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Taxact sign 5. Taxact sign   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Taxact sign Short-term lease. Taxact sign Retail space. Taxact sign Qualified long-term real property. Taxact sign Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Taxact sign If there is a connection between any income you receive and your business, the income is business income. Taxact sign A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Taxact sign You can have business income even if you are not involved in the activity on a regular full-time basis. Taxact sign Income from work you do on the side in addition to your regular job can be business income. Taxact sign You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Taxact sign But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Taxact sign For information on selling business assets, see chapter 3. Taxact sign Nonemployee compensation. Taxact sign Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Taxact sign This includes amounts reported as nonemployee compensation in box 7 of the form. Taxact sign You can find more information in the instructions on the back of the Form 1099-MISC you received. Taxact sign Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Taxact sign In most cases, your business income will be in the form of cash, checks, and credit card charges. Taxact sign But business income can be in other forms, such as property or services. Taxact sign These and other types of income are explained next. Taxact sign If you are a U. Taxact sign S. Taxact sign citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Taxact sign S. Taxact sign law. Taxact sign If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Taxact sign For details, see Publication 54, Tax Guide for U. Taxact sign S. Taxact sign Citizens and Resident Aliens Abroad. Taxact sign Bartering for Property or Services Bartering is an exchange of property or services. Taxact sign You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Taxact sign If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Taxact sign Example 1. Taxact sign You are a self-employed lawyer. Taxact sign You perform legal services for a client, a small corporation. Taxact sign In payment for your services, you receive shares of stock in the corporation. Taxact sign You must include the fair market value of the shares in income. Taxact sign Example 2. Taxact sign You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Taxact sign You must include the fair rental value of the apartment in your gross receipts. Taxact sign Your landlord must include the fair market value of the work of art in his or her rental income. Taxact sign Example 3. Taxact sign You are a self-employed accountant. Taxact sign Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Taxact sign Members get in touch with other members directly and bargain for the value of the services to be performed. Taxact sign In return for accounting services you provided for the house painter's business, the house painter painted your home. Taxact sign You must include in gross receipts the fair market value of the services you received from the house painter. Taxact sign The house painter must include the fair market value of your accounting services in his or her gross receipts. Taxact sign Example 4. Taxact sign You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Taxact sign As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Taxact sign You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Taxact sign The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Taxact sign It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Taxact sign See Publication 15 (Circular E), Employer's Tax Guide. Taxact sign Example 5. Taxact sign You operate a plumbing business and use the cash method of accounting. Taxact sign You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Taxact sign Each member has access to a directory that lists the members of the club and the services available. Taxact sign Members contact each other directly and request services to be performed. Taxact sign You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Taxact sign You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Taxact sign Information returns. Taxact sign   If you are involved in a bartering transaction, you may have to file either of the following forms. Taxact sign Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Taxact sign Form 1099-MISC, Miscellaneous Income. Taxact sign For information about these forms, see the General Instructions for Certain Information Returns. Taxact sign Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Taxact sign , who provides services (maid services, etc. Taxact sign ) for guests, report the rental income and expenses on Schedule C or C-EZ. Taxact sign If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Taxact sign For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxact sign Real estate dealer. Taxact sign   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Taxact sign Rent you receive from real estate held for sale to customers is subject to SE tax. Taxact sign However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Taxact sign Trailer park owner. Taxact sign   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Taxact sign    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Taxact sign Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Taxact sign   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Taxact sign   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Taxact sign Hotels, boarding houses, and apartments. Taxact sign   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Taxact sign   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Taxact sign An example of a service that is not normally provided for the convenience of the occupants is maid service. Taxact sign However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Taxact sign Prepaid rent. Taxact sign   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Taxact sign This is true no matter what accounting method or period you use. Taxact sign Lease bonus. Taxact sign   A bonus you receive from a lessee for granting a lease is an addition to the rent. Taxact sign Include it in your gross receipts in the year received. Taxact sign Lease cancellation payments. Taxact sign   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Taxact sign Payments to third parties. Taxact sign   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Taxact sign A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Taxact sign Settlement payments. Taxact sign   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Taxact sign Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Taxact sign ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Taxact sign Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Taxact sign If you receive any of those payments, include them in your gross receipts as explained in that discussion. Taxact sign Interest and Dividend Income Interest and dividends may be considered business income. Taxact sign Interest. Taxact sign   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Taxact sign Interest received on loans is business income if you are in the business of lending money. Taxact sign Uncollectible loans. Taxact sign   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Taxact sign If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Taxact sign See Bad Debts in chapter 8. Taxact sign Unstated interest. Taxact sign   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Taxact sign See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Taxact sign Dividends. Taxact sign   Generally, dividends are business income to dealers in securities. Taxact sign For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Taxact sign If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Taxact sign   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Taxact sign To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Taxact sign Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Taxact sign General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Taxact sign Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Taxact sign If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Taxact sign Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Taxact sign Price reduced after purchase. Taxact sign   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Taxact sign Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Taxact sign Deductible debt. Taxact sign   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Taxact sign Example. Taxact sign You get accounting services for your business on credit. Taxact sign Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Taxact sign Your accountant forgives part of the amount you owe for the accounting services. Taxact sign How you treat the canceled debt depends on your method of accounting. Taxact sign Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Taxact sign Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Taxact sign   For information on the cash and accrual methods of accounting, see chapter 2. Taxact sign Exclusions Do not include canceled debt in income in the following situations. Taxact sign However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Taxact sign For more information, see Form 982. Taxact sign The cancellation takes place in a bankruptcy case under title 11 of the U. Taxact sign S. Taxact sign Code (relating to bankruptcy). Taxact sign See Publication 908, Bankruptcy Tax Guide. Taxact sign The cancellation takes place when you are insolvent. Taxact sign You can exclude the canceled debt to the extent you are insolvent. Taxact sign See Publication 908. Taxact sign The canceled debt is a qualified farm debt owed to a qualified person. Taxact sign See chapter 3 in Publication 225, Farmer's Tax Guide. Taxact sign The canceled debt is a qualified real property business debt. Taxact sign This situation is explained later. Taxact sign The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Taxact sign See Form 982. Taxact sign If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Taxact sign If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Taxact sign Debt. Taxact sign   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Taxact sign Qualified real property business debt. Taxact sign   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Taxact sign If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Taxact sign Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Taxact sign However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Taxact sign Cancellation of qualified real property