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Myfreetaxes com taxtime 2. Myfreetaxes com taxtime   Taxable and Nontaxable Income Table of Contents Compensation for Services Retirement Plan DistributionsIndividual Retirement Arrangements (IRAs) Pensions and Annuities Social Security and Equivalent Railroad Retirement BenefitsAre Any of Your Benefits Taxable? How Much Is Taxable? How To Report Your Benefits Lump-Sum Election Repayments More Than Gross Benefits Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Life Insurance ProceedsInstallments for life. Myfreetaxes com taxtime Surviving spouse. Myfreetaxes com taxtime Endowment Contract Proceeds Accelerated Death Benefits Sale of HomeMaximum Amount of Exclusion Ownership and Use Tests Married Persons Business Use or Rental of Home Reporting the Sale Reverse Mortgages Other ItemsWelfare benefits. Myfreetaxes com taxtime Payments from a state fund for victims of crime. Myfreetaxes com taxtime Home Affordable Modification Program (HAMP). Myfreetaxes com taxtime Mortgage assistance payments. Myfreetaxes com taxtime Payments to reduce cost of winter energy use. Myfreetaxes com taxtime Nutrition Program for the Elderly. Myfreetaxes com taxtime Reemployment Trade Adjustment Assistance (RTAA). Myfreetaxes com taxtime Generally, income is taxable unless it is specifically exempt (not taxed) by law. Myfreetaxes com taxtime Your taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income of all kinds. Myfreetaxes com taxtime Under special provisions of the law, certain items are partially or fully exempt from tax. Myfreetaxes com taxtime Provisions that are of special interest to older taxpayers are discussed in this chapter. Myfreetaxes com taxtime Compensation for Services Generally, you must include in gross income everything you receive in payment for personal services. Myfreetaxes com taxtime In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Myfreetaxes com taxtime You need not receive the compensation in cash for it to be taxable. Myfreetaxes com taxtime Payments you receive in the form of goods or services generally must be included in gross income at their fair market value. Myfreetaxes com taxtime Volunteer work. Myfreetaxes com taxtime   Do not include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket expenses under any of the following volunteer programs. Myfreetaxes com taxtime Retired Senior Volunteer Program (RSVP). Myfreetaxes com taxtime Foster Grandparent Program. Myfreetaxes com taxtime Senior Companion Program. Myfreetaxes com taxtime Service Corps of Retired Executives (SCORE). Myfreetaxes com taxtime Unemployment compensation. Myfreetaxes com taxtime   You must include in income all unemployment compensation you or your spouse (if married filing jointly) received. Myfreetaxes com taxtime More information. Myfreetaxes com taxtime   See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income. Myfreetaxes com taxtime Retirement Plan Distributions This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements (IRA), employee pensions or annuities, and disability pensions or annuities. Myfreetaxes com taxtime A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. Myfreetaxes com taxtime A Roth IRA is an individual retirement plan that can be either an account or an annuity and features nondeductible contributions and tax-free distributions. Myfreetaxes com taxtime A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Myfreetaxes com taxtime More detailed information can be found in Publication 590, Individual Retirement Arrangements (IRAs), and Publication 575, Pension and Annuity Income. Myfreetaxes com taxtime Individual Retirement Arrangements (IRAs) In general, distributions from a traditional IRA are taxable in the year you receive them. Myfreetaxes com taxtime Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. Myfreetaxes com taxtime These are discussed in Publication 590. Myfreetaxes com taxtime If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. Myfreetaxes com taxtime If you do not file Form 8606 with your return, you may have to pay a $50 penalty. Myfreetaxes com taxtime Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Myfreetaxes com taxtime Early distributions. Myfreetaxes com taxtime   Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age  59½. Myfreetaxes com taxtime You must include early distributions of taxable amounts in your gross income. Myfreetaxes com taxtime These taxable amounts are also subject to an additional 10% tax unless the distribution qualifies for an exception. Myfreetaxes com taxtime For purposes of the additional 10% tax, an IRA is a qualified retirement plan. Myfreetaxes com taxtime For more information about this tax, see Tax on Early Distributions under Pensions and Annuities, later. Myfreetaxes com taxtime After age 59½ and before age 70½. Myfreetaxes com taxtime   After you reach age 59½, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. Myfreetaxes com taxtime Even though you can receive distributions after you reach age 59½, distributions are not required until you reach  age 70½. Myfreetaxes com taxtime Required distributions. Myfreetaxes com taxtime   If you are the owner of a traditional IRA, you generally must receive the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 70½. Myfreetaxes com taxtime See When Must You Withdraw Assets? (Required Minimum Distributions) in Publication 590. Myfreetaxes com taxtime If distributions from your traditional IRA(s) are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. Myfreetaxes com taxtime For purposes of the 50% excise tax, an IRA is a qualified retirement plan. Myfreetaxes com taxtime For more information about this tax, see Tax on Excess Accumulation under Pensions and Annuities, later. Myfreetaxes com taxtime See also Excess Accumulations (Insufficient Distributions) in Publication 590. Myfreetaxes com taxtime Pensions and Annuities Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. Myfreetaxes com taxtime However, see Insurance Premiums for Retired Public Safety Officers , later. Myfreetaxes com taxtime If you paid part of the cost of your pension or annuity plan (see Cost , later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract). Myfreetaxes com taxtime This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. Myfreetaxes com taxtime The rest of each payment is taxable. Myfreetaxes com taxtime However, see Insurance Premiums for Retired Public Safety Officers , later. Myfreetaxes com taxtime You figure the tax-free part of the payment using one of the following methods. Myfreetaxes com taxtime Simplified Method. Myfreetaxes com taxtime You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). Myfreetaxes com taxtime You cannot use this method if your annuity is paid under a nonqualified plan. Myfreetaxes com taxtime General Rule. Myfreetaxes com taxtime You must use this method if your annuity is paid under a nonqualified plan. Myfreetaxes com taxtime You generally cannot use this method if your annuity is paid under a qualified plan. Myfreetaxes com taxtime Contact your employer or plan administrator to find out if your pension or annuity is paid under a qualified or nonqualified plan. Myfreetaxes com taxtime You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Myfreetaxes com taxtime Exclusion limit. Myfreetaxes com taxtime   If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost cannot exceed your total cost. Myfreetaxes com taxtime Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Myfreetaxes com taxtime This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Myfreetaxes com taxtime   If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Myfreetaxes com taxtime If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Myfreetaxes com taxtime The total exclusion may be more than your cost. Myfreetaxes com taxtime Cost. Myfreetaxes com taxtime   Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost in the plan (your investment in the contract). Myfreetaxes com taxtime Your total cost in the plan includes everything that you paid. Myfreetaxes com taxtime It also includes amounts your employer contributed that were taxable to you when paid. Myfreetaxes com taxtime However, see Foreign employment contributions , later. Myfreetaxes com taxtime   From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts you received by the later of the annuity starting date or the date on which you received your first payment. Myfreetaxes com taxtime   The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the plan's obligations became fixed. Myfreetaxes com taxtime    The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Myfreetaxes com taxtime , that you receive. Myfreetaxes com taxtime Foreign employment contributions. Myfreetaxes com taxtime   If you worked abroad, certain amounts your employer paid into your retirement plan that were not includible in your gross income may be considered part of your cost. Myfreetaxes com taxtime For details, see Foreign employment contributions in Publication 575. Myfreetaxes com taxtime Withholding. Myfreetaxes com taxtime   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to you. Myfreetaxes com taxtime However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. Myfreetaxes com taxtime (These are distributions that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. Myfreetaxes com taxtime ) See Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information. Myfreetaxes com taxtime   For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form W-4P, Withholding Certificate for Pension or Annuity Payments. Myfreetaxes com taxtime Simplified Method. Myfreetaxes com taxtime   Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Myfreetaxes com taxtime For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Myfreetaxes com taxtime For any other annuity, this number is the number of monthly annuity payments under the contract. Myfreetaxes com taxtime Who must use the Simplified Method. Myfreetaxes com taxtime   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your pension or annuity payments from a qualified plan or annuity, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments (defined next). Myfreetaxes com taxtime   In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use the Simplified Method for payments from a qualified plan, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments. Myfreetaxes com taxtime If you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. Myfreetaxes com taxtime Guaranteed payments. Myfreetaxes com taxtime   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Myfreetaxes com taxtime If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Myfreetaxes com taxtime Who cannot use the Simplified Method. Myfreetaxes com taxtime   You cannot use the Simplified Method and must use the General Rule if you receive pension or annuity payments from: A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan, or A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed payments (defined above). Myfreetaxes com taxtime   In addition, you had to use the General Rule for either circumstance described above if your annuity starting date is after July 1, 1986, and before November 19, 1996. Myfreetaxes com taxtime If you did not have to use the General Rule, you could have chosen to use it. Myfreetaxes com taxtime You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July 2, 1986, and you did not qualify to use the Three-Year Rule. Myfreetaxes com taxtime   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Myfreetaxes