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Tax Act Online 2012

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Tax Act Online 2012

Tax act online 2012 Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Tax act online 2012 General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Tax act online 2012 Several assets. Tax act online 2012 Special situations. Tax act online 2012 Schedule D (Form 1040). Tax act online 2012 Form 4797. Tax act online 2012 How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Tax act online 2012 The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Tax act online 2012 The installment sales method cannot be used for the following. Tax act online 2012 Sale of inventory. Tax act online 2012   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Tax act online 2012 See Sale of a Business under Other Rules, later. Tax act online 2012 Dealer sales. Tax act online 2012   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Tax act online 2012 This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Tax act online 2012 However, the rule does not apply to an installment sale of property used or produced in farming. Tax act online 2012 Special rule. Tax act online 2012   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Tax act online 2012 For more information, see section 453(l). Tax act online 2012 Stock or securities. Tax act online 2012   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Tax act online 2012 You must report the entire gain on the sale in the year in which the trade date falls. Tax act online 2012 Installment obligation. Tax act online 2012   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Tax act online 2012 General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Tax act online 2012 See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Tax act online 2012 Sale at a loss. Tax act online 2012   If your sale results in a loss, you cannot use the installment method. Tax act online 2012 If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Tax act online 2012 Unstated interest. Tax act online 2012   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Tax act online 2012 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Tax act online 2012 Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Tax act online 2012 Each payment on an installment sale usually consists of the following three parts. Tax act online 2012 Interest income. Tax act online 2012 Return of your adjusted basis in the property. Tax act online 2012 Gain on the sale. Tax act online 2012 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Tax act online 2012 You do not include in income the part that is the return of your basis in the property. Tax act online 2012 Basis is the amount of your investment in the property for installment sale purposes. Tax act online 2012 Interest Income You must report interest as ordinary income. Tax act online 2012 Interest is generally not included in a down payment. Tax act online 2012 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Tax act online 2012 Interest provided in the agreement is called stated interest. Tax act online 2012 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Tax act online 2012 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Tax act online 2012 Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Tax act online 2012 A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Tax act online 2012 Figuring adjusted basis for installment sale purposes. Tax act online 2012   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Tax act online 2012 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Tax act online 2012 Worksheet A. Tax act online 2012 Figuring Adjusted Basis and Gross Profit Percentage 1. Tax act online 2012 Enter the selling price for the property   2. Tax act online 2012 Enter your adjusted basis for the property     3. Tax act online 2012 Enter your selling expenses     4. Tax act online 2012 Enter any depreciation recapture     5. Tax act online 2012 Add lines 2, 3, and 4. Tax act online 2012  This is your adjusted basis for installment sale purposes   6. Tax act online 2012 Subtract line 5 from line 1. Tax act online 2012 If zero or less, enter -0-. Tax act online 2012  This is your gross profit     If the amount entered on line 6 is zero, stop here. Tax act online 2012 You cannot use the installment method. Tax act online 2012   7. Tax act online 2012 Enter the contract price for the property   8. Tax act online 2012 Divide line 6 by line 7. Tax act online 2012 This is your gross profit percentage   Selling price. Tax act online 2012   The selling price is the total cost of the property to the buyer and includes any of the following. Tax act online 2012 Any money you are to receive. Tax act online 2012 The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Tax act online 2012 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Tax act online 2012 Any of your selling expenses the buyer pays. Tax act online 2012   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Tax act online 2012 Adjusted basis for installment sale purposes. Tax act online 2012   Your adjusted basis is the total of the following three items. Tax act online 2012 Adjusted basis. Tax act online 2012 Selling expenses. Tax act online 2012 Depreciation recapture. Tax act online 2012 Adjusted basis. Tax act online 2012   Basis is your investment in the property for installment sale purposes. Tax act online 2012 The way you figure basis depends on how you acquire the property. Tax act online 2012 The basis of property you buy is generally its cost. Tax act online 2012 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Tax act online 2012   While you own property, various events may change your original basis. Tax act online 2012 Some events, such as adding rooms or making permanent improvements, increase basis. Tax act online 2012 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Tax act online 2012 The result is adjusted basis. Tax act online 2012   For more information on how to figure basis and adjusted basis, see Publication 551. Tax act online 2012 For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Tax act online 2012 Selling expenses. Tax act online 2012   Selling expenses relate to the sale of the property. Tax act online 2012 They include commissions, attorney fees, and any other expenses paid on the sale. Tax act online 2012 Selling expenses are added to the basis of the sold property. Tax act online 2012 Depreciation recapture. Tax act online 2012   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Tax act online 2012 See Depreciation Recapture Income under Other Rules, later. Tax act online 2012 Gross profit. Tax act online 2012   Gross profit is the total gain you report on the installment method. Tax act online 2012   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Tax act online 2012 If the property you sold was your home, subtract from the gross profit any gain you can exclude. Tax act online 2012 See Sale of Your Home , later, under Reporting Installment Sale Income. Tax act online 2012 Contract price. Tax act online 2012   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Tax act online 2012 Gross profit percentage. Tax act online 2012   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Tax act online 2012 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Tax act online 2012   The gross profit percentage generally remains the same for each payment you receive. Tax act online 2012 However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Tax act online 2012 Example. Tax act online 2012 You sell property at a contract price of $6,000 and your gross profit is $1,500. Tax act online 2012 Your gross profit percentage is 25% ($1,500 ÷ $6,000). Tax act online 2012 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Tax act online 2012 The remainder (balance) of each payment is the tax-free return of your adjusted basis. Tax act online 2012 Amount to report as installment sale income. Tax act online 2012   Multiply the payments you receive each year (less interest) by the gross profit percentage. Tax act online 2012 The result is your installment sale income for the tax year. Tax act online 2012 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Tax act online 2012 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Tax act online 2012 For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Tax act online 2012 Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Tax act online 2012 You then must refigure the gross profit percentage for the remaining payments. Tax act online 2012 Refigure your gross profit using Worksheet B. Tax act online 2012 You will spread any remaining gain over future installments. Tax act online 2012 Worksheet B. Tax act online 2012 New Gross Profit Percentage — Selling Price Reduced 1. Tax act online 2012 Enter the reduced selling  price for the property   2. Tax act online 2012 Enter your adjusted  basis for the  property     3. Tax act online 2012 Enter your selling  expenses     4. Tax act online 2012 Enter any depreciation  recapture     5. Tax act online 2012 Add lines 2, 3, and 4. Tax act online 2012   6. Tax act online 2012 Subtract line 5 from line 1. Tax act online 2012  This is your adjusted  gross profit   7. Tax act online 2012 Enter any installment sale  income reported in  prior year(s)   8. Tax act online 2012 Subtract line 7 from line 6   9. Tax act online 2012 Future installments   10. Tax act online 2012 Divide line 8 by line 9. Tax act online 2012  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Tax act online 2012 Example. Tax act online 2012 In 2011, you sold land with a basis of $40,000 for $100,000. Tax act online 2012 Your gross profit was $60,000. Tax act online 2012 You received a $20,000 down payment and the buyer's note for $80,000. Tax act online 2012 The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Tax act online 2012 Your gross profit percentage is 60%. Tax act online 2012 You reported a gain of $12,000 on each payment received in 2011 and 2012. Tax act online 2012 In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Tax act online 2012 The new gross profit percentage, 46. Tax act online 2012 67%, is figured on Example—Worksheet B. Tax act online 2012 You will report a gain of $7,000 (46. Tax act online 2012 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Tax act online 2012 Example — Worksheet B. Tax act online 2012 New Gross Profit Percentage — Selling Price Reduced 1. Tax act online 2012 Enter the reduced selling  price for the property 85,000 2. Tax act online 2012 Enter your adjusted  basis for the  property 40,000   3. Tax act online 2012 Enter your selling  expenses -0-   4. Tax act online 2012 Enter any depreciation  recapture -0-   5. Tax act online 2012 Add lines 2, 3, and 4. Tax act online 2012 40,000 6. Tax act online 2012 Subtract line 5 from line 1. Tax act online 2012  This is your adjusted  gross profit 45,000 7. Tax act online 2012 Enter any installment sale  income reported in  prior year(s) 24,000 8. Tax act online 2012 Subtract line 7 from line 6 21,000 9. Tax act online 2012 Future installments 45,000 10. Tax act online 2012 Divide line 8 by line 9. Tax act online 2012  This is your new gross profit percentage* 46. Tax act online 2012 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Tax act online 2012 Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Tax act online 2012 You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Tax act online 2012 See Schedule D (Form 1040) and Form 4797 , later. Tax act online 2012 If the property was your main home, you may be able to exclude part or all of the gain. Tax act online 2012 See Sale of Your Home , later. Tax act online 2012 Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Tax act online 2012 Attach it to your tax return for each year. Tax act online 2012 Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Tax act online 2012 Which parts to complete. Tax act online 2012   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Tax act online 2012 Year of sale. Tax act online 2012   Complete lines 1 through 4, Part I, and Part II. Tax act online 2012 If you sold property to a related party during the year, also complete Part III. Tax act online 2012 Later years. Tax act online 2012   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Tax act online 2012   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Tax act online 2012 (After December 31, 1986, the installment method is not available for the sale of marketable securities. Tax act online 2012 ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Tax act online 2012 Complete Part III unless you received the final payment during the tax year. Tax act online 2012   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Tax act online 2012 Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Tax act online 2012 Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Tax act online 2012 Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Tax act online 2012 If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Tax act online 2012 Your gain is long-term if you owned the property for more than 1 year when you sold it. Tax act online 2012 Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Tax act online 2012 All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Tax act online 2012 For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Tax act online 2012 If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Tax act online 2012 ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Tax act online 2012 See Publication 523 for information about excluding the gain. Tax act online 2012 If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Tax act online 2012 Seller-financed mortgage. Tax act online 2012   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Tax act online 2012   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Tax act online 2012   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Tax act online 2012   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Tax act online 2012 Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Tax act online 2012 The following topics are discussed. Tax act online 2012 Electing out of the installment method. Tax act online 2012 Payments received or considered received. Tax act online 2012 Escrow account. Tax act online 2012 Depreciation recapture income. Tax act online 2012 Sale to a related person. Tax act online 2012 Like-kind exchange. Tax act online 2012 Contingent payment sale. Tax act online 2012 Single sale of several assets. Tax act online 2012 Sale of a business. Tax act online 2012 Unstated interest and original issue discount. Tax act online 2012 Disposition of an installment obligation. Tax act online 2012 Repossession. Tax act online 2012 Interest on deferred tax. Tax act online 2012 Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Tax act online 2012 To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Tax act online 2012 Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Tax act online 2012 You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Tax act online 2012 If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Tax act online 2012 Example. Tax act online 2012 You sold a parcel of land for $50,000. Tax act online 2012 You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Tax act online 2012 The buyer gave you a note for $40,000. Tax act online 2012 The note had an FMV of $40,000. Tax act online 2012 You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Tax act online 2012 The land cost $25,000, and you owned it for more than one year. Tax act online 2012 You decide to elect out of the installment method and report the entire gain in the year of sale. Tax act online 2012 Gain realized:     Selling price $50,000 Minus: Property's adj. Tax act online 2012 basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Tax act online 2012 basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Tax act online 2012 You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Tax act online 2012 The interest on the note is ordinary income and is reported as interest income each year. Tax act online 2012 How to elect out. Tax act online 2012   To make this election, do not report your sale on Form 6252. Tax act online 2012 Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Tax act online 2012 When to elect out. Tax act online 2012   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Tax act online 2012 Automatic six-month extension. Tax act online 2012   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Tax act online 2012 Write “Filed pursuant to section 301. Tax act online 2012 9100-2” at the top of the amended return and file it where the original return was filed. Tax act online 2012 Revoking the election. Tax act online 2012   Once made, the election can be revoked only with IRS approval. Tax act online 2012 A revocation is retroactive. Tax act online 2012 You will not be allowed to revoke the election if either of the following applies. Tax act online 2012 One of the purposes is to avoid federal income tax. Tax act online 2012 The tax year in which any payment was received has closed. Tax act online 2012 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Tax act online 2012 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Tax act online 2012 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Tax act online 2012 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Tax act online 2012 Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Tax act online 2012 Include these expenses in the selling and contract prices when figuring the gross profit percentage. Tax act online 2012 Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Tax act online 2012 Mortgage not more than basis. Tax act online 2012   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Tax act online 2012 It is considered a recovery of your basis. Tax act online 2012 The contract price is the selling price minus the mortgage. Tax act online 2012 Example. Tax act online 2012 You sell property with an adjusted basis of $19,000. Tax act online 2012 You have selling expenses of $1,000. Tax act online 2012 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Tax act online 2012 The selling price is $25,000 ($15,000 + $10,000). Tax act online 2012 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Tax act online 2012 The contract price is $10,000 ($25,000 − $15,000 mortgage). Tax act online 2012 Your gross profit percentage is 50% ($5,000 ÷ $10,000). Tax act online 2012 You report half of each $2,000 payment received as gain from the sale. Tax act online 2012 You also report all interest you receive as ordinary income. Tax act online 2012 Mortgage more than basis. Tax act online 2012   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Tax act online 2012 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Tax act online 2012   To figure the contract price, subtract the mortgage from the selling price. Tax act online 2012 This is the total amount (other than interest) you will receive directly from the buyer. Tax act online 2012 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Tax act online 2012 The contract price is then the same as your gross profit from the sale. Tax act online 2012    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Tax act online 2012 Example. Tax act online 2012 The selling price for your property is $9,000. Tax act online 2012 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Tax act online 2012 Your adjusted basis in the property is $4,400. Tax act online 2012 You have selling expenses of $600, for a total installment sale basis of $5,000. Tax act online 2012 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Tax act online 2012 This amount is included in the contract price and treated as a payment received in the year of sale. Tax act online 2012 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Tax act online 2012 Report 100% of each payment (less interest) as gain from the sale. Tax act online 2012 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Tax act online 2012 Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Tax act online 2012 You are considered to receive a payment equal to the outstanding canceled debt. Tax act online 2012 Example. Tax act online 2012 Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Tax act online 2012 On April 4, 2013, she bought the land for $70,000. Tax act online 2012 At that time, $30,000 of her loan to you was outstanding. Tax act online 2012 She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Tax act online 2012 She did not assume an existing mortgage. Tax act online 2012 She canceled the $30,000 debt you owed her. Tax act online 2012 You are considered to have received a $30,000 payment at the time of the