business debt. Taxact sign   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Taxact sign It was incurred or assumed in connection with real property used in a trade or business. Taxact sign It was secured by such real property. Taxact sign It was incurred or assumed at either of the following times. Taxact sign Before January 1, 1993. Taxact sign After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Taxact sign It is debt to which you choose to apply these rules. Taxact sign   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Taxact sign   You cannot exclude more than either of the following amounts. Taxact sign The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Taxact sign The total adjusted bases of depreciable real property held by you immediately before the cancellation. Taxact sign These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Taxact sign Do not take into account depreciable real property acquired in contemplation of the cancellation. Taxact sign Election. Taxact sign   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Taxact sign You must file your return by the due date (including extensions). Taxact sign If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Taxact sign For more information, see When To File in the form instructions. Taxact sign Other Income The following discussion explains how to treat other types of business income you may receive. Taxact sign Restricted property. Taxact sign   Restricted property is property that has certain restrictions that affect its value. Taxact sign If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Taxact sign However, you can choose to be taxed in the year you receive the property. Taxact sign For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Taxact sign Gains and losses. Taxact sign   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Taxact sign Instead, you must report these gains and losses on other forms. Taxact sign For more information, see chapter 3. Taxact sign Promissory notes. Taxact sign   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Taxact sign In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Taxact sign Lost income payments. Taxact sign   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Taxact sign Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Taxact sign Damages. Taxact sign   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Taxact sign Patent infringement. Taxact sign Breach of contract or fiduciary duty. Taxact sign Antitrust injury. Taxact sign Economic injury. Taxact sign   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Taxact sign Your deduction is the smaller of the following amounts. Taxact sign The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Taxact sign Your loss from the injury that you have not yet deducted. Taxact sign Punitive damages. Taxact sign   You must also include punitive damages in income. Taxact sign Kickbacks. Taxact sign   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Taxact sign However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Taxact sign Recovery of items previously deducted. Taxact sign   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Taxact sign However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Taxact sign If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Taxact sign Example. Taxact sign Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Taxact sign He also had 2 personal exemptions for a total of $7,800. Taxact sign He would not pay income tax even if he did not deduct the bad debt. Taxact sign Therefore, he will not report as income any part of the $300 he may recover in any future year. Taxact sign Exception for depreciation. Taxact sign   This rule does not apply to depreciation. Taxact sign You recover depreciation using the rules explained next. Taxact sign Recapture of depreciation. Taxact sign   In the following situations, you have to recapture the depreciation deduction. Taxact sign This means you include in income part or all of the depreciation you deducted in previous years. Taxact sign Listed property. Taxact sign   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Taxact sign You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Taxact sign Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Taxact sign For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Taxact sign That chapter explains how to determine whether property is used more than 50% in your business. Taxact sign Section 179 property. Taxact sign   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Taxact sign You do this by including in income on Schedule C part of the deduction you took. Taxact sign Use Part IV of Form 4797 to figure the amount to include on Schedule C. Taxact sign See chapter 2 in Publication 946 to find out when you recapture the deduction. Taxact sign Sale or exchange of depreciable property. Taxact sign   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Taxact sign You figure the income due to depreciation recapture in Part III of Form 4797. Taxact sign For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Taxact sign Items That Are Not Income In some cases the property or money you receive is not income. Taxact sign Appreciation. Taxact sign   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Taxact sign Consignments. Taxact sign   Consignments of merchandise to others to sell for you are not sales. Taxact sign The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Taxact sign Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Taxact sign Merchandise you have shipped out on consignment is included in your inventory until it is sold. Taxact sign   Do not include merchandise you receive on consignment in your inventory. Taxact sign Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Taxact sign Construction allowances. Taxact sign   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Taxact sign Under a short-term lease of retail space. Taxact sign For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Taxact sign Amount you can exclude. Taxact sign   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Taxact sign Short-term lease. Taxact sign   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Taxact sign The following rules apply in determining whether the lease is for 15 years or less. Taxact sign Take into account options to renew when figuring whether the lease is for 15 years or less. Taxact sign But do not take into account any option to renew at fair market value determined at the time of renewal. Taxact sign Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Taxact sign Retail space. Taxact sign   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Taxact sign Qualified long-term real property. Taxact sign   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Taxact sign Exchange of like-kind property. Taxact sign   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Taxact sign This means that the gain is not taxable and the loss is not deductible. Taxact sign A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Taxact sign For more information, see Form 8824. Taxact sign Leasehold improvements. Taxact sign   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Taxact sign However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Taxact sign Loans. Taxact sign   Money borrowed through a bona fide loan is not income. Taxact sign Sales tax. Taxact sign   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Taxact sign Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Taxact sign Direct seller. Taxact sign   You must report all income you receive as a direct seller on Schedule C or C-EZ. Taxact sign This includes any of the following. Taxact sign Income from sales—payments you receive from customers for products they buy from you. Taxact sign Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Taxact sign Prizes, awards, and gifts you receive from your selling business. Taxact sign You must report this income regardless of whether it is reported to you on an information return. Taxact sign   You are a direct seller if you meet all the following conditions. Taxact sign You are engaged in one of the following trades or businesses. Taxact sign Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Taxact sign Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Taxact sign Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Taxact sign Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Taxact sign Executor or administrator. Taxact sign   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Taxact sign A nonprofessional fiduciary (personal representative) and both of the following apply. Taxact sign The estate includes an active trade or business in which you actively participate. Taxact sign Your fees are related to the operation of that trade or business. Taxact sign A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Taxact sign    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Taxact sign Fishing crew member. Taxact sign    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Taxact sign Insurance agent, former. Taxact sign   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Taxact sign You received payments after your agreement to perform services for the company ended. Taxact sign You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Taxact sign You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Taxact sign The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Taxact sign The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Taxact sign Insurance agent, retired. Taxact sign   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Taxact sign Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Taxact sign   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Taxact sign Newspaper carrier or distributor. Taxact sign   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Taxact sign You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Taxact sign Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Taxact sign You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Taxact sign   This rule applies whether or not you hire others to help you make deliveries. Taxact sign It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Taxact sign Newspaper or magazine vendor. Taxact sign   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Taxact sign You sell newspapers or magazines to ultimate consumers. Taxact sign You sell them at a fixed price. Taxact sign Your earnings are based on the difference between the sales price and your cost of goods sold. Taxact sign   This rule applies whether or not you are guaranteed a minimum amount of earnings. Taxact sign It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Taxact