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1040 Form 2011

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1040 Form 2011

1040 form 2011 Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 1040 form 2011 Cost Basis The basis of property you buy is usually its cost. 1040 form 2011 The cost is the amount you pay in cash, debt obligations, other property, or services. 1040 form 2011 Your cost also includes amounts you pay for the following items. 1040 form 2011 Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). 1040 form 2011  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. 1040 form 2011 Loans with low or no interest. 1040 form 2011   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 1040 form 2011 You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040 form 2011 For more information, see Unstated Interest and Original Issue Discount in Publication 537. 1040 form 2011 Purchase of a business. 1040 form 2011   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. 1040 form 2011 Allocate the price among the various assets, including any section 197 intangibles. 1040 form 2011 See Allocating the Basis, later. 1040 form 2011 Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 1040 form 2011 If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. 1040 form 2011 You must adjust the basis of stocks for certain events that occur after purchase. 1040 form 2011 See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. 1040 form 2011 Identifying stock or bonds sold. 1040 form 2011   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. 1040 form 2011 If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 1040 form 2011 For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 1040 form 2011 Mutual fund shares. 1040 form 2011   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. 1040 form 2011 For more information, see Publication 550. 1040 form 2011 Real Property Real property, also called real estate, is land and generally anything built on or attached to it. 1040 form 2011 If you buy real property, certain fees and other expenses become part of your cost basis in the property. 1040 form 2011 Real estate taxes. 1040 form 2011   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040 form 2011 You cannot deduct them as taxes. 1040 form 2011   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. 1040 form 2011 Do not include that amount in the basis of the property. 1040 form 2011 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 1040 form 2011 Settlement costs. 1040 form 2011   Your basis includes the settlement fees and closing costs for buying property. 1040 form 2011 You cannot include in your basis the fees and costs for getting a loan on property. 1040 form 2011 A fee for buying property is a cost that must be paid even if you bought the property for cash. 1040 form 2011   The following items are some of the settlement fees or closing costs you can include in the basis of your property. 1040 form 2011 Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 1040 form 2011   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040 form 2011   The following items are some settlement fees and closing costs you cannot include in the basis of the property. 1040 form 2011 Casualty insurance premiums. 1040 form 2011 Rent for occupancy of the property before closing. 1040 form 2011 Charges for utilities or other services related to occupancy of the property before closing. 1040 form 2011 Charges connected with getting a loan. 1040 form 2011 The following are examples of these charges. 1040 form 2011 Points (discount points, loan origination fees). 1040 form 2011 Mortgage insurance premiums. 1040 form 2011 Loan assumption fees. 1040 form 2011 Cost of a credit report. 1040 form 2011 Fees for an appraisal required by a lender. 1040 form 2011 Fees for refinancing a mortgage. 1040 form 2011 If these costs relate to business property, items (1) through (3) are deductible as business expenses. 1040 form 2011 Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. 1040 form 2011 Points. 1040 form 2011   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. 1040 form 2011 Generally, you deduct the points over the term of the loan. 1040 form 2011 For more information on how to deduct points, see Points in chapter 4 of Publication 535. 1040 form 2011 Points on home mortgage. 1040 form 2011   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. 1040 form 2011 If certain requirements are met, you can deduct the points in full for the year in which they are paid. 1040 form 2011 Reduce the basis of your home by any seller-paid points. 1040 form 2011 For more information, see Points in Publication 936, Home Mortgage Interest Deduction. 1040 form 2011 Assumption of mortgage. 1040 form 2011   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. 1040 form 2011 Example. 1040 form 2011 If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. 1040 form 2011 Constructing assets. 1040 form 2011   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040 form 2011 Some of these expenses include the following costs. 1040 form 2011 Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040 form 2011 In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. 1040 form 2011 You must include them in the asset's basis. 1040 form 2011 Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. 1040 form 2011    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040 form 2011 Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. 1040 form 2011 If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. 1040 form 2011 In certain circumstances, you may be subject to the uniform capitalization rules, next. 1040 form 2011 Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. 1040 form 2011 Activities subject to the rules. 1040 form 2011   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. 1040 form 2011 Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. 1040 form 2011 However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. 1040 form 2011   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. 1040 form 2011 Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. 1040 form 2011 Tangible personal property includes films, sound recordings, video tapes, books, or similar property. 1040 form 2011    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. 1040 form 2011 To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. 1040 form 2011 You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040 form 2011   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. 1040 form 2011 Example. 1040 form 2011 If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. 1040 form 2011 The nondeductible part of the cost is not subject to the uniform capitalization rules. 1040 form 2011 More information. 1040 form 2011   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. 1040 form 2011 Exceptions. 1040 form 2011   The following are not subject to the uniform capitalization rules. 1040 form 2011 Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. 1040 form 2011 For other exceptions to the uniform capitalization rules, see section 1. 1040 form 2011 263A-1(b) of the regulations. 1040 form 2011   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. 1040 form 2011 Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. 1040 form 2011 The basis of an intangible asset is usually the cost to buy or create it. 1040 form 2011 If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. 