com taxtime   Unless your annuity starting date was before 1987, once you have recovered all of your non-taxable investment, all of each remaining payment you receive is fully taxable. Myfreetaxes com taxtime Once your remaining payments are fully taxable, there is no longer a concern with the General Rule or Simplified Method. Myfreetaxes com taxtime   Complete information on the General Rule, including the actuarial tables you need, is contained in Publication 939, General Rule for Pensions and Annuities. Myfreetaxes com taxtime How to use the Simplified Method. Myfreetaxes com taxtime   Complete the Simplified Method Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions or in Publication 575 to figure your taxable annuity for 2013. Myfreetaxes com taxtime Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. Myfreetaxes com taxtime   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. Myfreetaxes com taxtime How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. Myfreetaxes com taxtime For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. Myfreetaxes com taxtime    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Myfreetaxes com taxtime Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Myfreetaxes com taxtime Single-life annuity. Myfreetaxes com taxtime   If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Myfreetaxes com taxtime Enter on line 3 the number shown for your age on your annuity starting date. Myfreetaxes com taxtime This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Myfreetaxes com taxtime Multiple-lives annuity. Myfreetaxes com taxtime   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Myfreetaxes com taxtime Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. Myfreetaxes com taxtime For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. Myfreetaxes com taxtime For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Myfreetaxes com taxtime Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. Myfreetaxes com taxtime   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Myfreetaxes com taxtime Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Myfreetaxes com taxtime This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Myfreetaxes com taxtime Fixed-period annuities. Myfreetaxes com taxtime   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Myfreetaxes com taxtime Line 6. Myfreetaxes com taxtime   The amount on line 6 should include all amounts that could have been recovered in prior years. Myfreetaxes com taxtime If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. Myfreetaxes com taxtime    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years. Myfreetaxes com taxtime Example. Myfreetaxes com taxtime Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Myfreetaxes com taxtime Bill's annuity starting date is January 1, 2013. Myfreetaxes com taxtime The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Myfreetaxes com taxtime Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Myfreetaxes com taxtime Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Myfreetaxes com taxtime Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Myfreetaxes com taxtime See the illustrated Worksheet 2-A, Simplified Method Worksheet, later. Myfreetaxes com taxtime You can find a blank version of this worksheet in Publication 575. Myfreetaxes com taxtime (The references in the illustrated worksheet are to sections in Publication 575). Myfreetaxes com taxtime His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65), and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet and finds the line 3 amount to be 310. Myfreetaxes com taxtime Bill's tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet). Myfreetaxes com taxtime Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Myfreetaxes com taxtime The full amount of any annuity payments received after 310 payments are paid must generally be included in gross income. Myfreetaxes com taxtime If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Myfreetaxes com taxtime This deduction is not subject to the 2%-of-adjusted-gross-income limit. Myfreetaxes com taxtime Worksheet 2-A. Myfreetaxes com taxtime Simplified Method Worksheet—Illustrated 1. Myfreetaxes com taxtime Enter the total pension or annuity payments received this year. Myfreetaxes com taxtime Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Myfreetaxes com taxtime $ 14,400 2. Myfreetaxes com taxtime Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion* See Cost (Investment in the Contract), earlier 2. Myfreetaxes com taxtime 31,000   Note. Myfreetaxes com taxtime If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Myfreetaxes com taxtime Otherwise, go to line 3. Myfreetaxes com taxtime     3. Myfreetaxes com taxtime Enter the appropriate number from Table 1 below. Myfreetaxes com taxtime But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Myfreetaxes com taxtime 310 4. Myfreetaxes com taxtime Divide line 2 by the number on line 3 4. Myfreetaxes com taxtime 100 5. Myfreetaxes com taxtime Multiply line 4 by the number of months for which this year's payments were made. Myfreetaxes com taxtime If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Myfreetaxes com taxtime Otherwise, go to line 6 5. Myfreetaxes com taxtime 1,200 6. Myfreetaxes com taxtime Enter any amount previously recovered tax free in years after 1986. Myfreetaxes com taxtime This is the amount shown on line 10 of your worksheet for last year 6. Myfreetaxes com taxtime 0 7. Myfreetaxes com taxtime Subtract line 6 from line 2 7. Myfreetaxes com taxtime 31,000 8. Myfreetaxes com taxtime Enter the smaller of line 5 or line 7 8. Myfreetaxes com taxtime 1,200 9. Myfreetaxes com taxtime Taxable amount for year. Myfreetaxes com taxtime Subtract line 8 from line 1. Myfreetaxes com taxtime Enter the result, but not less than zero. Myfreetaxes com taxtime Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Myfreetaxes com taxtime Note. Myfreetaxes com taxtime If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Myfreetaxes com taxtime If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers, earlier, before entering an amount on your tax return. Myfreetaxes com taxtime 9. Myfreetaxes com taxtime $ 13,200 10. Myfreetaxes com taxtime Was your annuity starting date before 1987? □ Yes. Myfreetaxes com taxtime STOP. Myfreetaxes com taxtime Do not complete the rest of this worksheet. Myfreetaxes com taxtime  ☑ No. Myfreetaxes com taxtime Add lines 6 and 8. Myfreetaxes com taxtime This is the amount you have recovered tax free through 2013. Myfreetaxes com taxtime You will need this number if you need to fill out this worksheet next year. Myfreetaxes com taxtime 10. Myfreetaxes com taxtime 1,200 11. Myfreetaxes com taxtime Balance of cost to be recovered. Myfreetaxes com taxtime Subtract line 10 from line 2. Myfreetaxes com taxtime If zero, you will not have to complete this worksheet next year. Myfreetaxes com taxtime The payments you receive next year will generally be fully taxable 11. Myfreetaxes com taxtime $ 29,800 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Myfreetaxes com taxtime   Table 1 for Line 3 Above       AND your annuity starting date was—   IF your age on your annuity starting date was . Myfreetaxes com taxtime . Myfreetaxes com taxtime . Myfreetaxes com taxtime   BEFORE November 19, 1996, enter on line 3 . Myfreetaxes com taxtime . Myfreetaxes com taxtime . Myfreetaxes com taxtime AFTER November 18, 1996, enter on line 3 . Myfreetaxes com taxtime . Myfreetaxes com taxtime . Myfreetaxes com taxtime   55 or under 300 360   56-60 260 310   61-65 240 260   66-70 170 210   71 or over 120 160 Table 2 for Line 3 Above   IF the annuitants' combined ages on your annuity starting date were . Myfreetaxes com taxtime . Myfreetaxes com taxtime . Myfreetaxes com taxtime   THEN enter on line 3 . Myfreetaxes com taxtime . Myfreetaxes com taxtime . Myfreetaxes com taxtime         110 or under   410         111-120   360         121-130   310         131-140   260         141 or over   210       Survivors of retirees. Myfreetaxes com taxtime   Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the same way the retiree would have included them in gross income. Myfreetaxes com taxtime   If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in your income. Myfreetaxes com taxtime The retiree's cost has already been recovered tax free. Myfreetaxes com taxtime   If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your initial payment called for in the contract. Myfreetaxes com taxtime The resulting tax-free amount will then remain fixed. Myfreetaxes com taxtime Any increases in the survivor annuity are fully taxable. Myfreetaxes com taxtime   If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Myfreetaxes com taxtime See Simplified Method , earlier. Myfreetaxes com taxtime How to report. Myfreetaxes com taxtime   If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. Myfreetaxes com taxtime If your pension or annuity is fully taxable, enter it on line 16b. Myfreetaxes com taxtime Do not make an entry on line 16a. Myfreetaxes com taxtime   If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. Myfreetaxes com taxtime If your pension or annuity is fully taxable, enter it on line 12b. Myfreetaxes com taxtime Do not make an entry on line 12a. Myfreetaxes com taxtime   If you file Form 1040NR, report your total annuity on line 17a, and the taxable part on line 17b. Myfreetaxes com taxtime If your pension or annuity is fully taxable, enter it on line 17b. Myfreetaxes com taxtime Do not make an entry on line 17a. Myfreetaxes com taxtime Example. Myfreetaxes com taxtime You are a Form 1040 filer and you received monthly payments totaling $1,200 (12 months x $100) during 2013 from a pension plan that was completely financed by your employer. Myfreetaxes com taxtime You had paid no tax on the payments that your employer made to the plan, and the payments were not used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers ). Myfreetaxes com taxtime The entire $1,200 is taxable. Myfreetaxes com taxtime You include $1,200 only on Form 1040, line 16b. Myfreetaxes com taxtime Joint return. Myfreetaxes com taxtime   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on line 16a of Form 1040, line 12a of Form 1040A, or line 17a of Form 1040NR. Myfreetaxes com taxtime Report the total of the taxable parts on line 16b of Form 1040, line 12b of Form 1040A, or line 17b of Form 1040NR. Myfreetaxes com taxtime Form 1099-R. Myfreetaxes com taxtime   You should receive a Form 1099-R for your pension or annuity. Myfreetaxes com taxtime Form 1099-R shows your pension or annuity for the year and any income tax withheld. Myfreetaxes com taxtime You should receive a Form W-2 if you receive distributions from certain nonqualified plans. Myfreetaxes com taxtime You must attach Forms 1099-R or Forms W-2 to your 2013 tax return if federal income tax was withheld. Myfreetaxes com taxtime Generally, you should be sent these forms by January 31, 2014. Myfreetaxes com taxtime Nonperiodic Distributions If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. Myfreetaxes com taxtime Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends) on your investment, and certain loans. Myfreetaxes com taxtime For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575. Myfreetaxes com taxtime The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. Myfreetaxes com taxtime See Tax on Early Distributions, later. Myfreetaxes com taxtime Lump-sum distributions. Myfreetaxes com taxtime   