sign Notary public. Taxact sign   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Taxact sign These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Taxact sign Public official. Taxact sign   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Taxact sign This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Taxact sign Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Taxact sign   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Taxact sign Real estate agent or direct seller. Taxact sign   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Taxact sign Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Taxact sign You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Taxact sign Securities dealer. Taxact sign   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Taxact sign For more information, see sections 1256 and 1402(i). Taxact sign Securities trader. Taxact sign   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Taxact sign As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Taxact sign However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Taxact sign For more information about securities traders, see Publication 550, Investment Income and Expenses. Taxact sign Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Taxact sign This section discusses some of the more common differences that may affect business transactions. Taxact sign Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Taxact sign If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Taxact sign Dealers in real estate are not allowed to use inventories. Taxact sign For more information on inventories, see chapter 2. Taxact sign Income paid to a third party. Taxact sign   All income you earn is taxable to you. Taxact sign You cannot avoid tax by having the income paid to a third party. Taxact sign Example. Taxact sign You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Taxact sign The amount paid to your son is gross income to you. Taxact sign Cash discounts. Taxact sign   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Taxact sign For income tax purposes, you can use either of the following two methods to account for cash discounts. Taxact sign Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Taxact sign Credit the cash discount to a discount income account. Taxact sign You must use the chosen method every year for all your purchase discounts. Taxact sign   If you use the second method, the credit balance in the account at the end of your tax year is business income. Taxact sign Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Taxact sign When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Taxact sign Trade discounts. Taxact sign   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Taxact sign Do not enter these discounts on your books of account. Taxact sign Instead, use only the net amount as the cost of the merchandise purchased. Taxact sign For more information, see Trade discounts in chapter 6. Taxact sign Payment placed in escrow. Taxact sign   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Taxact sign However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Taxact sign Sales returns and allowances. Taxact sign   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Taxact sign Advance payments. Taxact sign   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Taxact sign Insurance proceeds. Taxact sign   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Taxact sign You cannot deduct the reimbursed part of a casualty or theft loss. Taxact sign   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. 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Taxact sign Publication 575 - Main Content Table of Contents General InformationPension. Taxact sign Annuity. Taxact sign Qualified employee plan. Taxact sign Qualified employee annuity. Taxact sign Designated Roth account. Taxact sign Tax-sheltered annuity plan. Taxact sign Fixed-period annuities. Taxact sign Annuities for a single life. Taxact sign Joint and survivor annuities. Taxact sign Variable annuities. Taxact sign Disability pensions. Taxact sign Variable Annuities Section 457 Deferred Compensation Plans Disability Pensions Insurance Premiums for Retired Public Safety Officers Railroad Retirement Benefits Withholding Tax and Estimated Tax Cost (Investment in the Contract)Foreign employment contributions while a nonresident alien. Taxact sign Taxation of Periodic PaymentsPeriod of participation. Taxact sign Fully Taxable Payments Partly Taxable Payments Taxation of Nonperiodic PaymentsFiguring the Taxable Amount Loans Treated as Distributions Transfers of Annuity Contracts Lump-Sum Distributions RolloversExceptions. Taxact sign No tax withheld. Taxact sign Partial rollovers. Taxact sign Frozen deposits. Taxact sign Reasonable period of time. Taxact sign 20% Mandatory withholding. Taxact sign How to report. Taxact sign How to report. Taxact sign Special rule for Roth IRAs and designated Roth accounts. Taxact sign Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and BeneficiariesGuaranteed payments. Taxact sign How To Get Tax HelpLow Income Taxpayer Clinics General Information Definitions. Taxact sign   Some of the terms used in this publication are defined in the following paragraphs. Taxact sign Pension. Taxact sign   A pension is generally a series of definitely determinable payments made to you after you retire from work. Taxact sign Pension payments are made regularly and are based on such factors as years of service and prior compensation. Taxact sign Annuity. Taxact sign   An annuity is a series of payments under a contract made at regular intervals over a period of more than one full year. Taxact sign They can be either fixed (under which you receive a definite amount) or variable (not fixed). Taxact sign You can buy the contract alone or with the help of your employer. Taxact sign Qualified employee plan. Taxact sign   A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries and that meets Internal Revenue Code requirements. Taxact sign It qualifies for special tax benefits, such as tax deferral for employer contributions and capital gain treatment or the 10-year tax option for lump-sum distributions (if participants qualify). Taxact sign To determine whether your plan is a qualified plan, check with your employer or the plan administrator. Taxact sign Qualified employee annuity. Taxact sign   A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Taxact sign Designated Roth account. Taxact sign   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. Taxact sign Elective deferrals that are designated as Roth contributions are included in your income. Taxact sign However, qualified distributions (explained later) are not included in your income. Taxact sign You should check with your plan administrator to determine if your plan will accept designated Roth contributions. Taxact sign Tax-sheltered annuity plan. Taxact sign   A tax-sheltered annuity plan (often referred to as a 403(b) plan or a tax-deferred annuity plan) is a retirement plan for employees of public schools and certain tax-exempt organizations. Taxact sign Generally, a tax-sheltered annuity plan provides retirement benefits by purchasing annuity contracts for its participants. Taxact sign Types of pensions and annuities. Taxact sign   Pensions and annuities include the following types. Taxact sign Fixed-period annuities. Taxact sign   You receive definite amounts at regular intervals for a specified length of time. Taxact sign Annuities for a single life. Taxact sign   You receive definite amounts at regular intervals for life. Taxact sign The payments end at death. Taxact sign Joint and survivor annuities. Taxact sign   The first annuitant receives a definite amount at regular intervals for life. Taxact sign After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Taxact sign The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Taxact sign Variable annuities. Taxact sign   You receive payments that may vary in amount for a specified length of time or for life. Taxact sign The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds, cost-of-living indexes, or earnings from a mutual fund. Taxact sign Disability pensions. Taxact sign   You receive disability payments because you retired on disability and have not reached minimum retirement age. Taxact sign More than one program. Taxact sign   You may receive employee plan benefits from more than one program under a single trust or plan of your employer. Taxact sign If you participate in more than one program, you may have to treat each as a separate pension or annuity contract, depending upon the facts in each case. Taxact sign Also, you may be considered to have received more than one pension or annuity. Taxact sign Your former employer or the plan administrator should be able to tell you if you have more than one contract. Taxact sign Example. Taxact sign Your employer set up a noncontributory profit-sharing plan for its employees. Taxact sign The plan provides that the amount held in the account of each participant will be paid when that participant retires. Taxact sign Your employer also set up a contributory defined benefit pension plan for its employees providing for the payment of a lifetime pension to each participant after retirement. Taxact sign The amount of any distribution from the profit-sharing plan depends on the contributions (including allocated forfeitures) made for the participant and the earnings from those contributions. Taxact sign Under the pension plan, however, a formula determines the amount of the pension benefits. Taxact sign The amount of contributions is the amount necessary to provide that pension. Taxact sign Each plan is a separate program and a separate contract. Taxact sign If you get benefits from these plans, you must account for each separately, even though the benefits from both may be included in the same check. Taxact sign Distributions from a designated Roth account are treated separately from other distributions from the plan. Taxact sign Qualified domestic relations order (QDRO). Taxact sign   A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a retirement plan. Taxact sign The QDRO must contain certain specific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant's benefits to be paid to each alternate payee. Taxact sign A QDRO may not award an amount or form of benefit that is not available under the plan. Taxact sign   A spouse or former spouse who receives part of the benefits from a retirement plan under a QDRO reports the payments received as if he or she were a plan participant. Taxact sign The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. Taxact sign