1040 form 2011 The basis of certain intangibles can be amortized. 1040 form 2011 See chapter 8 of Publication 535 for information on the amortization of these costs. 1040 form 2011 Patents. 1040 form 2011   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. 1040 form 2011 If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. 1040 form 2011 The value of the inventor's time spent on an invention is not part of the basis. 1040 form 2011 Copyrights. 1040 form 2011   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. 1040 form 2011 Do not include the value of your time as the author, or any other person's time you did not pay for. 1040 form 2011 Franchises, trademarks, and trade names. 1040 form 2011   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. 1040 form 2011 Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. 1040 form 2011 You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040 form 2011 See Trade or Business Acquired below. 1040 form 2011 Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. 1040 form 2011 If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040 form 2011 However, see Trade or Business Acquired, next. 1040 form 2011 Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. 1040 form 2011 Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. 1040 form 2011 Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. 1040 form 2011 Certificates of deposit, U. 1040 form 2011 S. 1040 form 2011 Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040 form 2011 Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. 1040 form 2011 Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. 1040 form 2011 All other assets except section 197 intangibles, goodwill, and going concern value. 1040 form 2011 Section 197 intangibles except goodwill and going concern value. 1040 form 2011 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040 form 2011 Agreement. 1040 form 2011   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. 1040 form 2011 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040 form 2011 Reporting requirement. 1040 form 2011   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 1040 form 2011 Use Form 8594 to provide this information. 1040 form 2011 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040 form 2011 More information. 1040 form 2011   See Sale of a Business in chapter 2 of Publication 544 for more information. 1040 form 2011 Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. 1040 form 2011 Figure the basis of each asset by multiplying the lump sum by a fraction. 1040 form 2011 The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040 form 2011 If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. 1040 form 2011 Demolition of building. 1040 form 2011   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. 1040 form 2011 Do not claim the costs as a current deduction. 1040 form 2011 Modification of building. 1040 form 2011   A modification of a building will not be treated as a demolition if the following conditions are satisfied. 1040 form 2011 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. 1040 form 2011   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. 1040 form 2011   If these conditions are met, add the costs of the modifications to the basis of the building. 1040 form 2011 Subdivided lots. 1040 form 2011   If you buy a tract of land and subdivide it, you must determine the basis of each lot. 1040 form 2011 This is necessary because you must figure the gain or loss on the sale of each individual lot. 1040 form 2011 As a result, you do not recover your entire cost in the tract until you have sold all of the lots. 1040 form 2011   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. 1040 form 2011 The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. 1040 form 2011 Future improvement costs. 1040 form 2011   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. 1040 form 2011 See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. 1040 form 2011 Use of erroneous cost basis. 1040 form 2011   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. 1040 form 2011 Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. 1040 form 2011 Example. 1040 form 2011 You bought a tract of land to which you assigned a cost of $15,000. 1040 form 2011 You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. 1040 form 2011 You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. 1040 form 2011 Several years later you determine that your original basis in the tract was $22,500 and not $15,000. 1040 form 2011 You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. 1040 form 2011 You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). 1040 form 2011 You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. 1040 form 2011 Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. 1040 form 2011 The result of these adjustments to the basis is the adjusted basis. 1040 form 2011 Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040 form 2011 These include the cost of any improvements having a useful life of more than 1 year. 1040 form 2011 Rehabilitation expenses also increase basis. 1040 form 2011 However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. 1040 form 2011 If you have to recapture any of the credit, increase your basis by the recaptured amount. 1040 form 2011 If you make additions or improvements to business property, keep separate accounts for them. 1040 form 2011 Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. 1040 form 2011 For more information, see Publication 946. 1040 form 2011 The following items increase the basis of property. 1040 form 2011 The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. 1040 form 2011 Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040 form 2011 Do not deduct them as taxes. 1040 form 2011 However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. 1040 form 2011 Example. 1040 form 2011 Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. 1040 form 2011 Add the assessment to your property's basis. 1040 form 2011 In this example, the assessment is a depreciable asset. 1040 form 2011 Deducting vs. 1040 form 2011 Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. 1040 form 2011 For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. 1040 form 2011 However, you can choose either to deduct or to capitalize certain other costs. 1040 form 2011 If you capitalize these costs, include them in your basis. 1040 form 2011 If you deduct them, do not include them in your basis. 1040 form 2011 See Uniform Capitalization Rules earlier. 1040 form 2011 The costs you can choose to deduct or to capitalize include the following. 1040 form 2011 Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. 1040 form 2011 If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. 1040 form 2011 For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. 1040 form 2011 Table 1. 1040 form 2011 Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. 1040 form 2011 Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. 1040 form 2011 Some of these items are discussed next. 1040 form 2011 Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. 1040 form 2011 You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. 1040 form 2011 To make this determination, compare the repaired property to the property before the casualty. 