxes by state   A full-time student is a child who during some part of each of any 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time on-farm training course given by a school or a state, county, or local government agency. Income taxes by state A school includes a technical, trade, or mechanical school. Income taxes by state It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Income taxes by state How to make the election. Income taxes by state   Make the election by attaching Form 8814 to your Form 1040. Income taxes by state (If you make this election, you cannot file Form 1040A or Form 1040EZ. Income taxes by state ) Attach a separate Form 8814 for each child for whom you make the election. Income taxes by state You can make the election for one or more children and not for others. Income taxes by state Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Income taxes by state Rate may be higher. Income taxes by state   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Income taxes by state This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Income taxes by state However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Income taxes by state Deductions you cannot take. Income taxes by state   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Income taxes by state The additional standard deduction if the child is blind. Income taxes by state The deduction for a penalty on an early withdrawal of your child's savings. Income taxes by state Itemized deductions (such as your child's investment expenses or charitable contributions). Income taxes by state Reduced deductions or credits. Income taxes by state   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following. Income taxes by state Deduction for contributions to a traditional individual retirement arrangement (IRA). Income taxes by state Deduction for student loan interest. Income taxes by state Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Income taxes by state Credit for child and dependent care expenses. Income taxes by state Child tax credit. Income taxes by state Education tax credits. Income taxes by state Earned income credit. Income taxes by state Penalty for underpayment of estimated tax. Income taxes by state   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Income taxes by state If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Income taxes by state See chapter 4 for more information. Income taxes by state Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Income taxes by state Only the amount over $2,000 is added to your income. Income taxes by state The amount over $2,000 is shown on Form 8814, line 6. Income taxes by state Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Income taxes by state Include the amount from Form 8814, line 12, on Form 1040, line 21. Income taxes by state Enter “Form 8814” on the dotted line next to line 21. Income taxes by state If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040, line 21. Income taxes by state Capital gain distributions and qualified dividends. Income taxes by state   If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Publication 929, Part 2. Income taxes by state If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Publication 929, Part 2. Income taxes by state Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Income taxes by state This tax is added to the tax figured on your income. Income taxes by state This additional tax is the smaller of: 10% × (your child's gross income − $1,000), or $100. Income taxes by state Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. Income taxes by state Check box a on Form 1040, line 44. Income taxes by state Figure 31-A. Income taxes by state Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Income taxes by state Figure 31–A. Income taxes by state Can You Include Your Child's Income On Your Tax Return? Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Income taxes by state If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Income taxes by state Attach the completed form to the child's Form 1040 or Form 1040A. Income taxes by state When Form 8615 must be filed. Income taxes by state   Form 8615 must be filed for a child if all of the following statements are true. Income taxes by state The child's investment income was more than $2,000. Income taxes by state The child is required to file a return for 2013. Income taxes by state The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Income taxes by state At least one of the child's parents was alive at the end of 2013. Income taxes by state The child does not file a joint return for 2013. Income taxes by state These conditions are also shown in  Figure 31-B. Income taxes by state Earned income. Income taxes by state   Earned income includes salaries, wages, tips, and other payments received for personal services performed. Income taxes by state It does not include unearned income as defined later in this chapter. Income taxes by state Support. Income taxes by state   Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Income taxes by state To figure your child's support, count support provided by you, your child, and others. Income taxes by state However, a scholarship received by your child is not considered support if your child is a full-time student. Income taxes by state See chapter 3 for details about support. Income taxes by state Certain January 1 birthdays. Income taxes by state   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Income taxes by state Figure 31-B. Income taxes by state Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Income taxes by state Figure 31-B. Income taxes by state Do You Have To Use Form 8615 To Figure Your Child's Tax?    