The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. Taxact sign The denominator is the present value of all benefits payable to the participant. Taxact sign   A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant. Taxact sign Variable Annuities The tax rules in this publication apply both to annuities that provide fixed payments and to annuities that provide payments that vary in amount based on investment results or other factors. Taxact sign For example, they apply to commercial variable annuity contracts, whether bought by an employee retirement plan for its participants or bought directly from the issuer by an individual investor. Taxact sign Under these contracts, the owner can generally allocate the purchase payments among several types of investment portfolios or mutual funds and the contract value is determined by the performance of those investments. Taxact sign The earnings are not taxed until distributed either in a withdrawal or in annuity payments. Taxact sign The taxable part of a distribution is treated as ordinary income. Taxact sign Net investment income tax. Taxact sign   Beginning in 2013, annuities under a nonqualified plan are included in calculating your net investment income for the net investment income tax (NIIT). Taxact sign For information see the Instructions for Form 8960, Net Investment Income Tax — Individuals, Estates and Trusts. Taxact sign For information on the tax treatment of a transfer or exchange of a variable annuity contract, see Transfers of Annuity Contracts under Taxation of Nonperiodic Payments, later. Taxact sign Withdrawals. Taxact sign   If you withdraw funds before your annuity starting date and your annuity is under a qualified retirement plan, a ratable part of the amount withdrawn is tax free. Taxact sign The tax-free part is based on the ratio of your cost (investment in the contract) to your account balance under the plan. Taxact sign   If your annuity is under a nonqualified plan (including a contract you bought directly from the issuer), the amount withdrawn is allocated first to earnings (the taxable part) and then to your cost (the tax-free part). Taxact sign However, if you bought your annuity contract before August 14, 1982, a different allocation applies to the investment before that date and the earnings on that investment. Taxact sign To the extent the amount withdrawn does not exceed that investment and earnings, it is allocated first to your cost (the tax-free part) and then to earnings (the taxable part). Taxact sign   If you withdraw funds (other than as an annuity) on or after your annuity starting date, the entire amount withdrawn is generally taxable. Taxact sign   The amount you receive in a full surrender of your annuity contract at any time is tax free to the extent of any cost that you have not previously recovered tax free. Taxact sign The rest is taxable. Taxact sign   For more information on the tax treatment of withdrawals, see Taxation of Nonperiodic Payments , later. Taxact sign If you withdraw funds from your annuity before you reach age 59½, also see Tax on Early Distributions under Special Additional Taxes, later. Taxact sign Annuity payments. Taxact sign   If you receive annuity payments under a variable annuity plan or contract, you recover your cost tax free under either the Simplified Method or the General Rule, as explained under Taxation of Periodic Payments , later. Taxact sign For a variable annuity paid under a qualified plan, you generally must use the Simplified Method. Taxact sign For a variable annuity paid under a nonqualified plan (including a contract you bought directly from the issuer), you must use a special computation under the General Rule. Taxact sign For more information, see Variable annuities in Publication 939 under Computation Under the General Rule. Taxact sign Death benefits. Taxact sign    If you receive a single-sum distribution from a variable annuity contract because of the death of the owner or annuitant, the distribution is generally taxable only to the extent it is more than the unrecovered cost of the contract. Taxact sign If you choose to receive an annuity, the payments are subject to tax as described above. Taxact sign If the contract provides a joint and survivor annuity and the primary annuitant had received annuity payments before death, you figure the tax-free part of annuity payments you receive as the survivor in the same way the primary annuitant did. Taxact sign See Survivors and Beneficiaries , later. Taxact sign Section 457 Deferred Compensation Plans If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Taxact sign 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. Taxact sign You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Taxact sign You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Taxact sign Your 457(b) plan may have a designated Roth account option. Taxact sign If so, you may be able to roll over amounts to the designated Roth account or make contributions. Taxact sign Elective deferrals to a designated Roth account are included in your income. Taxact sign Qualified distributions (explained later) are not included in your income. Taxact sign See the Designated Roth accounts discussion under Taxation of Periodic Payments, later. Taxact sign This publication covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Taxact sign For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525. Taxact sign Is your plan eligible?   To find out if your plan is an eligible plan, check with your employer. Taxact sign Plans that are not eligible section 457 plans include the following: Bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plans. Taxact sign Nonelective deferred compensation plans for nonemployees (independent contractors). Taxact sign Deferred compensation plans maintained by churches. Taxact sign Length of service award plans for bona fide volunteer firefighters and emergency medical personnel. Taxact sign An exception applies if the total amount paid to a volunteer exceeds $3,000 for any year of service. Taxact sign Disability Pensions If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Taxact sign You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Taxact sign Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Taxact sign You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Taxact sign For information on this credit, see Publication 524. Taxact sign Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Taxact sign Report the payments on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. Taxact sign 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. Taxact sign For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Taxact sign Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. Taxact sign The premiums can be for coverage for you, your spouse, or dependents. Taxact sign The distribution must be made directly from the plan to the insurance provider. Taxact sign You can exclude from income the smaller of the amount of the insurance premiums or $3,000. Taxact sign You can only make this election for amounts that would otherwise be included in your income. Taxact sign The amount excluded from your income cannot be used to claim a medical expense deduction. Taxact sign An eligible retirement plan is a governmental plan that is: a qualified trust, a section 403(a) plan, a section 403(b) annuity, or a section 457(b) plan. Taxact sign If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. Taxact sign The amount shown in box 2a of Form 1099-R does not reflect this exclusion. Taxact sign Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Taxact sign Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Taxact sign Enter “PSO” next to the appropriate line on which you report the taxable amount. Taxact sign If you are retired on disability and reporting your disability pension on line 7 of Form 1040 or Form 1040A, or line 8 of Form 1040NR, include only the taxable amount on that line and enter “PSO” and the amount excluded on the dotted line next to the applicable line. Taxact sign Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. Taxact sign These categories are treated differently for income tax purposes. Taxact sign The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. Taxact sign This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and you treat it for tax purposes like social security benefits. Taxact sign If you received, repaid, or had tax withheld from the SSEB portion of tier 1 benefits during 2013, you will receive Form RRB-1099, Payments by the Railroad Retirement Board (or Form RRB-1042S, Statement for Nonresident Alien Recipients of Payments by the Railroad Retirement Board, if you are a nonresident alien) from the U. Taxact sign S. Taxact sign Railroad Retirement Board (RRB). Taxact sign For more information about the tax treatment of the SSEB portion of tier 1 benefits and Forms RRB-1099 and RRB-1042S, see Publication 915. Taxact sign The second category contains the rest of the tier 1 railroad retirement benefits, called the non-social security equivalent benefit (NSSEB). Taxact sign It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Taxact sign Treat this category of benefits, shown on Form RRB-1099-R, as an amount received from a qualified employee plan. Taxact sign This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Taxact sign (The NSSEB and tier 2 benefits, less certain repayments, are combined into one amount called the Contributory Amount Paid on Form RRB-1099-R. Taxact sign ) Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. Taxact sign See Taxation of Periodic Payments , later, for information on how to report your benefits and how to recover the employee contributions tax free. Taxact sign Form RRB-1099-R is used for U. Taxact sign S. Taxact sign citizens, resident aliens, and nonresident aliens. Taxact sign Nonresident aliens. Taxact sign   A nonresident alien is an individual who is not a citizen or a resident alien of the United States. Taxact sign Nonresident aliens are subject to mandatory U. Taxact sign S. Taxact sign tax withholding unless exempt under a tax treaty between the United States and their country of legal residency. Taxact sign A tax treaty exemption may reduce or eliminate tax withholding from railroad retirement benefits. Taxact sign See Tax withholding next for more information. Taxact sign   If you are a nonresident alien and your tax withholding rate changed or your country of legal residence changed during the year, you may receive more than one Form RRB-1042S or Form RRB-1099-R. Taxact sign To determine your total benefits paid or repaid and total tax withheld for the year, you should add the amounts shown on all forms you received for that year. Taxact