sale. Tax act online 2012 Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Tax act online 2012 If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Tax act online 2012 Compare the debt to your installment sale basis in the property being sold. Tax act online 2012 If the debt is less than your installment sale basis, none of it is treated as a payment. Tax act online 2012 If it is more, only the difference is treated as a payment. Tax act online 2012 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Tax act online 2012 These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Tax act online 2012 However, they apply only to the following types of debt the buyer assumes. Tax act online 2012 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Tax act online 2012 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Tax act online 2012 If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Tax act online 2012 The value of the assumed debt is then considered a payment to you in the year of sale. Tax act online 2012 Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Tax act online 2012 However, see Like-Kind Exchange , later. Tax act online 2012 Generally, the amount of the payment is the property's FMV on the date you receive it. Tax act online 2012 Exception. Tax act online 2012   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Tax act online 2012 See Unstated Interest and Original Issue Discount (OID) , later. Tax act online 2012 Debt not payable on demand. Tax act online 2012   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Tax act online 2012 This is true even if the debt is guaranteed by a third party, including a government agency. Tax act online 2012 Fair market value (FMV). Tax act online 2012   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Tax act online 2012 Third-party note. Tax act online 2012   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Tax act online 2012 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Tax act online 2012 The excess of the note's face value over its FMV is interest. Tax act online 2012 Exclude this interest in determining the selling price of the property. Tax act online 2012 However, see Exception under Property Used As a Payment, earlier. Tax act online 2012 Example. Tax act online 2012 You sold real estate in an installment sale. Tax act online 2012 As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Tax act online 2012 The FMV of the third-party note at the time of the sale was $30,000. Tax act online 2012 This amount, not $50,000, is a payment to you in the year of sale. Tax act online 2012 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Tax act online 2012 The remaining 40% is interest taxed as ordinary income. Tax act online 2012 Bond. Tax act online 2012   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Tax act online 2012 For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Tax act online 2012    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Tax act online 2012 However, see Exception under Property Used As a Payment, earlier. Tax act online 2012 Buyer's note. Tax act online 2012   The buyer's note (unless payable on demand) is not considered payment on the sale. Tax act online 2012 However, its full face value is included when figuring the selling price and the contract price. Tax act online 2012 Payments you receive on the note are used to figure your gain in the year received. Tax act online 2012 Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Tax act online 2012 This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Tax act online 2012 It does not apply to the following dispositions. Tax act online 2012 Sales of property used or produced in farming. Tax act online 2012 Sales of personal-use property. Tax act online 2012 Qualifying sales of time-shares and residential lots. Tax act online 2012 The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Tax act online 2012 The amount treated as a payment is considered received on the later of the following dates. Tax act online 2012 The date the debt becomes secured. Tax act online 2012 The date you receive the debt proceeds. Tax act online 2012 A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Tax act online 2012 For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Tax act online 2012 Limit. Tax act online 2012   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Tax act online 2012 The total contract price on the installment sale. Tax act online 2012 Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Tax act online 2012 Installment payments. Tax act online 2012   The pledge rule accelerates the reporting of the installment obligation payments. Tax act online 2012 Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Tax act online 2012 Exception. Tax act online 2012   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Tax act online 2012 The debt was outstanding on December 17, 1987. Tax act online 2012 The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Tax act online 2012   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Tax act online 2012   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Tax act online 2012 Any excess is treated as a payment on the installment obligation. Tax act online 2012 Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Tax act online 2012 These sales cannot be reported on the installment method. Tax act online 2012 The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Tax act online 2012 When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Tax act online 2012 Example. Tax act online 2012 You sell property for $100,000. Tax act online 2012 The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Tax act online 2012 You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Tax act online 2012 You report the entire gain in the year of sale. Tax act online 2012 Escrow established in a later year. Tax act online 2012   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Tax act online 2012 Substantial restriction. Tax act online 2012   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Tax act online 2012 For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Tax act online 2012 Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Tax act online 2012 Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Tax act online 2012 Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Tax act online 2012 The recapture income is also included in Part I of Form 6252. Tax act online 2012 However, the gain equal to the recapture income is reported in full in the year of the sale. Tax act online 2012 Only the gain greater than the recapture income is reported on the installment method. Tax act online 2012 For more information on depreciation recapture, see chapter 3 in Publication 544. Tax act online 2012 The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Tax act online 2012 Determining gross profit is discussed under General Rules , earlier. Tax act online 2012 Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Tax act online 2012 If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Tax act online 2012 These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Tax act online 2012 Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Tax act online 2012 Instead, all payments to be received are considered received in the year of sale. Tax act online 2012 However, see Exception , below. Tax act online 2012 Depreciable property for this rule is any property the purchaser can depreciate. Tax act online 2012 Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Tax act online 2012 In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Tax act online 2012 The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Tax act online 2012 Exception. Tax act online 2012   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Tax act online 2012 You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Tax act online 2012 Related person. Tax act online 2012   Related persons include the following. Tax act online 2012 A person and all controlled entities with respect to that person. Tax act online 2012 A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Tax act online 2012 Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Tax act online 2012 Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Tax act online 2012   For information about which entities are controlled entities, see section 1239(c). Tax act online 2012 Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Tax act online 2012 The related person makes the second disposition before making all payments on the first disposition. Tax act online 2012 The related person disposes of the property within 2 years of the first disposition. Tax act online 2012 This rule does not apply if the property involved is marketable securities. Tax act online 2012 Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Tax act online 2012 See Exception , later. Tax act online 2012 Related person. Tax act online 2012   Related persons include the following. Tax act online 2012 Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Tax act online 2012 A partnership or estate and a partner or beneficiary. Tax act online 2012 A trust (other than a section 401(a) employees trust) and a beneficiary. Tax act online 2012 A trust and an owner of the trust. Tax act online 2012 Two corporations that are members of the same controlled group as defined in section 267(f). Tax act online 2012 The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Tax act online 2012 A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Tax act online 2012 An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Tax act online 2012 A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Tax act online 2012 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Tax act online 2012 Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax act online 2012 An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax act online 2012 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Tax act online 2012 An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Tax act online 2012 Example 1. Tax act online 2012 In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Tax act online 2012 His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Tax act online 2012 His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Tax act online 2012 He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Tax act online 2012 50). Tax act