IF a child was born on. Income taxes by state . Income taxes by state . Income taxes by state THEN, at the end of 2013, the child is considered to be. Income taxes by state . Income taxes by state . Income taxes by state January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Income taxes by state The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Income taxes by state  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Income taxes by state  ***Do not use Form 8615 for this child. Income taxes by state Providing Parental Information (Form 8615, lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Income taxes by state (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Income taxes by state ) On line C, check the box for the parent's filing status. Income taxes by state See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615. Income taxes by state Parent with different tax year. Income taxes by state   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Income taxes by state Parent's return information not known timely. Income taxes by state   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Income taxes by state   You can use any reasonable estimate. Income taxes by state This includes using information from last year's return. Income taxes by state If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Income taxes by state    When you get the correct information, file an amended return on Form 1040X, Amended U. Income taxes by state S. Income taxes by state Individual Income Tax Return. Income taxes by state   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Income taxes by state S. Income taxes by state Individual Income Tax Return. Income taxes by state Extensions are discussed in chapter 1. Income taxes by state Step 1. Income taxes by state Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Income taxes by state To do that, use Form 8615, Part I. Income taxes by state Line 1 (unearned income). Income taxes by state   If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Income taxes by state Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. Income taxes by state Form 1040EZ cannot be used if Form 8615 must be filed. Income taxes by state   If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Income taxes by state   However, if the child has: excluded any foreign earned income, deducted either a loss from self-employment, or deducted a net operating loss from another year, then use the Alternate Worksheet for Form 8615, Line 1, in Publication 929 to figure the amount to enter on Form 8615, line 1. Income taxes by state Unearned income defined. Income taxes by state   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. Income taxes by state It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, the taxable part of social security and pension payments, and certain distributions from trusts. Income taxes by state Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Income taxes by state Nontaxable income. Income taxes by state   For this purpose, unearned income includes only amounts the child must include in total income. Income taxes by state Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Income taxes by state Income from property received as a gift. Income taxes by state   A child's unearned income includes all income produced by property belonging to the child. Income taxes by state This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Income taxes by state   A child's unearned income includes income produced by property given as a gift to the child. Income taxes by state This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Income taxes by state Example. Income taxes by state Amanda Black, age 13, received the following income. Income taxes by state Dividends — $800 Wages — $2,100 Taxable interest — $1,200 Tax-exempt interest — $100 Net capital gains — $100 The dividends were qualified dividends on stock given to her by her grandparents. Income taxes by state Amanda's unearned income is $2,100. Income taxes by state This is the total of the dividends ($800), taxable interest ($1,200), and net capital gains ($100). Income taxes by state Her wages are earned (not unearned) income because they are received for work actually done. Income taxes by state Her tax-exempt interest is not included because it is nontaxable. Income taxes by state Trust income. Income taxes by state   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Income taxes by state   However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income. Income taxes by state Line 2 (deductions). Income taxes by state   If the child does not itemize deductions on Schedule A (Form 1040), enter $2,000 on line 2. Income taxes by state   If the child does itemize deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with the production of unearned income entered on line 1, or $2,000. Income taxes by state Directly connected. Income taxes by state   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Income taxes by state These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Income taxes by state   These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Income taxes by state Only the amount greater than 2% of the child's adjusted gross income can be deducted. Income taxes by state See chapter 28 for more information. Income taxes by state Example 1. Income taxes by state Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2% limit) that are directly connected with his unearned income. Income taxes by state His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Income taxes by state Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly connected itemized deductions of $300. Income taxes by state Example 2. Income taxes by state Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Income taxes by state She has no other income. Income taxes by state She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her unearned income. Income taxes by state Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Income taxes by state The amount on line 2 is $2,050. Income taxes by state This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Income taxes by state Line 3. Income taxes by state   Subtract line 2 from line 1 and enter the result on this line. Income taxes by state If zero or less, do not complete the rest of the form. Income taxes by state However, you must still attach Form 8615 to the child's tax return. Income taxes by state Figure the tax on the child's taxable income in the normal manner. Income taxes by state Line 4 (child's taxable income). Income taxes by state   Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27. Income taxes by state   However, if the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, see the Form 8615 instructions or Pub. Income taxes by state 929. Income taxes by state Line 5 (net unearned income). Income taxes by state   A child's net unearned income cannot be more than his or her taxable income. Income taxes by state Enter on Form 8615, line 5, the smaller of line 3 or line 4. Income taxes by state This is the child's net unearned income. Income taxes by state   