sign For information on filing requirements for aliens, see Publication 519, U. Taxact sign S. Taxact sign Tax Guide for Aliens. Taxact sign For information on tax treaties between the United States and other countries that may reduce or eliminate U. Taxact sign S. Taxact sign tax on your benefits, see Publication 901, U. Taxact sign S. Taxact sign Tax Treaties. Taxact sign Tax withholding. Taxact sign   To request or change your income tax withholding from SSEB payments, U. Taxact sign S. Taxact sign citizens should contact the IRS for Form W-4V, Voluntary Withholding Request, and file it with the RRB. Taxact sign To elect, revoke, or change your income tax withholding from NSSEB, tier 2, VDB, and supplemental annuity payments received, use Form RRB W-4P, Withholding Certificate for Railroad Retirement Payments. Taxact sign If you are a nonresident alien or a U. Taxact sign S. Taxact sign citizen living abroad, you should provide Form RRB-1001, Nonresident Questionnaire, to the RRB to furnish citizenship and residency information and to claim any treaty exemption from U. Taxact sign S. Taxact sign tax withholding. Taxact sign Nonresident U. Taxact sign S. Taxact sign citizens cannot elect to be exempt from withholding on payments delivered outside of the U. Taxact sign S. Taxact sign Help from the RRB. Taxact sign   To request an RRB form or to get help with questions about an RRB benefit, you should contact your nearest RRB field office if you reside in the United States (call 1-877-772-5772 for the nearest field office) or U. Taxact sign S. Taxact sign consulate/Embassy if you reside outside the United States. Taxact sign You can visit the RRB on the Internet at www. Taxact sign rrb. Taxact sign gov. Taxact sign Form RRB-1099-R. Taxact sign   The following discussion explains the items shown on Form RRB-1099-R. Taxact sign The amounts shown on this form are before any deduction for: Federal income tax withholding, Medicare premiums, Legal process garnishment payments, Recovery of a prior year overpayment of an NSSEB, tier 2 benefit, VDB, or supplemental annuity benefit, or Recovery of Railroad Unemployment Insurance Act benefits received while awaiting payment of your railroad retirement annuity. Taxact sign   The amounts shown on this form are after any offset for: Social Security benefits, Age reduction, Public Service pensions or public disability benefits, Dual railroad retirement entitlement under another RRB claim number, Work deductions, Legal process partition deductions, Actuarial adjustment, Annuity waiver, or Recovery of a current-year overpayment of NSSEB, tier 2, VDB, or supplemental annuity benefits. Taxact sign   The amounts shown on Form RRB-1099-R do not reflect any special rules, such as capital gain treatment or the special 10-year tax option for lump-sum payments, or tax-free rollovers. Taxact sign To determine if any of these rules apply to your benefits, see the discussions about them later. Taxact sign   Generally, amounts shown on your Form RRB-1099-R are considered a normal distribution. Taxact sign Use distribution code “7” if you are asked for a distribution code. Taxact sign Distribution codes are not shown on Form RRB-1099-R. Taxact sign   There are three copies of this form. Taxact sign Copy B is to be included with your income tax return if federal income tax is withheld. Taxact sign Copy C is for your own records. Taxact sign Copy 2 is filed with your state, city, or local income tax return, when required. Taxact sign See the illustrated Copy B (Form RRB-1099-R) above. Taxact sign       Each beneficiary will receive his or her own Form RRB-1099-R. Taxact sign If you receive benefits on more than one railroad retirement record, you may get more than one Form RRB-1099-R. Taxact sign So that you get your form timely, make sure the RRB always has your current mailing address. Taxact sign Please click here for the text description of the image. Taxact sign Form RRB-1099-R Box 1—Claim Number and Payee Code. Taxact sign   Your claim number is a six- or nine-digit number preceded by an alphabetical prefix. Taxact sign This is the number under which the RRB paid your benefits. Taxact sign Your payee code follows your claim number and is the last number in this box. Taxact sign It is used by the RRB to identify you under your claim number. Taxact sign In all your correspondence with the RRB, be sure to use the claim number and payee code shown in this box. Taxact sign Box 2—Recipient's Identification Number. Taxact sign   This is the recipient's U. Taxact sign S. Taxact sign taxpayer identification number. Taxact sign It is the social security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN), if known, for the person or estate listed as the recipient. Taxact sign If you are a resident or nonresident alien who must furnish a taxpayer identification number to the IRS and are not eligible to obtain an SSN, use Form W-7, Application for IRS Individual Taxpayer Identification Number, to apply for an ITIN. Taxact sign The Instructions for Form W-7 explain how and when to apply. Taxact sign Box 3—Employee Contributions. Taxact sign   This is the amount of taxes withheld from the railroad employee's earnings that exceeds the amount of taxes that would have been withheld had the earnings been covered under the social security system. Taxact sign This amount is the employee's cost that you use to figure the tax-free part of the NSSEB and tier 2 benefit you received (the amount shown in box 4). Taxact sign (For information on how to figure the tax-free part, see Partly Taxable Payments under Taxation of Periodic Payments, later. Taxact sign ) The amount shown is the total employee contribution amount, not reduced by any amounts that the RRB calculated as previously recovered. Taxact sign It is the latest amount reported for 2013 and may have increased or decreased from a previous Form RRB-1099-R. Taxact sign If this amount has changed, the change is retroactive. Taxact sign You may need to refigure the tax-free part of your NSSEB/tier 2 benefit for 2013 and prior tax years. Taxact sign If this box is blank, it means that the amount of your NSSEB and tier 2 payments shown in box 4 is fully taxable. Taxact sign    If you had a previous annuity entitlement that ended and you are figuring the tax-free part of your NSSEB/tier 2 benefit for your current annuity entitlement, you should contact the RRB for confirmation of your correct employee contribution amount. Taxact sign Box 4—Contributory Amount Paid. Taxact sign   This is the gross amount of the NSSEB and tier 2 benefit you received in 2013, less any 2013 benefits you repaid in 2013. Taxact sign (Any benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Taxact sign ) This amount is the total contributory pension paid in 2013. Taxact sign It may be partly taxable and partly tax free or fully taxable. Taxact sign If you determine you are eligible to compute a tax-free part as explained later in Partly Taxable Payments under Taxation of Periodic Payments, use the latest reported employee contribution amount shown in box 3 as the cost. Taxact sign Box 5—Vested Dual Benefit. Taxact sign   This is the gross amount of vested dual benefit (VDB) payments paid in 2013, less any 2013 VDB payments you repaid in 2013. Taxact sign It is fully taxable. Taxact sign VDB payments you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Taxact sign Note. Taxact sign The amounts shown in boxes 4 and 5 may represent payments for 2013 and/or other years after 1983. Taxact sign Box 6—Supplemental Annuity. Taxact sign   This is the gross amount of supplemental annuity benefits paid in 2013, less any 2013 supplemental annuity benefits you repaid in 2013. Taxact sign It is fully taxable. Taxact sign Supplemental annuity benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Taxact sign Box 7—Total Gross Paid. Taxact sign   This is the sum of boxes 4, 5, and 6. Taxact sign The amount represents the total pension paid in 2013. Taxact sign Include this amount on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Taxact sign Box 8—Repayments. Taxact sign   This amount represents any NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit you repaid to the RRB in 2013 for years before 2013 or for unknown years. Taxact sign The amount shown in this box has not been deducted from the amounts shown in boxes 4, 5, and 6. Taxact sign It only includes repayments of benefits that were taxable to you. Taxact sign This means it only includes repayments in 2013 of NSSEB benefits paid after 1985, tier 2 and VDB benefits paid after 1983, and supplemental annuity benefits paid in any year. Taxact sign If you included the benefits in your income in the year you received them, you may be able to deduct the repaid amount. Taxact sign For more information about repayments, see Repayment of benefits received in an earlier year , later. Taxact sign    You may have repaid an overpayment of benefits by returning a payment, by making a payment, or by having an amount withheld from your railroad retirement annuity payment. Taxact sign Box 9—Federal Income Tax Withheld. Taxact sign   This is the total federal income tax withheld from your NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit. Taxact sign Include this on your income tax return as tax withheld. Taxact sign If you are a nonresident alien and your tax withholding rate and/or country of legal residence changed during 2013, you will receive more than one Form RRB-1099-R for 2013. Taxact sign Determine the total amount of U. Taxact sign S. Taxact sign federal income tax withheld from your 2013 RRB NSSEB, tier 2, VDB, and supplemental annuity payments by adding the amounts in box 9 of all original 2013 Forms RRB-1099-R, or the latest corrected or duplicate Forms RRB-1099-R you receive. Taxact sign Box 10—Rate of Tax. Taxact sign   If you are taxed as a U. Taxact sign S. Taxact sign citizen or resident alien, this box does not apply to you. Taxact sign If you are a nonresident alien, an entry in this box indicates the rate at which tax was withheld on the NSSEB, tier 2, VDB, and supplemental annuity payments that were paid to you in 2013. Taxact sign If you are a nonresident alien whose tax was withheld at more than one rate during 2013, you will receive a separate Form RRB-1099-R for each rate change during 2013. Taxact sign Box 11—Country. Taxact sign   If you are taxed as a U. Taxact sign S. Taxact sign citizen or resident alien, this box does not apply to you. Taxact sign If you are a nonresident alien, an entry in this box indicates the country of which you were a resident for tax purposes at the time you received railroad retirement payments in 2013. Taxact sign If you are a nonresident