online 2012 Bob made no improvements to the property and sold it to Alfalfa Inc. Tax act online 2012 , in 2013 for $600,000 after making the payment for that year. Tax act online 2012 The amount realized from the second disposition is $600,000. Tax act online 2012 Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Tax act online 2012 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Tax act online 2012 Example 2. Tax act online 2012 Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Tax act online 2012 The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Tax act online 2012 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Tax act online 2012 They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Tax act online 2012 In 2016, he receives the final $100,000 payment. Tax act online 2012 He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Tax act online 2012 50 Installment sale income for 2016 $ 50,000 Exception. Tax act online 2012   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Tax act online 2012 Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Tax act online 2012   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Tax act online 2012 However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Tax act online 2012   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Tax act online 2012 An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Tax act online 2012 A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Tax act online 2012 Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Tax act online 2012 These trades are known as like-kind exchanges. Tax act online 2012 The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Tax act online 2012 You do not have to report any part of your gain if you receive only like-kind property. Tax act online 2012 However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Tax act online 2012 For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Tax act online 2012 Installment payments. Tax act online 2012   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Tax act online 2012 The contract price is reduced by the FMV of the like-kind property received in the trade. Tax act online 2012 The gross profit is reduced by any gain on the trade that can be postponed. Tax act online 2012 Like-kind property received in the trade is not considered payment on the installment obligation. Tax act online 2012 Example. Tax act online 2012 In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Tax act online 2012 He also receives an installment note for $800,000 in the trade. Tax act online 2012 Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Tax act online 2012 George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Tax act online 2012 His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Tax act online 2012 The contract price is $800,000 ($1,000,000 − $200,000). Tax act online 2012 The gross profit percentage is 75% ($600,000 ÷ $800,000). Tax act online 2012 He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Tax act online 2012 He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Tax act online 2012 Deferred exchanges. Tax act online 2012   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Tax act online 2012 Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Tax act online 2012 If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Tax act online 2012 See Regulations section 1. Tax act online 2012 1031(k)-1(j)(2) for these rules. Tax act online 2012 Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Tax act online 2012 This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Tax act online 2012 If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Tax act online 2012 For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Tax act online 2012 453-1(c). Tax act online 2012 Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Tax act online 2012 You also have to allocate part of the selling price to each asset. Tax act online 2012 If you sell assets that constitute a trade or business, see Sale of a Business , later. Tax act online 2012 Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Tax act online 2012 If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Tax act online 2012 This becomes the net FMV. Tax act online 2012 A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Tax act online 2012 However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Tax act online 2012 It must be reported separately. Tax act online 2012 The remaining assets sold at a gain are reported together. Tax act online 2012 Example. Tax act online 2012 You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Tax act online 2012 The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Tax act online 2012 Your installment sale basis for each parcel was $15,000. Tax act online 2012 Your net gain was $85,000 ($130,000 − $45,000). Tax act online 2012 You report the gain on the installment method. Tax act online 2012 The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Tax act online 2012 The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Tax act online 2012 The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Tax act online 2012 You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Tax act online 2012 Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Tax act online 2012 You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Tax act online 2012 The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Tax act online 2012 You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Tax act online 2012 However, if parcel C was held for personal use, the loss is not deductible. Tax act online 2012 You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Tax act online 2012 Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Tax act online 2012 Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Tax act online 2012 Assets sold at a loss. Tax act online 2012 Real and personal property eligible for the installment method. Tax act online 2012 Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Tax act online 2012 Inventory. Tax act online 2012   The sale of inventories of personal property cannot be reported on the installment method. Tax act online 2012 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Tax act online 2012   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Tax act online 2012 If you do not, each payment must be allocated between the inventory and the other assets sold. Tax act online 2012   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Tax act online 2012 Use your basis in the inventory to figure the cost of goods sold. Tax act online 2012 Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Tax act online 2012 Residual method. Tax act online 2012   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Tax act online 2012 This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Tax act online 2012   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Tax act online 2012 This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). Tax act online 2012   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Tax act online 2012   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Tax act online 2012 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Tax act online 2012   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Tax act online 2012 Certificates of deposit, U. Tax act online 2012 S. Tax act online 2012 Government securities, foreign currency, and actively traded personal property, including stock and securities. Tax act online 2012 Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Tax act online 2012 However, see Regulations section 1. Tax act online 2012 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Tax act online 2012 Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Tax act online 2012 All other assets except section 197 intangibles. Tax act online 2012 Section 197 intangibles except goodwill and going concern value. Tax act online 2012 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Tax act online 2012   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Tax act online 2012 For example, if an asset is described in both (4) and (6), include it in (4). Tax act online 2012 Agreement. Tax act online 2012   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Tax act online 2012 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Tax act online 2012 Reporting requirement. Tax act online 2012   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Tax act online 2012 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Tax act online 2012 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Tax act online 2012 Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Tax act online 2012 The sale of a partnership interest is treated as the sale of a single capital asset. Tax act online 2012 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Tax act online 2012 (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Tax act online 2012 ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Tax act online 2012 The gain allocated to the other assets can be reported under the installment method. Tax act online 2012 For more information on the treatment of unrealized receivables and inventory, see Publication 541. Tax act online 2012 Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Tax act online 2012 You received a $100,000 down payment and the buyer's note for $120,000. Tax act online 2012 The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Tax act online 2012 The total selling price is $220,000. Tax act online 2012 Your selling expenses are $11,000. Tax act online 2012 The selling expenses are divided among all the assets sold, including inventory. Tax act online 2012 Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Tax act online 2012 The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Tax act online 2012 Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Tax act online 2012 The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Tax act online 2012 The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Tax act online 2012   Sale  Price Sale   Exp. Tax act online 2012 Adj. Tax act online 2012   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Tax act online 2012 A 71,000 3,550 63,800 3,650 Mch. Tax act online 2012 B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Tax act online 2012 There is no depreciation recapture income because the building was depreciated