If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Myfreetaxes com taxtime The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Myfreetaxes com taxtime The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Myfreetaxes com taxtime You may be able to use the 10-year tax option to figure tax on the ordinary income part. Myfreetaxes com taxtime Form 1099-R. Myfreetaxes com taxtime   If you receive a total distribution from a plan, you should receive a Form 1099-R. Myfreetaxes com taxtime If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain part of the distribution. Myfreetaxes com taxtime The amount in box 2a, Taxable amount, minus the amount in box 3, Capital gain, is the ordinary income part. Myfreetaxes com taxtime More information. Myfreetaxes com taxtime   For more detailed information on lump-sum distributions, see Publication 575 or Form 4972, Tax on Lump-Sum Distributions. Myfreetaxes com taxtime Tax on Early Distributions Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age 59½ are subject to an additional tax of 10%. Myfreetaxes com taxtime The tax applies to the taxable part of the distribution. Myfreetaxes com taxtime For this purpose, a qualified retirement plan is: A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)), A qualified employee annuity plan, A tax-sheltered annuity plan (403(b) plan), or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Myfreetaxes com taxtime  An IRA is also a qualified retirement plan for purposes of this tax. Myfreetaxes com taxtime General exceptions to tax. Myfreetaxes com taxtime   The early distribution tax does not apply to any distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Myfreetaxes com taxtime Additional exceptions. Myfreetaxes com taxtime   There are additional exceptions to the early distribution tax for certain distributions from qualified retirement plans and nonqualified annuity contracts. Myfreetaxes com taxtime See Publication 575 for details. Myfreetaxes com taxtime Reporting tax. Myfreetaxes com taxtime   If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is correctly shown in Form 1099-R, box 7, multiply the taxable part of the early distribution by 10% (. Myfreetaxes com taxtime 10) and enter the result on Form 1040, line 58, or Form 1040NR, line 56. Myfreetaxes com taxtime See the instructions for line 58 of Form 1040 or line 56 of Form 1040NR for more information about reporting the early distribution tax. Myfreetaxes com taxtime Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date. Myfreetaxes com taxtime Unless the rule for 5% owners applies, this is generally April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Myfreetaxes com taxtime However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you reach 70½, even if you have not retired. Myfreetaxes com taxtime For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986). Myfreetaxes com taxtime  An IRA is also a qualified retirement plan for purposes of this tax. Myfreetaxes com taxtime An excess accumulation is the undistributed remainder of the required minimum distribution that was left in your qualified retirement plan. Myfreetaxes com taxtime 5% owners. Myfreetaxes com taxtime   If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions from the plan by April 1 of the year after the calendar year in which you reach age 70½. Myfreetaxes com taxtime See Publication 575 for more information. Myfreetaxes com taxtime Amount of tax. Myfreetaxes com taxtime   If you do not receive the required minimum distribution, you are subject to an additional tax. Myfreetaxes com taxtime The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. Myfreetaxes com taxtime You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall. Myfreetaxes com taxtime Form 5329. Myfreetaxes com taxtime   You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan. Myfreetaxes com taxtime Additional information. Myfreetaxes com taxtime   For more detailed information on the tax on excess accumulation, see Publication 575. Myfreetaxes com taxtime Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. Myfreetaxes com taxtime The premiums can be for coverage for you, your spouse, or dependent(s). Myfreetaxes com taxtime The distribution must be made directly from the plan to the insurance provider. Myfreetaxes com taxtime You can exclude from income the smaller of the amount of the insurance premiums or $3,000. Myfreetaxes com taxtime You can only make this election for amounts that would otherwise be included in your income. Myfreetaxes com taxtime The amount excluded from your income cannot be used to claim a medical expense deduction. Myfreetaxes com taxtime An eligible retirement plan is a governmental plan that is a: Qualified trust, Section 403(a) plan, Section 403(b) annuity, or Section 457(b) plan. Myfreetaxes com taxtime If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. Myfreetaxes com taxtime The taxable amount shown in box 2a of any Form 1099-R that you receive does not reflect the exclusion. Myfreetaxes com taxtime Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Myfreetaxes com taxtime Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Myfreetaxes com taxtime Enter “PSO” next to the appropriate line on which you report the taxable amount. Myfreetaxes com taxtime Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. Myfreetaxes com taxtime These categories are treated differently for income tax purposes. Myfreetaxes com taxtime Social security equivalent benefits. Myfreetaxes com taxtime   The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. Myfreetaxes com taxtime This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated for tax purposes like social security benefits. Myfreetaxes com taxtime (See Social Security and Equivalent Railroad Retirement Benefits , later. Myfreetaxes com taxtime ) Non-social security equivalent benefits. Myfreetaxes com taxtime   The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB). Myfreetaxes com taxtime It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Myfreetaxes com taxtime This category of benefits is treated as an amount received from a qualified employee plan. Myfreetaxes com taxtime This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Myfreetaxes com taxtime Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. Myfreetaxes com taxtime More information. Myfreetaxes com taxtime   For more information about railroad retirement benefits, see Publication 575. Myfreetaxes com taxtime Military Retirement Pay Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, lines 16a and 16b; on Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. Myfreetaxes com taxtime But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. Myfreetaxes com taxtime For more information, including information about veterans' benefits and insurance, see Publication 525. Myfreetaxes com taxtime Social Security and Equivalent Railroad Retirement Benefits This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. Myfreetaxes com taxtime Social security benefits include monthly retirement, survivor, and disability benefits. Myfreetaxes com taxtime They do not include supplemental security income (SSI) payments, which are not taxable. Myfreetaxes com taxtime Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. Myfreetaxes com taxtime They commonly are called the social security equivalent benefit (SSEB) portion of tier 1 benefits. Myfreetaxes com taxtime If you received these benefits during 2013, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are a nonresident alien), showing the amount of the benefits. Myfreetaxes com taxtime Are Any of Your Benefits Taxable? Note. Myfreetaxes com taxtime When the term “benefits” is used in this section, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits. Myfreetaxes com taxtime  To find out whether any of your benefits may be taxable, compare the base amount for your filing status (explained later) with the total of: One-half of your benefits, plus All your other income, including tax-exempt interest. Myfreetaxes com taxtime When making this comparison, do not reduce your other income by any exclusions for: Interest from qualified U. Myfreetaxes com taxtime S. Myfreetaxes com taxtime savings bonds, Employer-provided adoption benefits, Foreign earned income or foreign housing, or Income earned in American Samoa or Puerto Rico by bona fide residents. Myfreetaxes com taxtime Figuring total income. Myfreetaxes com taxtime   To figure the total of one-half of your benefits plus your other income, use Worksheet 2-B. Myfreetaxes com taxtime If that total amount is more than your base amount, part of your benefits may be taxable. Myfreetaxes com taxtime If you are married and file a joint return for 2013, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Myfreetaxes com taxtime Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable. Myfreetaxes com taxtime If the only income you received during 2013 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. Myfreetaxes com taxtime If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. Myfreetaxes com taxtime Worksheet 2-B. Myfreetaxes com taxtime A Quick Way To Check if Your Benefits May Be Taxable A. Myfreetaxes com taxtime Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Myfreetaxes com taxtime Include  the full amount of any lump-sum benefit payments received in 2013, for 2013 and  earlier years. Myfreetaxes com taxtime (If you received more than one form, combine the amounts from box 5  and enter the total. Myfreetaxes com taxtime ) A. Myfreetaxes com taxtime     Note. Myfreetaxes com taxtime If the amount on line A is zero or less, stop here; none of your benefits are  taxable this year. Myfreetaxes com taxtime     B. Myfreetaxes com taxtime Enter one-half of the amount on line A B. Myfreetaxes com taxtime   C. Myfreetaxes com taxtime Enter your taxable pensions, wages, interest, dividends, and other taxable income C. Myfreetaxes com taxtime   D. Myfreetaxes com taxtime Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income for: •Interest from qualified U. Myfreetaxes com taxtime S. Myfreetaxes com taxtime savings bonds, •Employer-provided adoption benefits, •Foreign earned income or foreign housing, or •Income earned in American Samoa or Puerto Rico by bona fide residents D. Myfreetaxes com taxtime   E. Myfreetaxes com taxtime Add lines B, C, and D and enter the total E. Myfreetaxes com taxtime   F. Myfreetaxes com taxtime If you are: •Married filing jointly, enter $32,000 •Single, head of household, qualifying widow(er), or married filing separately and you  lived apart from your spouse for all of 2013, enter $25,000 •Married filing separately and you lived with your spouse at any time during 2013,  enter -0- F. Myfreetaxes com taxtime   G. Myfreetaxes com taxtime Is the amount on line F less than or equal to the amount on line E? □ No. Myfreetaxes com taxtime None of your benefits are taxable this year. Myfreetaxes com taxtime  □ Yes. Myfreetaxes com taxtime Some of your benefits may be taxable. Myfreetaxes com taxtime To figure how much of your benefits  are taxable, see Which worksheet to use under How Much Is Taxable. Myfreetaxes com taxtime     Base Amount Your base amount is: $25,000 if you are single, head of household, or qualifying widow(er) with dependent child, $25,000 if you are married filing separately and lived apart from your spouse for all of 2013, $32,000 if you are married filing jointly, or $0 if you are married filing separately and lived with your spouse at any time during 2013. Myfreetaxes com