alien who was a resident of more than one country during 2013, you will receive a separate Form RRB-1099-R for each country of residence during 2013. Taxact sign Box 12—Medicare Premium Total. Taxact sign   This is for information purposes only. Taxact sign The amount shown in this box represents the total amount of Part B Medicare premiums deducted from your railroad retirement annuity payments in 2013. Taxact sign Medicare premium refunds are not included in the Medicare total. Taxact sign The Medicare total is normally shown on Form RRB-1099 (if you are a citizen or resident alien of the United States) or Form RRB-1042S (if you are a nonresident alien). Taxact sign However, if Form RRB-1099 or Form RRB-1042S is not required for 2013, then this total will be shown on Form RRB-1099-R. Taxact sign If your Medicare premiums were deducted from your social security benefits, paid by a third party, refunded to you, and/or you paid the premiums by direct billing, your Medicare total will not be shown in this box. Taxact sign Repayment of benefits received in an earlier year. Taxact sign   If you had to repay any railroad retirement benefits that you had included in your income in an earlier year because at that time you thought you had an unrestricted right to it, you can deduct the amount you repaid in the year in which you repaid it. Taxact sign   If you repaid $3,000 or less in 2013, deduct it on Schedule A (Form 1040), line 23. Taxact sign The 2%-of-adjusted-gross-income limit applies to this deduction. Taxact sign You cannot take this deduction if you file Form 1040A. Taxact sign    If you repaid more than $3,000 in 2013, you can either take a deduction for the amount repaid on Schedule A (Form 1040), line 28 or you can take a credit against your tax. Taxact sign For more information, see Repayments in Publication 525. Taxact sign Withholding Tax and Estimated Tax Your retirement plan distributions are subject to federal income tax withholding. Taxact sign However, you can choose not to have tax withheld on payments you receive unless they are eligible rollover distributions. Taxact sign (These are distributions, described later under Rollovers, that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. Taxact sign ) If you choose not to have tax withheld or if you do not have enough tax withheld, you may have to make estimated tax payments. Taxact sign See Estimated tax , later. Taxact sign The withholding rules apply to the taxable part of payments you receive from: An employer pension, annuity, profit-sharing, or stock bonus plan, Any other deferred compensation plan, A traditional individual retirement arrangement (IRA), or A commercial annuity. Taxact sign For this purpose, a commercial annuity means an annuity, endowment, or life insurance contract issued by an insurance company. Taxact sign There will be no withholding on any part of a distribution where it is reasonable to believe that it will not be includible in gross income. Taxact sign Choosing no withholding. Taxact sign   You can choose not to have income tax withheld from retirement plan payments unless they are eligible rollover distributions. Taxact sign You can make this choice on Form W-4P for periodic and nonperiodic payments. Taxact sign This choice generally remains in effect until you revoke it. Taxact sign   The payer will ignore your choice not to have tax withheld if: You do not give the payer your social security number (in the required manner), or The IRS notifies the payer, before the payment is made, that you gave an incorrect social security number. Taxact sign   To choose not to have tax withheld, a U. Taxact sign S. Taxact sign citizen or resident alien must give the payer a home address in the United States or its possessions. Taxact sign Without that address, the payer must withhold tax. Taxact sign For example, the payer has to withhold tax if the recipient has provided a U. Taxact sign S. Taxact sign address for a nominee, trustee, or agent to whom the benefits are delivered, but has not provided his or her own U. Taxact sign S. Taxact sign home address. Taxact sign   If you do not give the payer a home address in the United States or its possessions, you can choose not to have tax withheld only if you certify to the payer that you are not a U. Taxact sign S. Taxact sign citizen, a U. Taxact sign S. Taxact sign resident alien, or someone who left the country to avoid tax. Taxact sign But if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. Taxact sign This 30% rate will not apply if you are exempt or subject to a reduced rate by treaty. Taxact sign For details, get Publication 519. Taxact sign Periodic payments. Taxact sign   Unless you choose no withholding, your annuity or similar periodic payments (other than eligible rollover distributions) will be treated like wages for withholding purposes. Taxact sign Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Taxact sign You should give the payer a completed withholding certificate (Form W-4P or a similar form provided by the payer). Taxact sign If you do not, tax will be withheld as if you were married and claiming three withholding allowances. Taxact sign   Tax will be withheld as if you were single and were claiming no withholding allowances if: You do not give the payer your social security number (in the required manner), or The IRS notifies the payer (before any payment is made) that you gave an incorrect social security number. Taxact sign   You must file a new withholding certificate to change the amount of withholding. Taxact sign Nonperiodic distributions. Taxact sign    Unless you choose no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution is 10% of the distribution. Taxact sign You can also ask the payer to withhold an additional amount using Form W-4P. Taxact sign The part of any loan treated as a distribution (except an offset amount to repay the loan), explained later, is subject to withholding under this rule. Taxact sign Eligible rollover distribution. Taxact sign    If you receive an eligible rollover distribution, 20% of it generally will be withheld for income tax. Taxact sign You cannot choose not to have tax withheld from an eligible rollover distribution. Taxact sign However, tax will not be withheld if you have the plan administrator pay the eligible rollover distribution directly to another qualified plan or an IRA in a direct rollover. Taxact sign For more information about eligible rollover distributions, see Rollovers , later. Taxact sign Estimated tax. Taxact sign   Your estimated tax is the total of your expected income tax, self-employment tax, and certain other taxes for the year, minus your expected credits and withheld tax. Taxact sign Generally, you must make estimated tax payments for 2014 if you expect to owe at least $1,000 in tax (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your 2014 return, or 100% of the tax shown on your 2013 return. Taxact sign If your adjusted gross income for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing separately), substitute 110% for 100% in (2) above. Taxact sign For more information, get Publication 505, Tax Withholding and Estimated Tax. Taxact sign In figuring your withholding or estimated tax, remember that a part of your monthly social security or equivalent tier 1 railroad retirement benefits may be taxable. Taxact sign See Publication 915. Taxact sign You can choose to have income tax withheld from those benefits. Taxact sign Use Form W-4V to make this choice. Taxact sign Cost (Investment in the Contract) Distributions from your pension or annuity plan may include amounts treated as a recovery of your cost (investment in the contract). Taxact sign If any part of a distribution is treated as a recovery of your cost under the rules explained in this publication, that part is tax free. Taxact sign Therefore, the first step in figuring how much of a distribution is taxable is to determine the cost of your pension or annuity. Taxact sign In general, your cost is your net investment in the contract as of the annuity starting date (or the date of the distribution, if earlier). Taxact sign To find this amount, you must first figure the total premiums, contributions, or other amounts you paid. Taxact sign This includes the amounts your employer contributed that were taxable to you when paid. Taxact sign (However, see Foreign employment contributions , later. Taxact sign ) It does not include amounts withheld from your pay on a tax-deferred basis (money that was taken out of your gross pay before taxes were deducted). Taxact sign It also does not include amounts you contributed for health and accident benefits (including any additional premiums paid for double indemnity or disability benefits). Taxact sign From this total cost you must subtract the following amounts. Taxact sign Any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income and that you received by the later of the annuity starting date or the date on which you received your first payment. Taxact sign Any other tax-free amounts you received under the contract or plan by the later of the dates in (1). Taxact sign If you must use the Simplified Method for your annuity payments, the tax-free part of any single-sum payment received in connection with the start of the annuity payments, regardless of when you received it. Taxact sign (See Simplified Method , later, for information on its required use. Taxact sign ) If you use the General Rule for your annuity payments, the value of the refund feature in your annuity contract. Taxact sign (See General Rule , later, for information on its use. Taxact sign ) Your annuity contract has a refund feature if the annuity payments are for your life (or the lives of you and your survivor) and payments in the nature of a refund of the annuity's cost will be made to your beneficiary or estate if all annuitants die before a stated amount or a stated number of payments are made. Taxact sign For more information, see Publication 939. Taxact sign The tax treatment of the items described in (1) through (3) is discussed later under Taxation of Nonperiodic Payments . Taxact sign Form 1099-R. Taxact sign If you began receiving periodic payments of a life annuity in 2013, the payer should show your total contributions to the plan in box 9b of your 2013 Form 1099-R. Taxact sign Annuity starting date defined. Taxact sign   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. Taxact sign Example. Taxact sign On January 1, you completed all your payments required under an annuity contract providing for monthly payments starting on August 1 for the period beginning July 1. Taxact sign The annuity starting date is July 1. Taxact sign This is the date you use in