using the straight line method. Tax act online 2012 All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Tax act online 2012 Figure depreciation recapture in Part III of Form 4797. Tax act online 2012 The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Tax act online 2012 This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Tax act online 2012 These gains are reported in full in the year of sale and are not included in the installment sale computation. Tax act online 2012 Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Tax act online 2012 The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Tax act online 2012 The selling price equals the contract price for the installment sale ($108,500). Tax act online 2012 The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Tax act online 2012   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Tax act online 2012 The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Tax act online 2012 95 Building— $9,600 ÷ $108,500 8. Tax act online 2012 85 Goodwill— $17,575 ÷ $108,500 16. Tax act online 2012 20 Total 48. Tax act online 2012 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Tax act online 2012 The selling price for the installment sale is $108,500. Tax act online 2012 This is 49. Tax act online 2012 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Tax act online 2012 The selling price of assets not reported on the installment method is $111,500. Tax act online 2012 This is 50. Tax act online 2012 7% ($111,500 ÷ $220,000) of the total selling price. Tax act online 2012 Multiply principal payments by 49. Tax act online 2012 3% to determine the part of the payment for the installment sale. Tax act online 2012 The balance, 50. Tax act online 2012 7%, is for the part reported in the year of the sale. Tax act online 2012 The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Tax act online 2012 When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Tax act online 2012 Only the part for the installment sale (49. Tax act online 2012 3%) is used in the installment sale computation. Tax act online 2012 The only payment received in 2013 is the down payment of $100,000. Tax act online 2012 The part of the payment for the installment sale is $49,300 ($100,000 × 49. Tax act online 2012 3%). Tax act online 2012 This amount is used in the installment sale computation. Tax act online 2012 Installment income for 2013. Tax act online 2012   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Tax act online 2012 Income Land—22. Tax act online 2012 95% of $49,300 $11,314 Building—8. Tax act online 2012 85% of $49,300 4,363 Goodwill—16. Tax act online 2012 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Tax act online 2012   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Tax act online 2012 3% of the total payments you receive on the buyer's note during the year. Tax act online 2012 Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Tax act online 2012 Interest provided in the contract is called stated interest. Tax act online 2012 If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Tax act online 2012 If section 483 applies to the contract, this interest is called unstated interest. Tax act online 2012 If section 1274 applies to the contract, this interest is called original issue discount (OID). Tax act online 2012 An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Tax act online 2012 Treatment of unstated interest and OID. Tax act online 2012   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Tax act online 2012 As a result, the buyer cannot deduct the unstated interest. Tax act online 2012 The seller must report the unstated interest as income. Tax act online 2012   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Tax act online 2012   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Tax act online 2012 Rules for the seller. Tax act online 2012   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Tax act online 2012 If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Tax act online 2012   Include the unstated interest in income based on your regular method of accounting. Tax act online 2012 Include OID in income over the term of the contract. Tax act online 2012   The OID includible in income each year is based on the constant yield method described in section 1272. Tax act online 2012 (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Tax act online 2012 )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Tax act online 2012 Reduce the selling price by any stated principal treated as interest to determine the gain. Tax act online 2012   Report unstated interest or OID on your tax return, in addition to stated interest. Tax act online 2012 Rules for the buyer. Tax act online 2012   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Tax act online 2012 These rules do not apply to personal-use property (for example, property not used in a trade or business). Tax act online 2012 Adequate stated interest. Tax act online 2012   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Tax act online 2012 The present value of a payment is determined based on the test rate of interest, defined next. Tax act online 2012 (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Tax act online 2012 ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Tax act online 2012 Test rate of interest. Tax act online 2012   The test rate of interest for a contract is the 3-month rate. Tax act online 2012 The 3-month rate is the lower of the following applicable federal rates (AFRs). Tax act online 2012 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Tax act online 2012 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Tax act online 2012 Applicable federal rate (AFR). Tax act online 2012   The AFR depends on the month the binding
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The Tax Act Online 2012

Tax act online 2012 10. Tax act online 2012   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Tax act online 2012 Individual retirement arrangements (IRAs). Tax act online 2012 Civil service retirement benefits. Tax act online 2012 Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Tax act online 2012 How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Tax act online 2012 Exclusion not limited to cost. Tax act online 2012 Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Tax act online 2012 Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Tax act online 2012 However, these distributions are taken into account when determining the modified adjusted gross income threshold. Tax act online 2012 Distributions from a nonqualified retirement plan are included in net investment income. Tax act online 2012 See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Tax act online 2012 Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Tax act online 2012 For more information, see Designated Roth accounts discussed later. Tax act online 2012 Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. Tax act online 2012 What is not covered in this chapter. Tax act online 2012   The following topics are not discussed in this chapter. Tax act online 2012 The General Rule. Tax act online 2012   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Tax act online 2012 For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Tax act online 2012 For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Tax act online 2012 Individual retirement arrangements (IRAs). Tax act online 2012   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Tax act online 2012 Civil service retirement benefits. Tax act online 2012    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Tax act online 2012 S. Tax act online 2012 Civil Service Retirement Benefits. Tax act online 2012 Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Tax act online 2012 Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Tax act online 2012 S. Tax act online 2012 Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Tax act online 2012 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Tax act online 2012   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Tax act online 2012 Elective deferrals that are designated as Roth contributions are included in your income. Tax act online 2012 However, qualified distributions are not included in your income. Tax act online 2012 See Publication 575 for more information. Tax act online 2012 In-plan rollovers to designated Roth accounts. Tax act online 2012   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Tax act online 2012 The rollover of any untaxed amounts must be included in income. Tax act online 2012 See Publication 575 for more information. Tax act online 2012 More than one program. Tax act online 2012   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Tax act online 2012 Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Tax act online 2012 Section 457 deferred compensation plans. Tax act online 2012    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Tax act online 2012 If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Tax act online 2012 You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Tax act online 2012 You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Tax act online 2012   Your 457(b) plan may have a designated Roth account option. Tax act online 2012 If so, you may be able to roll over amounts to the designated Roth account or make contributions. Tax act online 2012 Elective deferrals to a designated Roth account are included in your income. Tax act online 2012 Qualified distributions from a designated Roth account are not subject to tax. Tax act online 2012   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Tax act online 2012 For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Tax act online 2012   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Tax act online 2012 Disability pensions. Tax act online 2012   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Tax act online 2012 You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Tax act online 2012 Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Tax act online 2012    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Tax act online 2012 For information on the credit for the elderly or the disabled, see chapter 33. Tax act online 2012   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Tax act online 2012 Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Tax act online 