taxtime Repayment of Benefits Any repayment of benefits you made during 2013 must be subtracted from the gross benefits you received in 2013. Myfreetaxes com taxtime It does not matter whether the repayment was for a benefit you received in 2013 or in an earlier year. Myfreetaxes com taxtime If you repaid more than the gross benefits you received in 2013, see Repayments More Than Gross Benefits , later. Myfreetaxes com taxtime Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Myfreetaxes com taxtime Your repayments are shown in box 4. Myfreetaxes com taxtime The amount in box 5 shows your net benefits for 2013 (box 3 minus box 4). Myfreetaxes com taxtime Use the amount in box 5 to figure whether any of your benefits are taxable. Myfreetaxes com taxtime Tax Withholding and Estimated Tax You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits. Myfreetaxes com taxtime If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. Myfreetaxes com taxtime If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the year. Myfreetaxes com taxtime For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals. Myfreetaxes com taxtime How Much Is Taxable? If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. Myfreetaxes com taxtime Generally, the higher that total amount, the greater the taxable part of your benefits. Myfreetaxes com taxtime Maximum taxable part. Myfreetaxes com taxtime   The taxable part of your benefits usually cannot be more than 50%. Myfreetaxes com taxtime However, up to 85% of your benefits can be taxable if either of the following situations applies to you. Myfreetaxes com taxtime The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly). Myfreetaxes com taxtime You are married filing separately and lived with your spouse at any time during 2013. Myfreetaxes com taxtime   If you are a nonresident alien, 85% of your benefits are taxable. Myfreetaxes com taxtime However, this income is exempt under some tax treaties. Myfreetaxes com taxtime Which worksheet to use. Myfreetaxes com taxtime   A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. Myfreetaxes com taxtime However, you will need to use a different worksheet(s) if any of the following situations applies to you. Myfreetaxes com taxtime You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement plan at work. Myfreetaxes com taxtime In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits. Myfreetaxes com taxtime Situation (1) does not apply and you take one or more of the following exclusions. Myfreetaxes com taxtime Interest from qualified U. Myfreetaxes com taxtime S. Myfreetaxes com taxtime savings bonds (Form 8815). Myfreetaxes com taxtime Employer-provided adoption benefits (Form 8839). Myfreetaxes com taxtime Foreign earned income or housing (Form 2555 or Form 2555-EZ). Myfreetaxes com taxtime Income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. Myfreetaxes com taxtime In these situations, you must use Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure your taxable benefits. Myfreetaxes com taxtime You received a lump-sum payment for an earlier year. Myfreetaxes com taxtime In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. Myfreetaxes com taxtime See Lump-Sum Election , later. Myfreetaxes com taxtime How To Report Your Benefits If part of your benefits are taxable, you must use Form 1040, Form 1040A, or Form 1040NR. Myfreetaxes com taxtime You cannot use Form 1040EZ. Myfreetaxes com taxtime Reporting on Form 1040. Myfreetaxes com taxtime   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. Myfreetaxes com taxtime If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 20a. Myfreetaxes com taxtime Reporting on Form 1040A. Myfreetaxes com taxtime   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. Myfreetaxes com taxtime If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 14a. Myfreetaxes com taxtime Reporting on Form 1040NR. Myfreetaxes com taxtime   Report 85% of the total amount of your benefits (box 5 of your Form SSA-1042S or Form RRB-1042S) in the appropriate column of Form 1040NR, Schedule NEC, line 8. Myfreetaxes com taxtime Benefits not taxable. Myfreetaxes com taxtime   If you are filing Form 1040EZ, do not report any benefits on your tax return. Myfreetaxes com taxtime If you are filing Form 1040 or Form 1040A, report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on Form 1040, line 20a, or Form 1040A, line 14a. Myfreetaxes com taxtime Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. Myfreetaxes com taxtime If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. Myfreetaxes com taxtime Lump-Sum Election You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2013 in your 2013 income, even if the payment includes benefits for an earlier year. Myfreetaxes com taxtime This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. Myfreetaxes com taxtime No part of the lump-sum death benefit is subject to tax. Myfreetaxes com taxtime For more information about the lump-sum death benefit, visit the Social Security Administration website at www. Myfreetaxes com taxtime SSA. Myfreetaxes com taxtime gov, and use keyword: death benefit. Myfreetaxes com taxtime Generally, you use your 2013 income to figure the taxable part of the total benefits received in 2013. Myfreetaxes com taxtime However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. Myfreetaxes com taxtime You can elect this method if it lowers your taxable benefits. Myfreetaxes com taxtime See Publication 915 for more information. Myfreetaxes com taxtime Repayments More Than Gross Benefits In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. Myfreetaxes com taxtime If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Myfreetaxes com taxtime If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year. Myfreetaxes com taxtime If you have any questions about this negative figure, contact your local Social Security Administration office or your local U. Myfreetaxes com taxtime S. Myfreetaxes com taxtime Railroad Retirement Board field office. Myfreetaxes com taxtime Joint return. Myfreetaxes com taxtime   If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5 but your spouse's does not, subtract the box 5 amount on your form from the box 5 amount on your spouse's form. Myfreetaxes com taxtime You do this to get your net benefits when figuring if your combined benefits are taxable. Myfreetaxes com taxtime Repayment of benefits received in an earlier year. Myfreetaxes com taxtime   If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year. Myfreetaxes com taxtime   If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Myfreetaxes com taxtime Claim it on Schedule A (Form 1040), line 23. Myfreetaxes com taxtime   If this deduction is more than $3,000, you have to follow some special instructions. Myfreetaxes com taxtime See Publication 915 for those instructions. Myfreetaxes com taxtime Sickness and Injury Benefits Generally, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. Myfreetaxes com taxtime If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. Myfreetaxes com taxtime However, certain payments may not be taxable to you. Myfreetaxes com taxtime Some of these payments are discussed later in this section. Myfreetaxes com taxtime Also, see Military and Government Disability Pensions and Other Sickness and Injury Benefits in Publication 525. Myfreetaxes com taxtime Cost paid by you. Myfreetaxes com taxtime   If you pay the entire cost of an accident or health plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. Myfreetaxes com taxtime If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. Myfreetaxes com taxtime Disability Pensions If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. Myfreetaxes com taxtime You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Myfreetaxes com taxtime Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Myfreetaxes com taxtime If you were 65 or older by the end of 2013 or you were retired on permanent and total disability and received taxable disability income, you may be able to claim the credit for the elderly or the disabled. Myfreetaxes com taxtime See Credit for the Elderly or the Disabled, later. Myfreetaxes com taxtime For more information on this credit, see Publication 524, Credit for the Elderly or the Disabled. Myfreetaxes com taxtime Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Myfreetaxes com taxtime Report the payments on lines 16a and 16b of Form 1040, on lines 12a and 12b of Form 1040A, or on lines 17a and 17b of Form 1040NR. Myfreetaxes com taxtime For more information on pensions and annuities, see Publication 575. Myfreetaxes com taxtime Retirement and profit-sharing plans. Myfreetaxes com taxtime   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. Myfreetaxes com taxtime The payments must be reported as a pension or annuity. Myfreetaxes com taxtime Accrued leave payment. Myfreetaxes com taxtime   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. Myfreetaxes com taxtime The payment is not a disability payment. Myfreetaxes com taxtime Include it in your income in the tax year you receive it. Myfreetaxes com taxtime Long-Term Care Insurance Contracts In most cases, long-term care insurance contracts generally are treated as accident and health insurance contracts. Myfreetaxes com taxtime Amounts you receive from them (other than policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal injury or sickness. Myfreetaxes com taxtime However, the amount you can exclude may be limited. Myfreetaxes com taxtime Long-term care insurance contracts are discussed in more detail in Publication 525. Myfreetaxes com taxtime Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. Myfreetaxes com taxtime The exemption also applies to your survivors. Myfreetaxes com taxtime The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. Myfreetaxes com taxtime If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Myfreetaxes com taxtime For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Myfreetaxes com taxtime Return to work. Myfreetaxes com taxtime   If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. Myfreetaxes com taxtime Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. Myfreetaxes com taxtime Federal Employees' Compensation Act (FECA). Myfreetaxes com taxtime   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. Myfreetaxes com taxtime However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Myfreetaxes com taxtime Report this income on Form 1040, line 7; Form 1040A, line 7; on Form 1040EZ, line 1; or Form 1040NR, line 8. Myfreetaxes com taxtime Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. Myfreetaxes com taxtime    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Myfreetaxes com taxtime For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Myfreetaxes com taxtime Other compensation. Myfreetaxes com taxtime   Many other amounts you receive as compensation for sickness or injury are not taxable. Myfreetaxes com taxtime These include the following amounts. Myfreetaxes com taxtime Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. Myfreetaxes com taxtime Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. Myfreetaxes com taxtime Compensation you receive for permanent loss or loss of use of a part or function of your body, for your permanent disfigurement, or for such loss or disfigurement suffered by your spouse or dependent(s). Myfreetaxes com taxtime This compensation must be based only on the injury and not on the period of your absence from work. Myfreetaxes com taxtime