If zero or less, do not complete the rest of the form. Income taxes by state However, you must still attach Form 8615 to the child's tax return. Income taxes by state Figure the tax on the child's taxable income in the normal manner. Income taxes by state Step 2. Income taxes by state Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Income taxes by state The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Income taxes by state When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Income taxes by state For example, do not refigure the medical expense deduction. Income taxes by state Figure the tentative tax on Form 8615, lines 6 through 13. Income taxes by state Note. Income taxes by state If the child or parent has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II. Income taxes by state Line 6 (parent's taxable income). Income taxes by state   Enter on line 6 the parent's taxable income from Form 1040, line 43, Form 1040A, line 27, or Form 1040EZ, line 6. Income taxes by state   If the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) was used to figure the parent's tax, enter the amount from line 3 of that worksheet instead of the parent's taxable income. Income taxes by state Line 7 (net unearned income of other children). Income taxes by state   If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Income taxes by state Do not include the amount from line 5 of the Form 8615 being completed. Income taxes by state Example. Income taxes by state Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Income taxes by state The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon — $800 Jerry — $600 Mike — $1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Income taxes by state Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Income taxes by state Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Income taxes by state Other children's information not available. Income taxes by state   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Income taxes by state See Parent's return information not known timely , earlier. Income taxes by state Line 11 (tentative tax). Income taxes by state   Subtract line 10 from line 9 and enter the result on this line. Income taxes by state This is the tentative tax. Income taxes by state   If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Income taxes by state Also skip the discussion for lines 12a and 12b that follows. Income taxes by state Lines 12a and 12b (dividing the tentative tax). Income taxes by state   If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net unearned income. Income taxes by state This is done on lines 12a, 12b, and 13. Income taxes by state Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Income taxes by state Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. Income taxes by state Example. Income taxes by state In the earlier example under Line 7 (net unearned income of other children), Sharon's Form 8615 shows $1,600 on line 7. Income taxes by state The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). Income taxes by state The decimal on line 12b is  . Income taxes by state 333, figured as follows and rounded to three places. Income taxes by state   $800 = . Income taxes by state 333     $2,400   Step 3. Income taxes by state Figuring the Child's Tax (Form 8615, Part III) The final step in figuring a child's tax using Form 8615 is to determine the larger of: The total of: The child's share of the tentative tax based on the parent's tax rate, plus The tax on the child's taxable income in excess of net unearned income, figured at the child's tax rate, or The tax on the child's taxable income, figured at the child's tax rate. Income taxes by state This is the child's tax. Income taxes by state It is figured on Form 8615, lines 14 through 18. Income taxes by state Alternative minimum tax. Income taxes by state   A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. Income taxes by state See Alternative Minimum Tax (AMT) in chapter 30. Income taxes by state    For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. Income taxes by state For information on special limits that apply to a child who files Form 6251, see Certain Children Under Age 24 in the Instructions for Form 6251. Income taxes by state Prev  Up  Next   Home   More Online Publications
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The Income Taxes By State

Income taxes by state 3. Income taxes by state   SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Income taxes by state Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. Income taxes by state In addition, you will contribute matching or nonelective contributions. Income taxes by state SIMPLE plans can only be maintained on a calendar-year basis. Income taxes by state A SIMPLE plan can be set up in either of the following ways. Income taxes by state Using SIMPLE IRAs (SIMPLE IRA plan). Income taxes by state As part of a 401(k) plan (SIMPLE 401(k) plan). Income taxes by state Many financial institutions will help you set up a SIMPLE plan. Income taxes by state SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Income taxes by state Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. Income taxes by state For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. Income taxes by state Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. Income taxes by state You meet the employee limit. Income taxes by state You do not maintain another qualified plan unless the other plan is for collective bargaining employees. Income taxes by state Employee limit. Income taxes by state   You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Income taxes by state Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Income taxes by state Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). Income taxes by state   Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. Income taxes by state Grace period for employers who cease to meet the 100-employee limit. Income taxes by state   If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. Income taxes by state   A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Income taxes by state Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. Income taxes by state Coverage under the plan has not significantly changed during the grace period. Income taxes by state The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. Income taxes by state    