2012    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Tax act online 2012 For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Tax act online 2012   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Tax act online 2012 Retired public safety officers. Tax act online 2012   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. Tax act online 2012 See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Tax act online 2012 Railroad retirement benefits. Tax act online 2012   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. Tax act online 2012 For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Tax act online 2012 For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Tax act online 2012 Withholding and estimated tax. Tax act online 2012   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. Tax act online 2012 You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Tax act online 2012 If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Tax act online 2012   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Tax act online 2012 Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Tax act online 2012 See Direct rollover option under Rollovers, later. Tax act online 2012   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Tax act online 2012 Qualified plans for self-employed individuals. Tax act online 2012   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Tax act online 2012 R. Tax act online 2012 10 plans. Tax act online 2012 Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Tax act online 2012 They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Tax act online 2012    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Tax act online 2012 If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. Tax act online 2012 For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Tax act online 2012 Purchased annuities. Tax act online 2012   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. Tax act online 2012 For more information about the General Rule, get Publication 939. Tax act online 2012 Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Tax act online 2012 Loans. Tax act online 2012   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Tax act online 2012 This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. Tax act online 2012 This means that you must include in income all or part of the amount borrowed. Tax act online 2012 Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. Tax act online 2012 For details, see Loans Treated as Distributions in Publication 575. Tax act online 2012 For information on the deductibility of interest, see chapter 23. Tax act online 2012 Tax-free exchange. Tax act online 2012   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. Tax act online 2012 However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. Tax act online 2012 See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Tax act online 2012 How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Tax act online 2012 If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Tax act online 2012 If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Tax act online 2012 If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Tax act online 2012 More than one annuity. Tax act online 2012   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Tax act online 2012 If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. Tax act online 2012 Joint return. Tax act online 2012   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 Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Tax act online 2012 Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Tax act online 2012 Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Tax act online 2012 This includes the amounts your employer contributed that were taxable to you when paid. Tax act online 2012 Cost does not include any amounts you deducted or were excluded from your income. Tax act online 2012 From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. Tax act online 2012 Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Tax act online 2012 Designated Roth accounts. Tax act online 2012   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Tax act online 2012 Your cost will also include any in-plan Roth rollovers you included in income. Tax act online 2012 Foreign employment contributions. Tax act online 2012   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Tax act online 2012 See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Tax act online 2012 Taxation of Periodic Payments Fully taxable payments. Tax act online 2012   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 from your pay while you worked, the amounts you receive each year are fully taxable. Tax act online 2012 You must report them on your income tax return. Tax act online 2012 Partly taxable payments. Tax act online 2012   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. Tax act online 2012 The rest of the amount you receive is generally taxable. Tax act online 2012 You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Tax act online 2012 Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Tax act online 2012   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Tax act online 2012 Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. Tax act online 2012   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Tax act online 2012   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Tax act online 2012 Exclusion limit. Tax act online 2012   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Tax act online 2012 Once your annuity starting date is determined, it does not change. Tax act online 2012 If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Tax act online 2012 That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Tax act online 2012 Exclusion limited to cost. Tax act online 2012   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Tax act online 2012 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. Tax act online 2012 This deduction is not subject to the 2%-of-adjusted-gross-income limit. Tax act online 2012 Exclusion not limited to cost. Tax act online 2012   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Tax act online 2012 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. Tax act online 2012 The total exclusion may be more than your cost. Tax act online 2012 Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Tax act online 2012 For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Tax act online 2012 For any other annuity, this number is the number of monthly annuity payments under the contract. Tax act online 2012 Who must use the Simplified Method. Tax act online 2012   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. Tax act online 2012 Guaranteed payments. Tax act online 2012   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. Tax act online 2012 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. Tax act online 2012 How to use the Simplified Method. Tax act online 2012    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Tax act online 2012 Single-life annuity. Tax act online 2012    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. Tax act online 2012 Enter on line 3 the number shown for your age at the annuity starting date. Tax act online 2012 Multiple-lives annuity. Tax act online 2012   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. Tax act online 2012 Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Tax act online 2012   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Tax act online 2012 Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Tax act online 2012    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Tax act online 2012 Example. Tax act online 2012 Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Tax act online 2012 Bill's annuity starting date is January 1, 2013. Tax act online 2012 The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Tax act online 2012 Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Tax act online 2012 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. Tax act online 2012 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. Tax act online 2012 Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. Tax act online 2012 His completed worksheet is shown in Worksheet 10-A. Tax act online 2012 Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Tax act online 2012 Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Tax act online 2012 The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Tax act online 2012 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. Tax act online 2012 This deduction is not subject to the 2%-of-adjusted- gross-income limit. Tax act online 2012 Worksheet 10-A. Tax act online 2012 Simplified Method Worksheet for Bill Smith 1. Tax act online 2012 Enter the total pension or annuity payments received this year. Tax act online 2012 Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Tax act online 2012 14,400 2. Tax act online 2012 Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Tax act online 2012 See Cost (Investment in the Contract) , earlier 2. Tax act online 2012 31,000       Note: 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). Tax act online 2012 Otherwise, go to line 3. Tax act online 2012         3. Tax act online 2012 Enter the appropriate number from Table 1 below. Tax act online 2012 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. Tax act online 2012 310     4. Tax act online 2012 Divide line 2 by the number on line 3 4. Tax act online 2012 100     5. Tax act online 2012 Multiply line 4 by the number of months for which this year's payments were made. Tax act online 2012 If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Tax act online 2012 Otherwise, go to line 6 5. Tax act online 2012 1,200     6. Tax act online 2012 Enter any amounts previously recovered tax free in years after 1986. Tax act online 2012 This is the amount shown on line 10 of your worksheet for last year 6. Tax act online 2012 -0-     7. Tax act online 2012 Subtract line 6 from line 2 7. Tax act online 2012 31,000     8. Tax act online 2012 Enter the smaller of line 5 or line 7 8. Tax act online 2012 1,200 9. Tax act online 2012 Taxable amount for year. Tax act online 2012 Subtract line 8 from line 1. Tax act online 2012 Enter the result, but not less than zero. Tax act online 2012 Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Tax act