These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. Myfreetaxes com taxtime Life Insurance Proceeds Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. Myfreetaxes com taxtime This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. Myfreetaxes com taxtime Proceeds not received in installments. Myfreetaxes com taxtime   If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. Myfreetaxes com taxtime If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death. Myfreetaxes com taxtime Proceeds received in installments. Myfreetaxes com taxtime   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. Myfreetaxes com taxtime   To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Myfreetaxes com taxtime Include anything over this excluded part in your income as interest. Myfreetaxes com taxtime Installments for life. Myfreetaxes com taxtime   If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. Myfreetaxes com taxtime If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee. Myfreetaxes com taxtime Surviving spouse. Myfreetaxes com taxtime   If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude, in any year, up to $1,000 of the interest included in the installments. Myfreetaxes com taxtime If you remarry, you can continue to take the exclusion. Myfreetaxes com taxtime Surrender of policy for cash. Myfreetaxes com taxtime   If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Myfreetaxes com taxtime In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income. Myfreetaxes com taxtime You should receive a Form 1099-R showing the total proceeds and the taxable part. Myfreetaxes com taxtime Report these amounts on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or Form 1040NR, lines 17a and 17b. Myfreetaxes com taxtime Endowment Contract Proceeds An endowment contract is a policy that pays over to you a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Myfreetaxes com taxtime Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. Myfreetaxes com taxtime To determine your cost, subtract from the total premiums (or other consideration) paid for the contract any amount that you previously received under the contract and excluded from your income. Myfreetaxes com taxtime Include in your income the part of the lump-sum payment that is more than your cost. Myfreetaxes com taxtime Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity. Myfreetaxes com taxtime The tax treatment of an annuity is explained in Publication 575. Myfreetaxes com taxtime For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. Myfreetaxes com taxtime This election must be made within 60 days after the lump-sum payment first becomes payable to you. Myfreetaxes com taxtime Accelerated Death Benefits Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are generally excluded from income if the insured is terminally or chronically ill. Myfreetaxes com taxtime However, see Exception , later. Myfreetaxes com taxtime For a chronically ill individual, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Myfreetaxes com taxtime Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit. Myfreetaxes com taxtime In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. Myfreetaxes com taxtime Generally, a viatical settlement provider is one who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill. Myfreetaxes com taxtime To report taxable accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. Myfreetaxes com taxtime Terminally or chronically ill defined. Myfreetaxes com taxtime   A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months from the date of the certification. Myfreetaxes com taxtime A chronically ill person is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions. Myfreetaxes com taxtime The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity. Myfreetaxes com taxtime The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment. Myfreetaxes com taxtime Exception. Myfreetaxes com taxtime   The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of the insured because the insured: Is a director, officer, or employee of the other person, or Has a financial interest in the business of the other person. Myfreetaxes com taxtime Sale of Home You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. Myfreetaxes com taxtime Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return. Myfreetaxes com taxtime You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Myfreetaxes com taxtime Main home. Myfreetaxes com taxtime   Usually, your main home is the home you live in most of the time and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Myfreetaxes com taxtime Repaying the first-time homebuyer credit because you sold your home. Myfreetaxes com taxtime   If you claimed a first-time homebuyer credit for your main home and you sell it, you may have to repay the credit. Myfreetaxes com taxtime For a home purchased in 2008 and used as your main home until sold in 2013, you must file Form 5405 and repay the balance of the unpaid credit on your 2013 tax return. Myfreetaxes com taxtime   For a home purchased after 2008, you generally must repay the entire credit if the home was sold (or otherwise ceased to be your main home) within 36 months of the purchase date. Myfreetaxes com taxtime If you purchased your home in 2009 and used it as your main home until sold in 2013, you do not have to repay the credit or file Form 5405. Myfreetaxes com taxtime If you purchased your home in 2010 and used it as your main home until sold in 2013, you may have to file Form 5405 and repay the entire credit on your 2013 tax return. Myfreetaxes com taxtime   See the Instructions for Form 5405 for more information about repaying the credit and exceptions to repayment that may apply to you. Myfreetaxes com taxtime Maximum Amount of Exclusion You can generally exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Myfreetaxes com taxtime You meet the ownership test. Myfreetaxes com taxtime You meet the use test. Myfreetaxes com taxtime During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Myfreetaxes com taxtime You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Myfreetaxes com taxtime Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Myfreetaxes com taxtime This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Myfreetaxes com taxtime Exception to ownership and use tests. Myfreetaxes com taxtime   If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in some cases. Myfreetaxes com taxtime Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances. Myfreetaxes com taxtime The maximum amount you can exclude will be reduced. Myfreetaxes com taxtime See Publication 523, Selling Your Home, for more information. Myfreetaxes com taxtime Exception to use test for individuals with a disability. Myfreetaxes com taxtime   There is an exception to the use test if, during the 5-year period before the sale of your home: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year. Myfreetaxes com taxtime Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition. Myfreetaxes com taxtime   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Myfreetaxes com taxtime Exception to ownership test for property acquired in a like-kind exchange. Myfreetaxes com taxtime   You must have owned your main home for at least 5 years to qualify for the exclusion if you acquired your main home in a like-kind exchange. Myfreetaxes com taxtime This special 5-year ownership rule continues to apply to a home you acquired in a like-kind exchange and gave to another person. Myfreetaxes com taxtime A like-kind exchange is an exchange of property held for productive use in a trade or business or for investment. Myfreetaxes com taxtime See Publication 523 for more information. Myfreetaxes com taxtime Period of nonqualified use. Myfreetaxes com taxtime   Generally, the gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gain is allocated to periods of nonqualified use. Myfreetaxes com taxtime Nonqualified use is any period after December 31, 2008, during which the property is not used as the main home. Myfreetaxes com taxtime See Publication 523 for more information. Myfreetaxes com taxtime Married Persons In the special situations discussed below, if you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of gain. Myfreetaxes com taxtime However, see Special rules for joint returns , next. Myfreetaxes com taxtime Special rules for joint returns. Myfreetaxes com taxtime   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Myfreetaxes com taxtime You are married and file a joint return for the year. Myfreetaxes com taxtime Either you or your spouse meets the ownership test. Myfreetaxes com taxtime Both you and your spouse meet the use test. Myfreetaxes com taxtime During the 2-year period ending on the date of the sale, neither you nor your spouse exclude gain from the sale of another home. Myfreetaxes com taxtime Sale of home by surviving spouse. Myfreetaxes com taxtime   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Myfreetaxes com taxtime   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home in 2013. Myfreetaxes com taxtime The sale or exchange took place no more than 2 years after the date of death of your spouse. Myfreetaxes com taxtime You have not remarried. Myfreetaxes com taxtime You and your spouse met the use test at the time of your spouse's death. Myfreetaxes com taxtime You or your spouse met the ownership test at the time of your spouse's death. Myfreetaxes com taxtime Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Myfreetaxes com taxtime Home transferred from spouse. Myfreetaxes com taxtime   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Myfreetaxes com taxtime Use of home after divorce. Myfreetaxes com taxtime   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Myfreetaxes com taxtime Business Use or Rental of Home You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. Myfreetaxes com taxtime However, you must meet the ownership and use tests. Myfreetaxes com taxtime See Publication 523 for more information. Myfreetaxes com taxtime Depreciation after May 6, 1997. Myfreetaxes com taxtime   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Myfreetaxes com taxtime See Publication 523 for more information. Myfreetaxes com taxtime Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and you do not qualify to exclude all of it, You have a gain and you choose not to exclude it, or You received Form 1099-S. Myfreetaxes com taxtime If you have a gain that you cannot or choose not to exclude, if you received a Form 1099-S, or if you have a deductible loss, report the sale on your tax return. Myfreetaxes com taxtime Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. Myfreetaxes com taxtime If you used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property, to report the sale of the business or rental part. Myfreetaxes com taxtime See Publication 523 for more information. Myfreetaxes com taxtime Reverse Mortgages A revers
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e-services - Online Tools for Tax Professionals

e-services is a suite of web-based products that will allow tax professionals and payers to conduct business with the IRS electronically. These services are only available to approved IRS business partners and not available to the general public.  e-services is available via the Internet 24 hours a day, 7 days a week. Authorized Business partners needing assistance after using the on-line resources, can contact the e-help Desk at 1-866-255-0654 (512-416-7750 for international calls).                              