The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. Income taxes by state Other qualified plan. Income taxes by state   The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. Income taxes by state Exception. Income taxes by state   If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. Income taxes by state Who Can Participate in a SIMPLE IRA Plan? Eligible employee. Income taxes by state   Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. Income taxes by state The term “employee” includes a self-employed individual who received earned income. Income taxes by state   You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. Income taxes by state For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. Income taxes by state However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. Income taxes by state Excludable employees. Income taxes by state   The following employees do not need to be covered under a SIMPLE IRA plan. Income taxes by state Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Income taxes by state Nonresident alien employees who have received no U. Income taxes by state S. Income taxes by state source wages, salaries, or other personal services compensation from you. Income taxes by state Compensation. Income taxes by state   Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Income taxes by state Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. Income taxes by state If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. Income taxes by state How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Income taxes by state Each form is a model savings incentive match plan for employees (SIMPLE) plan document. Income taxes by state Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. Income taxes by state Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. Income taxes by state Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. Income taxes by state The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Income taxes by state Keep the original form. Income taxes by state Do not file it with the IRS. Income taxes by state Other uses of the forms. Income taxes by state   If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. Income taxes by state Meeting employer notification requirements for the SIMPLE IRA plan. Income taxes by state Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. Income taxes by state Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. Income taxes by state Deadline for setting up a SIMPLE IRA plan. Income taxes by state   You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. Income taxes by state This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. Income taxes by state If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. Income taxes by state A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. Income taxes by state Setting up a SIMPLE IRA. Income taxes by state   SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. Income taxes by state A SIMPLE IRA must be set up for each eligible employee. Income taxes by state Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. Income taxes by state   A SIMPLE IRA cannot be a Roth IRA. Income taxes by state Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Income taxes by state Deadline for setting up a SIMPLE IRA. Income taxes by state   A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. Income taxes by state See Time limits for contributing funds , later, under Contribution Limits. Income taxes by state Credit for startup costs. Income taxes by state   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. Income taxes by state For more information, see Credit for startup costs under Reminders, earlier. Income taxes by state Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. Income taxes by state The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. Income taxes by state Your decision to make either matching contributions or nonelective contributions (discussed later). Income taxes by state A summary description provided by the financial institution. Income taxes by state Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. Income taxes by state Election period. Income taxes by state   The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). Income taxes by state However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. Income taxes by state   A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. Income taxes by state For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Income taxes by state Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. Income taxes by state Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. Income taxes by state You, as the employer, must make either matching contributions or nonelective contributions, defined later. Income taxes by state No other contributions can be made to the SIMPLE IRA plan. Income taxes by state These contributions, which you can deduct, must be made timely. Income taxes by state See Time limits for contributing funds , later. Income taxes by state Salary reduction contributions. Income taxes by state   The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. Income taxes by state These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. Income taxes by state You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. Income taxes by state   If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. Income taxes by state Catch-up contributions. Income taxes by state   A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Income taxes by state The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. Income taxes by state Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. Income taxes by state However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Income taxes by state The catch-up contribution limit. Income taxes by state The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. Income taxes by state Employer matching contributions. Income taxes by state   You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. Income taxes by state This requirement does not apply if you make nonelective contributions as discussed later. Income taxes by state Example. Income taxes by state In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Income taxes by state Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Income taxes by state You make 3% matching contributions. Income taxes by state The total contribution you make for