figuring the cost of the contract and selecting the appropriate number from Table 1 for line 3 of the Simplified Method Worksheet. Taxact sign Designated Roth accounts. Taxact sign   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Taxact sign Your cost will also include any in-plan Roth rollovers you included in income. Taxact sign Foreign employment contributions. Taxact sign   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. Taxact sign The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (not including the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) but only if the contributions would be excludible from your gross income had they been paid directly to you. Taxact sign Foreign employment contributions while a nonresident alien. Taxact sign   In determining your cost, special rules apply if you are a U. Taxact sign S. Taxact sign citizen or resident alien who received distributions in 2013 from a plan to which contributions were made while you were a nonresident alien. Taxact sign Your contributions and your employer's contributions are not included in your cost if the contribution: Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed. Taxact sign Taxation of Periodic Payments This section explains how the periodic payments you receive from a pension or annuity plan are taxed. Taxact sign Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Taxact sign These payments are also known as amounts received as an annuity. Taxact sign If you receive an amount from your plan that is not a periodic payment, see Taxation of Nonperiodic Payments , later. Taxact sign In general, you can recover the cost of your pension or annuity tax free over the period you are to receive the payments. Taxact sign The amount of each payment that is more than the part that represents your cost is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Taxact sign Designated Roth accounts. Taxact sign   If you receive a qualified distribution from a designated Roth account, the distribution is not included in your gross income. Taxact sign This applies to both your cost in the account and income earned on that account. Taxact sign A qualified distribution is generally a distribution that is: Made after a 5-tax-year period of participation, and Made on or after the date you reach age 59½, made to a beneficiary or your estate on or after your death, or attributable to your being disabled. Taxact sign   If the distribution is not a qualified distribution, the rules discussed in this section apply. Taxact sign The designated Roth account is treated as a separate contract. Taxact sign Period of participation. Taxact sign   The 5-tax-year period of participation is the 5-tax-year period beginning with the first tax year for which the participant made a designated Roth contribution to the plan. Taxact sign Therefore, for designated Roth contributions made for 2013, the first year for which a qualified distribution can be made is 2018. Taxact sign   However, if a direct rollover is made to the plan from a designated Roth account under another plan, the 5-tax-year period for the recipient plan begins with the first tax year for which the participant first had designated Roth contributions made to the other plan. Taxact sign   Your 401(k), 403(b), or 457(b) plan may permit you to roll over amounts from those plans to a designated Roth account within the same plan. Taxact sign This is known as an in-plan Roth rollover. Taxact sign For more details, see In-plan Roth rollovers , later. Taxact sign Fully Taxable Payments The pension or annuity payments that you receive are fully taxable if you have no cost in the contract because any of the following situations applies to you (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Taxact sign You did not pay anything or are not considered to have paid anything for your pension or annuity. Taxact sign Amounts withheld from your pay on a tax-deferred basis are not considered part of the cost of the pension or annuity payment. Taxact sign Your employer did not withhold contributions from your salary. Taxact sign You got back all of your contributions tax free in prior years (however, see Exclusion not limited to cost under Partly Taxable Payments, later). Taxact sign Report the total amount you got on Form 1040, line 16b; Form 1040A, line 12b; or on Form 1040NR, line 17b. Taxact sign You should make no entry on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Taxact sign Deductible voluntary employee contributions. Taxact sign   Distributions you receive that are based on your accumulated deductible voluntary employee contributions are generally fully taxable in the year distributed to you. Taxact sign Accumulated deductible voluntary employee contributions include net earnings on the contributions. Taxact sign If distributed as part of a lump sum, they do not qualify for the 10-year tax option or capital gain treatment, explained later. Taxact sign Partly Taxable Payments If you have a cost to recover from your pension or annuity plan (see Cost (Investment in the Contract) , earlier), you can exclude part of each annuity payment from income as a recovery of your cost. Taxact sign This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. Taxact sign The rest of each payment is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Taxact sign You figure the tax-free part of the payment using one of the following methods. Taxact sign Simplified Method. Taxact sign You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). Taxact sign You cannot use this method if your annuity is paid under a nonqualified plan. Taxact sign General Rule. Taxact sign You must use this method if your annuity is paid under a nonqualified plan. Taxact sign You generally cannot use this method if your annuity is paid under a qualified plan. Taxact sign You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Taxact sign If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Taxact sign Qualified plan annuity starting before November 19, 1996. Taxact sign   If your annuity is paid under a qualified plan and your annuity starting date (defined earlier under Cost (Investment in the Contract) ) is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the Simplified Method or the General Rule. Taxact sign If your annuity starting date is before July 2, 1986, you use the General Rule unless your annuity qualified for the Three-Year Rule. Taxact sign If you used the Three-Year Rule (which was repealed for annuities starting after July 1, 1986), your annuity payments are generally now fully taxable. Taxact sign Exclusion limit. Taxact sign   Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years. Taxact sign Once your annuity starting date is determined, it does not change. Taxact sign 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. Taxact sign That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Taxact sign Exclusion limited to cost. Taxact sign   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. Taxact sign 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. Taxact sign This deduction is not subject to the 2%-of-adjusted-gross-income limit. Taxact sign Example 1. Taxact sign Your annuity starting date is after 1986, and you exclude $100 a month ($1,200 a year) under the Simplified Method. Taxact sign The total cost of your annuity is $12,000. Taxact sign Your exclusion ends when you have recovered your cost tax free, that is, after 10 years (120 months). Taxact sign After that, your annuity payments are generally fully taxable. Taxact sign Example 2. Taxact sign The facts are the same as in Example 1, except you die (with no surviving annuitant) after the eighth year of retirement. Taxact sign You have recovered tax free only $9,600 (8 × $1,200) of your cost. Taxact sign An itemized deduction for your unrecovered cost of $2,400 ($12,000 – $9,600) can be taken on your final return. Taxact sign Exclusion not limited to cost. Taxact sign   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Taxact sign 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. Taxact sign The total exclusion may be more than your cost. Taxact sign 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. Taxact sign 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. Taxact sign For any other annuity, this number is the number of monthly annuity payments under the contract. Taxact sign Who must use the Simplified Method. Taxact sign   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you meet both of the following conditions. Taxact sign You receive your pension or annuity payments from any of the following plans. Taxact sign A qualified employee plan. Taxact sign A qualified employee annuity. Taxact sign A tax-sheltered annuity plan (403(b) plan). Taxact sign On your annuity starting date, at least one of the following conditions applies to you. Taxact sign You are under age 75. Taxact sign You are entitled to less than 5 years of guaranteed payments. Taxact sign Guaranteed payments. Taxact sign   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. Taxact sign 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. Taxact sign Annuity starting before November 19, 1996. Taxact sign   If your annuity starting date is after July 1, 1986, and before November 19, 1996, and you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. Taxact sign You could have chosen to use the Simplified Method if your annuity is payable for your life (or the lives of you and your survivor annuitant) and you met both of the conditions listed earlier under Who must use the Simplified Method . Taxact sign Who cannot use the Simplified Method. Taxact sign   You cannot use the Simplified Method if you receive your pension or annuity from a nonqualified plan or otherwise do not meet the conditions described in the preceding discussion. Taxact sign See General Rule , later. Taxact sign How to use the Simplified Method. Taxact sign    Complete Worksheet A in the back of this publication to figure your taxable annuity for 2013. Taxact sign Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. Taxact sign   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. Taxact sign How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. Taxact sign For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. Taxact sign    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Taxact sign Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Taxact sign Single-life annuity. Taxact sign   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. Taxact sign Enter on line 3 the number shown for your age on your annuity starting date. Taxact sign This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Taxact sign Multiple-lives