online 2012 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Tax act online 2012 If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. Tax act online 2012     10. Tax act online 2012 Was your annuity starting date before 1987? □ Yes. Tax act online 2012 STOP. Tax act online 2012 Do not complete the rest of this worksheet. Tax act online 2012  ☑ No. Tax act online 2012 Add lines 6 and 8. Tax act online 2012 This is the amount you have recovered tax free through 2013. Tax act online 2012 You will need this number if you need to fill out this worksheet next year 10. Tax act online 2012 1,200 11. Tax act online 2012 Balance of cost to be recovered. Tax act online 2012 Subtract line 10 from line 2. Tax act online 2012 If zero, you will not have to complete this worksheet next year. Tax act online 2012 The payments you receive next year will generally be fully taxable 11. Tax act online 2012 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Tax act online 2012 . Tax act online 2012 . Tax act online 2012 before November 19, 1996, enter on line 3. Tax act online 2012 . Tax act online 2012 . Tax act online 2012 after November 18, 1996, enter on line 3. Tax act online 2012 . Tax act online 2012 . Tax act online 2012 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. Tax act online 2012 . Tax act online 2012 . Tax act online 2012   THEN enter on line 3. Tax act online 2012 . Tax act online 2012 . Tax act online 2012 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Tax act online 2012 Who must use the General Rule. Tax act online 2012   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Tax act online 2012 Annuity starting before November 19, 1996. Tax act online 2012   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Tax act online 2012 You also had to use it for any fixed-period annuity. Tax act online 2012 If you did not have to use the General Rule, you could have chosen to use it. Tax act online 2012 If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Tax act online 2012   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. Tax act online 2012 Who cannot use the General Rule. Tax act online 2012   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Tax act online 2012 See Who must use the Simplified Method , earlier. Tax act online 2012 More information. Tax act online 2012   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Tax act online 2012 Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Tax act online 2012 They include all payments other than periodic payments and corrective distributions. Tax act online 2012 Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. Tax act online 2012 Corrective distributions of excess plan contributions. Tax act online 2012   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Tax act online 2012 To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Tax act online 2012 For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Tax act online 2012 Figuring the taxable amount of nonperiodic payments. Tax act online 2012   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Tax act online 2012 If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Tax act online 2012 If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Tax act online 2012 Annuity starting date. Tax act online 2012   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Tax act online 2012 Distribution on or after annuity starting date. Tax act online 2012   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. Tax act online 2012 Distribution before annuity starting date. Tax act online 2012   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. Tax act online 2012 You exclude from your gross income the part that you allocate to the cost. Tax act online 2012 You include the remainder in your gross income. Tax act online 2012   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Tax act online 2012 This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Tax act online 2012    Distributions from nonqualified plans are subject to the net investment income tax. Tax act online 2012 See the Instructions for Form 8960. Tax act online 2012   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Tax act online 2012 Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Tax act online 2012 If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Tax act online 2012 A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Tax act online 2012 A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. Tax act online 2012 The participant's entire balance from a plan does not include certain forfeited amounts. Tax act online 2012 It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Tax act online 2012 For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. Tax act online 2012 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. Tax act online 2012 The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Tax act online 2012 The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Tax act online 2012 You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Tax act online 2012 Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Tax act online 2012 The tax figured on Form 4972 is added to the regular tax figured on your other income. Tax act online 2012 This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. Tax act online 2012 How to treat the distribution. Tax act online 2012   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Tax act online 2012 Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. Tax act online 2012 Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Tax act online 2012 Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Tax act online 2012 Roll over all or part of the distribution. Tax act online 2012 See Rollovers , later. Tax act online 2012 No tax is currently due on the part rolled over. Tax act online 2012 Report any part not rolled over as ordinary income. Tax act online 2012 Report the entire taxable part of the distribution as ordinary income on your tax return. Tax act online 2012   The first three options are explained in the following discussions. Tax act online 2012 Electing optional lump-sum treatment. Tax act online 2012   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Tax act online 2012 If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Tax act online 2012 Taxable and tax-free parts of the distribution. Tax act online 2012    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Tax act online 2012 You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Tax act online 2012 Cost. Tax act online 2012   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. Tax act online 2012 You must reduce this cost by amounts previously distributed tax free. Tax act online 2012 Net unrealized appreciation (NUA). Tax act online 2012   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. Tax act online 2012 (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Tax act online 2012 ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. Tax act online 2012 The amount treated as capital gain is taxed at a 20% rate. Tax act online 2012 You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Tax act online 2012 Complete Part II of Form 4972 to choose the 20% capital gain election. Tax act online 2012 For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Tax act online 2012 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. Tax act online 2012 You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Tax act online 2012 You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Tax act online 2012 The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. Tax act online 2012 You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. Tax act online 2012 Complete Part III of Form 4972 to choose the 10-year tax option. Tax act online 2012 You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Tax act online 2012 Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Tax act online 2012 Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. Tax act online 2012 For this purpose, the following plans are qualified retirement plans. Tax act online 2012 A qualified employee plan. Tax act online 2012 A qualified employee annuity. Tax act online 2012 A tax-sheltered annuity plan (403(b) plan). Tax act online 2012 An eligible state or local government section 457 deferred compensation plan. Tax act online 2012 Eligible rollover distributions. Tax act online 2012   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Tax act online 2012 For information about exceptions to eligible rollover distributions, see Publication 575. Tax act online 2012 Rollover of nontaxable amounts. Tax act online 2012   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. Tax act online 2012 The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. Tax act online 2012   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. Tax act online 2012   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Tax act online 2012 To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Tax act online 2012 For more information, see the Form 8606 instructions. Tax act online 2012 Direct rollover option. Tax act online 2012   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. Tax act online 2012 If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Tax act online 2012 Payment to you option. Tax act online 2012   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Tax act online 2012 However, the full amount is treated as distributed to you even though you actually receive only 80%. Tax act online 2012 You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. Tax act online 2012 (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Tax act online 2012 )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. Tax act online 2012 Time for making rollover. Tax act online 2012   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. Tax act online 2012 (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. Tax act online 2012 )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Tax act online 2012   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. Tax act online 2012 Qualified domestic relations order (QDRO). Tax act online 2012   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. Tax act online 2012 If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. Tax act online 2012 You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Tax act online 2012 See Rollovers in Publication 575 