John is $2,000, figured as follows. Income taxes by state Salary reduction contributions ($25,000 × . Income taxes by state 05) $1,250 Employer matching contribution ($25,000 × . Income taxes by state 03) 750 Total contributions $2,000     The total contribution you make for yourself is $5,200, figured as follows. Income taxes by state Salary reduction contributions ($40,000 × . Income taxes by state 10) $4,000 Employer matching contribution ($40,000 × . Income taxes by state 03) 1,200 Total contributions $5,200 Lower percentage. Income taxes by state   If you choose a matching contribution less than 3%, the percentage must be at least 1%. Income taxes by state You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Income taxes by state You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. Income taxes by state Nonelective contributions. Income taxes by state   Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. Income taxes by state If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Income taxes by state Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). Income taxes by state   If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Income taxes by state Example 1. Income taxes by state In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Income taxes by state Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Income taxes by state You make a 2% nonelective contribution. Income taxes by state Both of you are under age 50. Income taxes by state The total contribution you make for Jane is $4,320, figured as follows. Income taxes by state Salary reduction contributions ($36,000 × . Income taxes by state 10) $3,600 2% nonelective contributions ($36,000 × . Income taxes by state 02) 720 Total contributions $4,320     The total contribution you make for yourself is $6,000, figured as follows. Income taxes by state Salary reduction contributions ($50,000 × . Income taxes by state 10) $5,000 2% nonelective contributions ($50,000 × . Income taxes by state 02) 1,000 Total contributions $6,000 Example 2. Income taxes by state Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. Income taxes by state Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . Income taxes by state 02) 1,500 Total contributions $13,500 Time limits for contributing funds. Income taxes by state   You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. Income taxes by state You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Income taxes by state Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. Income taxes by state When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. Income taxes by state You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. Income taxes by state Example 1. Income taxes by state Your tax year is the fiscal year ending June 30. Income taxes by state Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. Income taxes by state Example 2. Income taxes by state You are a sole proprietor whose tax year is the calendar year. Income taxes by state Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. Income taxes by state Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Income taxes by state For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. Income taxes by state Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Income taxes by state (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. Income taxes by state ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. Income taxes by state SIMPLE IRA plan contributions are not subject to federal income tax withholding. Income taxes by state However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Income taxes by state Matching and nonelective contributions are not subject to these taxes. Income taxes by state Reporting on Form W-2. Income taxes by state   Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. Income taxes by state You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Income taxes by state You must also include them in box 12. Income taxes by state Mark the “Retirement plan” checkbox in box 13. Income taxes by state For more information, see the Form W-2 instructions. Income taxes by state Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Income taxes by state Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. Income taxes by state However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. Income taxes by state Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Income taxes by state Early withdrawals generally are subject to a 10% additional tax. Income taxes by state However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. Income taxes by state More information. Income taxes by state   See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. Income taxes by state More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. Income taxes by state SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. Income taxes by state A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. Income taxes by state However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. Income taxes by state Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. Income taxes by state If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. Income taxes by state See Catch-up contributions , earlier under Contribution Limits. Income taxes by state You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. Income taxes by state No other contributions can be made to the trust. Income taxes by state No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. Income taxes by state The employee's rights to any contributions are nonforfeitable. Income taxes by state No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). Income taxes by state Compensation is defined earlier in this chapter. Income taxes by state Employee notification. Income taxes by state   The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. Income taxes by state See Notification Requirement in this chapter. Income taxes by state Credit for startup costs. Income taxes by state   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. Income taxes by state For more information, see Credit for startup costs under Reminders, earlier. Income taxes by state Note on Forms. Income taxes by state   Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. Income taxes by state To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. Income taxes by state Prev  Up  Next   Home   More Online Publications