annuity. Taxact sign   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. Taxact sign Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. Taxact sign For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. Taxact sign For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Taxact sign Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. Taxact sign   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Taxact sign Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Taxact sign This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Taxact sign Fixed-period annuity. Taxact sign   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Taxact sign Line 6. Taxact sign   The amount on line 6 should include all amounts that could have been recovered in prior years. Taxact sign If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. Taxact sign Example. Taxact sign Bill Smith, age 65, began receiving retirement benefits in 2013 under a joint and survivor annuity. Taxact sign Bill's annuity starting date is January 1, 2013. Taxact sign The benefits are to be paid for the joint lives of Bill and his wife, Kathy, age 65. Taxact sign Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Taxact sign 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. Taxact sign 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. Taxact sign Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of Worksheet A in completing line 3 of the worksheet. Taxact sign His completed worksheet is shown later. Taxact sign Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Taxact sign Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Taxact sign The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Taxact sign 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. Taxact sign This deduction is not subject to the 2%-of-adjusted-gross-income limit. Taxact sign Worksheet A. Taxact sign Simplified Method Worksheet for Bill Smith 1. Taxact sign Enter the total pension or annuity payments received this year. Taxact sign Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Taxact sign $14,400 2. Taxact sign Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion. Taxact sign * See Cost (Investment in the Contract) , earlier 2. Taxact sign 31,000   Note. Taxact sign 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). Taxact sign Otherwise, go to line 3. Taxact sign     3. Taxact sign Enter the appropriate number from Table 1 below. Taxact sign 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. Taxact sign 310 4. Taxact sign Divide line 2 by the number on line 3 4. Taxact sign 100 5. Taxact sign Multiply line 4 by the number of months for which this year's payments were made. Taxact sign If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Taxact sign Otherwise, go to line 6 5. Taxact sign 1,200 6. Taxact sign Enter any amount previously recovered tax free in years after 1986. Taxact sign This is the amount shown on line 10 of your worksheet for last year 6. Taxact sign -0- 7. Taxact sign Subtract line 6 from line 2 7. Taxact sign 31,000 8. Taxact sign Enter the smaller of line 5 or line 7 8. Taxact sign 1,200 9. Taxact sign Taxable amount for year. Taxact sign Subtract line 8 from line 1. Taxact sign Enter the result, but not less than zero. Taxact sign Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Taxact sign Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Taxact sign If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers , earlier, before entering an amount on your tax return 9. Taxact sign $13,200 10. Taxact sign Was your annuity starting date before 1987? □ Yes. Taxact sign STOP. Taxact sign Do not complete the rest of this worksheet. Taxact sign  ☑ No. Taxact sign Add lines 6 and 8. Taxact sign This is the amount you have recovered tax free through 2013. Taxact sign You will need this number if you need to fill out this worksheet next year 10. Taxact sign 1,200 11. Taxact sign Balance of cost to be recovered. Taxact sign Subtract line 10 from line 2. Taxact sign If zero, you will not have to complete this worksheet next year. Taxact sign The payments you receive next year will generally be fully taxable 11. Taxact sign $29,800         * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Taxact sign           Table 1 for Line 3 Above       AND your annuity starting date was—     IF the age at annuity starting date was. Taxact sign . Taxact sign . Taxact sign BEFORE November 19, 1996, enter on line 3. Taxact sign . Taxact sign . Taxact sign AFTER November 18, 1996, enter on line 3. Taxact sign . Taxact sign . Taxact sign     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. Taxact sign . Taxact sign . Taxact sign THEN enter on line 3. Taxact sign . Taxact sign . Taxact sign     110 or under   410     111-120   360     121-130   310     131-140   260     141 or older   210   Multiple annuitants. Taxact sign   If you and one or more other annuitants receive payments at the same time, you exclude from each annuity payment a pro rata share of the monthly tax-free amount. Taxact sign Figure your share by taking the following steps. Taxact sign Complete your worksheet through line 4 to figure the monthly tax-free amount. Taxact sign Divide the amount of your monthly payment by the total amount of the monthly payments to all annuitants. Taxact sign Multiply the amount on line 4 of your worksheet by the amount figured in (2) above. Taxact sign The result is your share of the monthly tax-free amount. Taxact sign   Replace the amount on line 4 of the worksheet with the result in (3) above. Taxact sign Enter that amount on line 4 of your worksheet each year. Taxact sign General Rule Under the General Rule, you determine the tax-free part of each annuity payment based on the ratio of the cost of the contract to the total expected return. Taxact sign Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Taxact sign To figure it, you must use life expectancy (actuarial) tables prescribed by the IRS. Taxact sign Who must use the General Rule. Taxact sign   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. Taxact sign Annuity starting before November 19, 1996. Taxact sign   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. Taxact sign You also had to use it for any fixed-period annuity. Taxact sign If you did not have to use the General Rule, you could have chosen to use it. Taxact sign 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. Taxact sign   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. Taxact sign Who cannot use the General Rule. Taxact sign   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. Taxact sign See Simplified Method , earlier. Taxact sign More information. Taxact sign   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Taxact sign Taxation of Nonperiodic Payments This section of the publication explains how any nonperiodic distributions you receive under a pension or annuity plan are taxed. Taxact sign Nonperiodic distributions are also known as amounts not received as an annuity. Taxact sign They include all payments other than periodic payments and corrective distributions. Taxact sign For example, the following items are treated as nonperiodic distributions. Taxact sign Cash withdrawals. Taxact sign Distributions of current earnings (dividends) on your investment. Taxact sign However, do not include these distributions in your income to the extent the insurer keeps them to pay premiums or other consideration for the contract. Taxact sign Certain loans. Taxact sign See Loans Treated as Distributions , later. Taxact sign The value of annuity contracts transferred without full and adequate consideration. Taxact sign See Transfers of Annuity Contracts , later. Taxact sign Corrective distributions of excess plan contributions. Taxact sign   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Taxact sign To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Taxact sign Although the plan reports the corrective distributions on Form 1099-R, the distribution is not treated as a nonperiodic distribution from the plan. Taxact sign It is not subject to the allocation rules explained in the following discussion, it cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Taxact sign    If your retirement plan made a corrective distribution of excess amounts (excess deferrals, excess contributions, or excess annual additions), your Form 1099-R should have the code “8,” “B,” “P,” or “E” in box 7. Taxact sign   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. Taxact sign Figuring the Taxable Amount How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Taxact sign 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. Taxact sign 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. Taxact sign You may be able to roll over the taxable amount of a nonperiodic distribution from a qualified retirement plan into another qualified retirement plan or a traditional IRA tax free. Taxact sign See Rollovers, later. Taxact sign If you do not make a tax-free rollover and the distribution qualifies as a lump-sum distribution, you may be able to elect an optional method of figuring the tax on the taxable amount. Taxact sign See Lump-Sum Distributions, later. Taxact sign Annuity starting date. Taxact sign   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. Taxact sign Distributions of employer securities. Taxact sign    If you receive a distribution of employer securities from a qualified retirement plan, you may be able to defer the tax on the net unrealized appreciation (NUA) in the securities. Taxact sign The NUA is the net increase in the securities' value while they were in the trust. Taxact sign This tax deferral applies to distributions of the employer corporation's stocks, bonds, registered debentures, and debentures with interest coupons attached. Taxact sign   If the distribution is a lump-sum distribution, tax is deferred on all of the NUA unless you choose to include it in your income for the year of the distribution. Taxact sign    A lump-sum distribution for this purpose is the distribution or payment of a plan participant's entire balance (within a single tax year) from all of the employer's qualified plans of one kind (pension, profit-sharing, or stock bonus plans), but only if paid: Because of the plan participant's death, After the participant reaches age 59½, Because the participant, if an employee, separates from service, or After the participant, if a self-employed individual, becomes totally and permanently disabled. Taxact sign    If you choose to include NUA in your income for the year of the distribution and the participant was born before January 2, 1936, you may be able to figure the tax on the NUA using the optional methods described und