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Registration
All tax professionals who wish to use e-services products must register online to create an individual electronic account.  The registration process is a one-time automated process where the user selects a username, password and PIN.  When the registration information has been validated, the registrant will receive an on-screen acknowledgement.  For security purposes, a confirmation code is sent via postal mail to the tax professional to complete the registration process. 

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What's new with e-services?

On September 2, 2013, TIN Matching was re-engineered to upgrade equipment and software as well as to improve processing and increase capacity.  FAQ's           New! Talking Points


e-file Application
Use the IRS online e-file Application to become an authorized e-file provider. Applications can be saved in progress and modifications to a firm's application can be made quickly and easily without restarting the process. You can also check the status of the application as the IRS makes updates to the suitability check. 

The IRS e-file Application enables you to easily adapt your application to the changes in your business. You may want to add a new Principal to your firm's e-file application or you may want to delegate the management of the IRS e-file Application to someone in your organization. You can manage all your Authorized IRS e-file Provider information in one place and more easily update the information when changes occur.         


Transcript Delivery System (TDS)
Eligible tax professionals may use TDS to request and receive account transcripts, wage and income documents, tax return transcripts, and verification of non-filing letters. A new product (the Record of Account) combines both the Return Transcript and Account Transcript in one product. Tax Professionals can request the products for both individual and business taxpayers. Use the TDS application to resolve your clients' need for return and account information quickly, in a secure, online session. Tax professionals must have a Power of Attorney authorization on file with the IRS before accessing a client's account.          


Taxpayer Identification Number (TIN) Matching
TIN Matching is a pre-filing service offered to payers and/or authorized agents who submit any of six information returns subject to backup withholding (Forms 1099-B, INT, DIV, OID, PATR, and MISC). With Interactive TIN Matching authorized payers can match up to 25 payee TIN and name combinations against IRS records prior to submitting an information return. Bulk TIN Matching allows payers and/or authorized agents filing any of the six information returns to match up to 100,000 TIN and name combinations. In order to participate in TIN Matching, payers must be listed in the IRS Payer Account File (PAF) database. If your firm has not filed information returns with the IRS in one of the past two tax years, the application will not be available to you at this time.


QuickAlerts Messaging Service
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Page Last Reviewed or Updated: 07-Mar-2014

The Myfreetaxes Com Taxtime

Myfreetaxes com taxtime 11. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Kickbacks. Myfreetaxes com taxtime Form 1099-MISC. Myfreetaxes com taxtime Exception. Myfreetaxes com taxtime Tax preparation fees. Myfreetaxes com taxtime Covered executive branch official. Myfreetaxes com taxtime Exceptions to denial of deduction. Myfreetaxes com taxtime Indirect political contributions. Myfreetaxes com taxtime Type of deduction. Myfreetaxes com taxtime Repayment—$3,000 or less. Myfreetaxes com taxtime Repayment—over $3,000. Myfreetaxes com taxtime Method 1. Myfreetaxes com taxtime Method 2. Myfreetaxes com taxtime Repayment does not apply. Myfreetaxes com taxtime Year of deduction (or credit). Myfreetaxes com taxtime Telephone. Myfreetaxes com taxtime What's New Standard mileage rate. Myfreetaxes com taxtime  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. Myfreetaxes com taxtime 5 cents per mile. Myfreetaxes com taxtime For more information, see Car and truck expenses under Miscellaneous Expenses. Myfreetaxes com taxtime Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. Myfreetaxes com taxtime For more information on travel, meals, and entertainment, including deductibility, see Publication 463. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime If the expenses are substantiated, you can deduct the allowable amount on your tax return. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime For example, you can deduct 100% of the cost of meals on your business books and records. Myfreetaxes com taxtime However, only 50% of these costs are allowed by law as a tax deduction. Myfreetaxes com taxtime How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. Myfreetaxes com taxtime If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime See Table 11-1 , Reporting Reimbursements. Myfreetaxes com taxtime Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. Myfreetaxes com taxtime The advance is reasonably calculated not to exceed the amount of anticipated expenses. Myfreetaxes com taxtime You make the advance within a reasonable period of time of your employee paying or incurring the expense. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Myfreetaxes com taxtime Adequate accounting. Myfreetaxes com taxtime   Your employees must adequately account to you for their travel, meals, and entertainment expenses. Myfreetaxes com taxtime They must give you documentary evidence of their travel, mileage, and other employee business expenses. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Excess reimbursement or allowance. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. Myfreetaxes com taxtime Reasonable period of time. Myfreetaxes com taxtime   A reasonable period of time depends on the facts and circumstances. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime You give an advance within 30 days of the time the employee pays or incurs the expense. Myfreetaxes com taxtime Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. Myfreetaxes com taxtime Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime How to deduct. Myfreetaxes com taxtime   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Myfreetaxes com taxtime Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. Myfreetaxes com taxtime S. Myfreetaxes com taxtime Corporation Income Tax Return. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Table 11-1. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Myfreetaxes com taxtime Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime No reimbursement plan The entire amount as wages in box 1. Myfreetaxes com taxtime Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. Myfreetaxes com taxtime Federal rate. Myfreetaxes com taxtime   The federal rate can be figured using any one of the following methods. Myfreetaxes com taxtime For car expenses: The standard mileage rate. Myfreetaxes com taxtime A fixed and variable rate (FAVR). Myfreetaxes com taxtime For per diem amounts: The regular federal per diem rate. Myfreetaxes com taxtime The standard meal allowance. Myfreetaxes com taxtime The high-low rate. Myfreetaxes com taxtime Car allowance. Myfreetaxes com taxtime   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Myfreetaxes com taxtime Beginning in 2013, the standard business mileage rate is 56. Myfreetaxes com taxtime 5 cents per mile. Myfreetaxes com taxtime   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. Myfreetaxes com taxtime ). Myfreetaxes com taxtime For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. Myfreetaxes com taxtime irs. Myfreetaxes com taxtime gov/irb/2010-51_IRB/ar14. Myfreetaxes com taxtime html and Notice 2012-72, available at www. Myfreetaxes com taxtime irs. Myfreetaxes com taxtime gov/irb/2012-50_IRB/ar10. Myfreetaxes com taxtime html. Myfreetaxes com taxtime Per diem allowance. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Regular federal per diem rate. Myfreetaxes com taxtime   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. Myfreetaxes com taxtime It has two components: Lodging expense, and Meal and incidental expense (M&IE). Myfreetaxes com taxtime The rates are different for different locations. Myfreetaxes com taxtime Publication 1542 lists the rates in the continental United States. Myfreetaxes com taxtime Standard meal allowance. Myfreetaxes com taxtime   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime Internet access. Myfreetaxes com taxtime    Per diem rates are available on the Internet. Myfreetaxes com taxtime You can access per diem rates at www. Myfreetaxes com taxtime gsa. Myfreetaxes com taxtime gov/perdiemrates. Myfreetaxes com taxtime High-low method. Myfreetaxes com taxtime   This is a simplified method of computing the federal per diem rate for travel within the continental United States. Myfreetaxes com taxtime It eliminates the need to keep a current list of the per diem rate for each city. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime All other areas have a per diem amount of $163 ($52 for M&IE). Myfreetaxes com taxtime The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. Myfreetaxes com taxtime   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). Myfreetaxes com taxtime The rate for all other locations increased to $170 ($52 for M&IE). Myfreetaxes com taxtime 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. Myfreetaxes com taxtime However, you must use the same rate for all employees reimbursed under the high-low method. Myfreetaxes com taxtime   For more information about the high-low method, see Notice 2013-65, available at www. Myfreetaxes com taxtime irs. Myfreetaxes com taxtime gov/irb/2013-44_IRB/ar13. Myfreetaxes com taxtime html. Myfreetaxes com taxtime See Publication 1542 (available on the Internet at IRS. Myfreetaxes com taxtime gov) for the current per diem rates for all locations. Myfreetaxes com taxtime Reporting per diem and car allowances. Myfreetaxes com taxtime   The following discussion explains how to report per diem and car allowances. Myfreetaxes com taxtime The manner in which you report them depends on how the allowance compares to the federal rate. Myfreetaxes com taxtime See Table 11-1. Myfreetaxes com taxtime Allowance less than or equal to the federal rate. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). Myfreetaxes com taxtime See How to deduct under Accountable Plans, earlier. Myfreetaxes com taxtime Allowance more than the federal rate. Myfreetaxes com taxtime   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. Myfreetaxes com taxtime   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Myfreetaxes com taxtime Deduct it as travel expenses (as explained above). Myfreetaxes com taxtime This part of the allowance is treated as reimbursed under an accountable plan. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Myfreetaxes com taxtime This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime The deduction limit applies even if you reimburse them for 100% of the expenses. Myfreetaxes com taxtime Application of the 50% limit. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. Myfreetaxes com taxtime The deduction limit may also apply to meals you furnish on your premises to your employees. Myfreetaxes com taxtime Related expenses. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Amount subject to 50% limit. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime The per diem allowance. Myfreetaxes com taxtime The federal rate for M&IE. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Meal expenses when subject to “hours of service” limits. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. Myfreetaxes com taxtime De minimis (minimal) fringe benefit. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime See Publication 15-B for additional information on de minimis fringe benefits. Myfreetaxes com taxtime Company cafeteria or executive dining room. Myfreetaxes com taxtime   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. Myfreetaxes com taxtime This includes the cost of maintaining the facilities for providing the food and beverages. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime Employee activities. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime The benefit must be primarily for your employees who are not highly compensated. Myfreetaxes com taxtime   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. Myfreetaxes com taxtime Owned a 10% or more interest in the business during the year or the preceding year. Myfreetaxes com taxtime An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Myfreetaxes com taxtime Received more than $115,000 in pay for the preceding year. Myfreetaxes com taxtime You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. Myfreetaxes com taxtime   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. Myfreetaxes com taxtime Meals or entertainment treated as compensation. Myfreetaxes com taxtime   The 50% limit does not apply to either of the following. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Sales of meals or entertainment. Myfreetaxes com taxtime   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime The 50% limit does not apply to this expense. Myfreetaxes com taxtime Providing meals or entertainment to general public to promote goodwill. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime The 50% limit does not apply to this expense. Myfreetaxes com taxtime Director, stockholder, or employee meetings. Myfreetaxes com taxtime   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. Myfreetaxes com taxtime You can provide some minor social activities, but the main purpose of the meeting must be your company's business. Myfreetaxes com taxtime These expenses are subject to the 50% limit. Myfreetaxes com taxtime Trade association meetings. Myfreetaxes com taxtime   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. Myfreetaxes com taxtime These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Myfreetaxes com taxtime Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. Myfreetaxes com taxtime All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. Myfreetaxes com taxtime The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Myfreetaxes com taxtime You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Myfreetaxes com taxtime Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. Myfreetaxes com taxtime Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Myfreetaxes com taxtime Advertising expenses. Myfreetaxes com taxtime   You generally can deduct reasonable advertising expenses that are directly related to your business activities. Myfreetaxes com taxtime Generally, you cannot deduct amounts paid to influence legislation (i. Myfreetaxes com taxtime e. Myfreetaxes com taxtime , lobbying). Myfreetaxes com taxtime See Lobbying expenses , later. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. Myfreetaxes com taxtime S. Myfreetaxes com taxtime Savings Bonds, or to participate in similar causes is usually deductible. Myfreetaxes com taxtime Anticipated liabilities. Myfreetaxes com taxtime   Anticipated liabilities or reserves for anticipated liabilities are not deductible. Myfreetaxes com taxtime For example, assume you sold 1-year TV service contracts this year totaling $50,000. Myfreetaxes com taxtime From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. Myfreetaxes com taxtime You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. Myfreetaxes com taxtime You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Myfreetaxes com taxtime Bribes and kickbacks. Myfreetaxes com taxtime   Engaging in the payment of bribes or kickbacks is a serious criminal matter. Myfreetaxes com taxtime Such activity could result in criminal prosecution. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Meaning of “generally enforced. Myfreetaxes com taxtime ”   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. Myfreetaxes com taxtime For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Myfreetaxes com taxtime Kickbacks. Myfreetaxes com taxtime   A kickback is a payment for referring a client, patient, or customer. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime   For example, the Yard Corporation is in the business of repairing ships. Myfreetaxes com taxtime It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Myfreetaxes com taxtime Form 1099-MISC. Myfreetaxes com taxtime   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. Myfreetaxes com taxtime See Form 1099-MISC for more information. Myfreetaxes com taxtime Car and truck expenses. Myfreetaxes com taxtime   The costs of operating a car, truck, or other vehicle in your business are deductible. Myfreetaxes com taxtime For more information on how to figure your deduction, see Publication 463. Myfreetaxes com taxtime Charitable contributions. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. Myfreetaxes com taxtime However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Myfreetaxes com taxtime See the Instructions for Form 1120 for more information. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime Example. Myfreetaxes com taxtime You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. Myfreetaxes com taxtime The purpose of the ad was to encourage readers to buy your products. Myfreetaxes com taxtime Your payment is not a charitable contribution. Myfreetaxes com taxtime You can deduct it as an advertising expense. Myfreetaxes com taxtime Example. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Your payment is not a charitable contribution. Myfreetaxes com taxtime You can deduct it as a business expense. Myfreetaxes com taxtime See Publication 526 for a discussion of donated inventory, including capital gain property. Myfreetaxes com taxtime Club dues and membership fees. Myfreetaxes com taxtime   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Exception. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Boards of trade. Myfreetaxes com taxtime Business leagues. Myfreetaxes com taxtime Chambers of commerce. Myfreetaxes com taxtime Civic or public service organizations. Myfreetaxes com taxtime Professional organizations such as bar associations and medical associations. Myfreetaxes com taxtime Real estate boards. Myfreetaxes com taxtime Trade associations. Myfreetaxes com taxtime Credit card convenience fees. Myfreetaxes com taxtime   Credit card companies charge a fee to businesses who accept their cards. Myfreetaxes com taxtime This fee when paid or incurred by the business can be deducted as a business expense. Myfreetaxes com taxtime Damages recovered. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime You must include this compensation in your income. Myfreetaxes com taxtime However, you may be able to take a special deduction. Myfreetaxes com taxtime The deduction applies only to amounts recovered for actual economic injury, not any additional amount. Myfreetaxes com taxtime The deduction is the smaller of the following. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Your losses from the injury you have not deducted. Myfreetaxes com taxtime Demolition expenses or losses. Myfreetaxes com taxtime   Amounts paid or incurred to demolish a structure are not deductible. Myfreetaxes com taxtime These amounts are added to the basis of the land where the demolished structure was located. Myfreetaxes com taxtime Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. Myfreetaxes com taxtime Education expenses. Myfreetaxes com taxtime   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. Myfreetaxes com taxtime See Education Expenses in chapter 2. Myfreetaxes com taxtime   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime This is true even if the education maintains or improves skills presently required in your business. Myfreetaxes com taxtime For more information on education expenses, see Publication 970. Myfreetaxes com taxtime Franchise, trademark, trade name. Myfreetaxes com taxtime   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). Myfreetaxes com taxtime   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. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Impairment-related expenses. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime   You are disabled if you have either of the following. Myfreetaxes com taxtime A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. Myfreetaxes com taxtime A physical or mental impairment that substantially limits one or more of your major life activities. Myfreetaxes com taxtime   The expense qualifies as a business expense if all the following apply. Myfreetaxes com taxtime Your work clearly requires the expense for you to satisfactorily perform that work. Myfreetaxes com taxtime The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. Myfreetaxes com taxtime Their treatment is not specifically provided for under other tax law provisions. Myfreetaxes com taxtime Example. Myfreetaxes com taxtime You are blind. Myfreetaxes com taxtime You must use a reader to do your work, both at and away from your place of work. Myfreetaxes com taxtime The reader's services are only for your work. Myfreetaxes com taxtime You can deduct your expenses for the reader as a business expense. Myfreetaxes com taxtime Internet-related expenses. Myfreetaxes com taxtime   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. Myfreetaxes com taxtime If you are starting a business you may have to amortize these expenses as start-up costs. Myfreetaxes com taxtime For more information about amortizing start-up and organizational costs, see chapter 8. Myfreetaxes com taxtime Interview expense allowances. Myfreetaxes com taxtime   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. Myfreetaxes com taxtime You can deduct the reimbursements as a business expense. Myfreetaxes com taxtime However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. Myfreetaxes com taxtime Legal and professional fees. Myfreetaxes com taxtime   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. Myfreetaxes com taxtime However, usually legal fees you pay to acquire business assets are not deductible. Myfreetaxes com taxtime These costs are added to the basis of the property. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime The result is the portion of the invoice attributable to business expenses. Myfreetaxes com taxtime The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). Myfreetaxes com taxtime   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. Myfreetaxes com taxtime However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. Myfreetaxes com taxtime See Publication 529, Miscellaneous Deductions. Myfreetaxes com taxtime Tax preparation fees. Myfreetaxes com taxtime   The cost of hiring a tax professional, such as a C. Myfreetaxes com taxtime P. Myfreetaxes com taxtime A. Myfreetaxes com taxtime , 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. Myfreetaxes com taxtime Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Licenses and regulatory fees. Myfreetaxes com taxtime   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Myfreetaxes com taxtime Some licenses and fees may have to be amortized. Myfreetaxes com taxtime See chapter 8 for more information. Myfreetaxes com taxtime Lobbying expenses. Myfreetaxes com taxtime   Generally, lobbying expenses are not deductible. Myfreetaxes com taxtime Lobbying expenses include amounts paid or incurred for any of the following activities. Myfreetaxes com taxtime Influencing legislation. Myfreetaxes com taxtime Participating in or intervening in any political campaign for, or against, any candidate for public office. Myfreetaxes com taxtime Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. Myfreetaxes com taxtime Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. Myfreetaxes com taxtime Researching, preparing, planning, or coordinating any of the preceding activities. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime For information on making this allocation, see section 1. Myfreetaxes com taxtime 162-28 of the regulations. Myfreetaxes com taxtime   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. Myfreetaxes com taxtime The organization conducts lobbying activities on matters of direct financial interest to your business. Myfreetaxes com taxtime A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime Covered executive branch official. Myfreetaxes com taxtime   For purposes of this discussion, a covered executive branch official is any of the following. Myfreetaxes com taxtime The President. Myfreetaxes com taxtime The Vice President. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime Exceptions to denial of deduction. Myfreetaxes com taxtime   The general denial of the deduction does not apply to the following. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime An Indian tribal government is treated as a local council or similar governing body. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime 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). Myfreetaxes com taxtime Moving machinery. Myfreetaxes com taxtime   Generally, the cost of moving machinery from one city to another is a deductible expense. Myfreetaxes com taxtime So is the cost of moving machinery from one plant to another, or from one part of your plant to another. Myfreetaxes com taxtime You can deduct the cost of installing the machinery in the new location. Myfreetaxes com taxtime However, you must capitalize the costs of installing or moving newly purchased machinery. Myfreetaxes com taxtime Outplacement services. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime are deductible. Myfreetaxes com taxtime   The costs of outplacement services may cover more than one deduction category. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. Myfreetaxes com taxtime Penalties and fines. Myfreetaxes com taxtime   Penalties paid for late performance or nonperformance of a contract are generally deductible. Myfreetaxes com taxtime For instance, you own and operate a construction company. Myfreetaxes com taxtime Under a contract, you are to finish construction of a building by a certain date. Myfreetaxes com taxtime Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. Myfreetaxes com taxtime You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. Myfreetaxes com taxtime These additional costs are deductible business expenses. Myfreetaxes com taxtime   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. Myfreetaxes com taxtime These fines or penalties include the following amounts. Myfreetaxes com taxtime Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. Myfreetaxes com taxtime Forfeited as collateral posted for a proceeding that could result in a fine or penalty. Myfreetaxes com taxtime   Examples of nondeductible penalties and fines include the following. Myfreetaxes com taxtime Fines for violating city housing codes. Myfreetaxes com taxtime Fines paid by truckers for violating state maximum highway weight laws. Myfreetaxes com taxtime Fines for violating air quality laws. Myfreetaxes com taxtime Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. Myfreetaxes com taxtime   A fine or penalty does not include any of the following. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Court costs or stenographic and printing charges. Myfreetaxes com taxtime Compensatory damages paid to a government. Myfreetaxes com taxtime Political contributions. Myfreetaxes com taxtime   Contributions or gifts paid to political parties or candidates are not deductible. Myfreetaxes com taxtime In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. Myfreetaxes com taxtime Indirect political contributions. Myfreetaxes com taxtime   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. Myfreetaxes com taxtime Examples of nondeductible expenses include the following. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. Myfreetaxes com taxtime Repairs. Myfreetaxes com taxtime   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Otherwise, the cost must be capitalized and depreciated. Myfreetaxes com taxtime See Form 4562 and its instructions for how to compute and claim the depreciation deduction. Myfreetaxes com taxtime   The cost of repairs includes the costs of labor, supplies, and certain other items. Myfreetaxes com taxtime The value of your own labor is not deductible. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime Repayments. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Type of deduction. Myfreetaxes com taxtime   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Myfreetaxes com taxtime For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. Myfreetaxes com taxtime 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). Myfreetaxes com taxtime   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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Repayment—$3,000 or less. Myfreetaxes com taxtime   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Myfreetaxes com taxtime Repayment—over $3,000. Myfreetaxes com taxtime   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. Myfreetaxes com taxtime If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. Myfreetaxes com taxtime Method 1. Myfreetaxes com taxtime   Figure your tax for 2013 claiming a deduction for the repaid amount. Myfreetaxes com taxtime Method 2. Myfreetaxes com taxtime   Figure your tax for 2013 claiming a credit for the repaid amount. Myfreetaxes com taxtime Follow these steps. Myfreetaxes com taxtime Figure your tax for 2013 without deducting the repaid amount. Myfreetaxes com taxtime Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Myfreetaxes com taxtime Subtract the tax in (2) from the tax shown on your return for the earlier year. Myfreetaxes com taxtime This is the amount of your credit. Myfreetaxes com taxtime Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). Myfreetaxes com taxtime   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. Myfreetaxes com taxtime   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. Myfreetaxes com taxtime R. Myfreetaxes com taxtime C. Myfreetaxes com taxtime 1341” next to line 71. Myfreetaxes com taxtime Example. Myfreetaxes com taxtime For 2012, you filed a return and reported your income on the cash method. Myfreetaxes com taxtime In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. Myfreetaxes com taxtime Your filing status in 2013 and 2012 is single. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Repayment does not apply. Myfreetaxes com taxtime   This discussion does not apply to the following. Myfreetaxes com taxtime Deductions for bad debts. Myfreetaxes com taxtime Deductions from sales to customers, such as returns and allowances, and similar items. Myfreetaxes com taxtime Deductions for legal and other expenses of contesting the repayment. Myfreetaxes com taxtime Year of deduction (or credit). Myfreetaxes com taxtime   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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime Subscriptions. Myfreetaxes com taxtime   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. Myfreetaxes com taxtime Supplies and materials. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime You do not keep a record of when they are used. Myfreetaxes com taxtime You do not take an inventory of the amount on hand at the beginning and end of the tax year. Myfreetaxes com taxtime This method does not distort your income. Myfreetaxes com taxtime   You can also deduct the cost of books, professional instruments, equipment, etc. Myfreetaxes com taxtime , if you normally use them within a year. Myfreetaxes com taxtime 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. Myfreetaxes com taxtime For more information regarding depreciation see Publication 946, How To Depreciate Property. Myfreetaxes com taxtime Utilities. Myfreetaxes com taxtime   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. Myfreetaxes com taxtime However, any part due to personal use is not deductible. Myfreetaxes com taxtime Telephone. Myfreetaxes com taxtime   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. Myfreetaxes com taxtime 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. 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