for more information on benefits received under a QDRO. Tax act online 2012 Rollover by surviving spouse. Tax act online 2012   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. Tax act online 2012 The rollover rules apply to you as if you were the employee. Tax act online 2012 You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Tax act online 2012 For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Tax act online 2012    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Tax act online 2012 However, see Rollovers by nonspouse beneficiary next. Tax act online 2012 Rollovers by nonspouse beneficiary. Tax act online 2012   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. Tax act online 2012 The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Tax act online 2012 The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Tax act online 2012 For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Tax act online 2012 Retirement bonds. Tax act online 2012   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. Tax act online 2012 Designated Roth accounts. Tax act online 2012   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Tax act online 2012 If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. Tax act online 2012 For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Tax act online 2012 In-plan rollovers to designated Roth accounts. Tax act online 2012   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Tax act online 2012 The rollover of any untaxed amounts must be included in income. Tax act online 2012 See Designated Roth accounts under Rollovers in Publication 575 for more information. Tax act online 2012 Rollovers to Roth IRAs. Tax act online 2012   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Tax act online 2012   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. Tax act online 2012 You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. Tax act online 2012 In addition, the 10% tax on early distributions does not apply. Tax act online 2012 More information. Tax act online 2012   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Tax act online 2012 Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Tax act online 2012 Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. Tax act online 2012 These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Tax act online 2012 These taxes are discussed in the following sections. Tax act online 2012 If you must pay either of these taxes, report them on Form 5329. Tax act online 2012 However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Tax act online 2012 Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. Tax act online 2012 Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Tax act online 2012 This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. Tax act online 2012 Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. Tax act online 2012 This tax applies to the part of the distribution that you must include in gross income. Tax act online 2012 For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity 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). Tax act online 2012 5% rate on certain early distributions from deferred annuity contracts. Tax act online 2012   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Tax act online 2012 A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. Tax act online 2012 On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Tax act online 2012 Attach an explanation to your return. Tax act online 2012 Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Tax act online 2012   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. Tax act online 2012 You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. Tax act online 2012 The additional tax is figured on Form 5329. Tax act online 2012 For more information, see Form 5329 and its instructions. Tax act online 2012 For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Tax act online 2012 Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Tax act online 2012   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. Tax act online 2012 You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. Tax act online 2012 The additional tax is figured on Form 5329. Tax act online 2012 For more information, see Form 5329 and its instructions. Tax act online 2012 For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Tax act online 2012 Exceptions to tax. Tax act online 2012    Certain early distributions are excepted from the early distribution tax. Tax act online 2012 If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. Tax act online 2012 If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Tax act online 2012 Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Tax act online 2012 On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Tax act online 2012    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Tax act online 2012 Enter exception number “12” on line 2. Tax act online 2012 General exceptions. Tax act online 2012   The tax does not apply to 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 your 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. Tax act online 2012 Additional exceptions for qualified retirement plans. Tax act online 2012   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. Tax act online 2012 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. Tax act online 2012 See Pub. Tax act online 2012 721 for more information on the phased retirement program. Tax act online 2012 Qualified public safety employees. Tax act online 2012   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. Tax act online 2012 You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. Tax act online 2012 Qualified reservist distributions. Tax act online 2012   A qualified reservist distribution is not subject to the additional tax on early distributions. Tax act online 2012 A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. Tax act online 2012 You must have been ordered or called to active duty after September 11, 2001. Tax act online 2012 For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Tax act online 2012 Additional exceptions for nonqualified annuity contracts. Tax act online 2012   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). Tax act online 2012 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 (defined later). Tax act online 2012 The payments each year cannot be less than the required minimum distribution. Tax act online 2012 Required distributions not made. Tax act online 2012   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. Tax act online 2012 The tax equals 50% of the part of the required minimum distribution that was not distributed. Tax act online 2012   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). Tax act online 2012 Waiver. Tax act online 2012   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. Tax act online 2012 See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Tax act online 2012 State insurer delinquency proceedings. Tax act online 2012   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Tax act online 2012 If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Tax act online 2012 Under certain conditions, you will not have to pay the 50% excise tax. Tax act online 2012 Required beginning date. Tax act online 2012   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by 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. Tax act online 2012 However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. Tax act online 2012   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Tax act online 2012 Your required distribution then must be made for 2014 by December 31, 2014. Tax act online 2012 5% owners. Tax act online 2012   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. Tax act online 2012   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. Tax act online 2012 Age 70½. Tax act online 2012   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Tax act online 2012   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Tax act online 2012 If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Tax act online 2012 Required distributions. Tax act online 2012   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). Tax act online 2012 Additional information. Tax act online 2012   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Tax act online 2012 Form 5329. Tax act online 2012   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Tax act online 2012 Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Tax act online 2012 However, some special rules apply. Tax act online 2012 See Publication 575 for more information. Tax act online 2012 Survivors of employees. Tax act online 2012   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. Tax act online 2012 You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Tax act online 2012 Survivors of retirees. Tax act online 2012   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. Tax act online 2012 If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. Tax act online 2012    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. Tax act online 2012 The resulting tax-free amount will then remain fixed. Tax act online 2012 Any increases in the survivor annuity are fully taxable. Tax act online 2012    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. Tax act online 2012 This amount remains fixed even if the annuity payments are increased or decreased. Tax act online 2012 See Simplified Method , earlier. Tax act online 2012   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Tax act online 2012 Estate tax deduction. Tax act online 2012   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. Tax act online 2012 You can deduct the part of the total estate tax that was based on the annuity. Tax act online 2012 The deceased annuitant must have died after the annuity starting date. Tax act online 2012 (For details, see section 1. Tax act online 2012 691(d)-1 of the regulations. Tax act online 2012 ) Deduct it in equal amounts over your remaining life expectancy. Tax act online 2012   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. Tax act online 2012   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Tax act online 2012 This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Tax act online 2012 See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Tax act online 2012 Prev  Up  Next   Home   More Online Publications