1040 form 2011 For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040 form 2011 Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. 1040 form 2011 It reduces the basis of the affected part of the property. 1040 form 2011 If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040 form 2011 Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. 1040 form 2011 For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. 1040 form 2011 Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. 1040 form 2011 This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. 1040 form 2011 If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. 1040 form 2011 Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040 form 2011 For more information about the section 179 deduction, see Publication 946. 1040 form 2011 Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. 1040 form 2011 Reduce the basis of the property for which you received the subsidy by the excluded amount. 1040 form 2011 For more information on this subsidy, see Publication 525. 1040 form 2011 Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040 form 2011 If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040 form 2011 If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040 form 2011 Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. 1040 form 2011 If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. 1040 form 2011 In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. 1040 form 2011 For information on figuring depreciation, see Publication 946. 1040 form 2011 If you are claiming depreciation on a business vehicle, see Publication 463. 1040 form 2011 If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. 1040 form 2011 Include the excess depreciation in your gross income and add it to your basis in the property. 1040 form 2011 For information on the computation of excess depreciation, see chapter 4 in Publication 463. 1040 form 2011 Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040 form 2011 A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040 form 2011 You can exclude canceled debt from income in the following situations. 1040 form 2011 Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). 1040 form 2011 If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040 form 2011 However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. 1040 form 2011 For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. 1040 form 2011 For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. 1040 form 2011 For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. 1040 form 2011 Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. 1040 form 2011 For more information on the rules for the sale of a home, see Publication 523. 1040 form 2011 Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. 1040 form 2011 This also applies to amounts you received under an employer's adoption assistance program and excluded from income. 1040 form 2011 For more information Form 8839, Qualified Adoption Expenses. 1040 form 2011 Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. 1040 form 2011 You must reduce your basis in that property by the credit claimed. 1040 form 2011 For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. 1040 form 2011 Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. 1040 form 2011 You also paid commissions of $2,000 and title search and legal fees of $600. 1040 form 2011 You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. 1040 form 2011 Immediately you spent $20,000 in remodeling the building before you placed it in service. 1040 form 2011 You were allowed depreciation of $14,526 for the years 2005 through 2009. 1040 form 2011 In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. 1040 form 2011 You claimed a deduction for this loss. 1040 form 2011 You spent $5,500 to repair the damages and extend the useful life of the building. 1040 form 2011 The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. 1040 form 2011 It is not affected by any of the above adjustments. 1040 form 2011 Basis Other Than Cost There are many times when you cannot use cost as basis. 1040 form 2011 In these cases, the fair market value or the adjusted basis of property may be used. 1040 form 2011 Adjusted basis is discussed earlier. 1040 form 2011 Fair market value (FMV). 1040 form 2011   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040 form 2011 Sales of similar property on or about the same date may be helpful in figuring the property's FMV. 1040 form 2011 Property Received for Services If you receive property for services, include the property's FMV in income. 1040 form 2011 The amount you include in income becomes your basis. 1040 form 2011 If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040 form 2011 Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. 1040 form 2011 If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 1040 form 2011 Your basis in the property is its FMV (your purchase price plus the amount you include in income). 1040 form 2011 If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. 1040 form 2011 However, your basis in the property is still its FMV. 1040 form 2011 See Employee Discounts in Publication 15-B. 1040 form 2011 Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. 1040 form 2011 Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. 1040 form 2011 There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. 1040 form 2011 When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. 1040 form 2011 Example. 1040 form 2011 Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. 1040 form 2011 The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. 1040 form 2011 You do not report any income until you have completed the 5 years of service that satisfy the condition. 1040 form 2011 Fair market value. 1040 form 2011   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. 1040 form 2011 Example. 1040 form 2011 You received stock from your employer for services you performed. 1040 form 2011 If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. 1040 form 2011 At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. 1040 form 2011 This is a restriction that by its terms will never end and you must consider it when you figure the FMV. 1040 form 2011 Election. 1040 form 2011   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. 1040 form 2011 If you make this choice, the substantially vested rules do not apply. 1040 form 2011 Your basis is the amount you paid plus the amount you included in income. 1040 form 2011   See the discussion of Restricted Property in Publication 525 for more information. 1040 form 2011 Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 1040 form 2011 A taxable gain or deductible loss is also known as a recognized gain or loss. 1040 form 2011 If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. 1040 form 2011 A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. 1040 form 2011 Example. 1040 form 2011 You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. 1040 form 2011 You must report a taxable gain of $3,000 for the land. 1040 form 2011 The tractor has a basis of $6,000. 1040 form 2011 Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. 1040 form 2011 Similar or related property. 1040 form 2011   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. 1040 form 2011 However, make the following adjustments. 1040 form 2011 Decrease the basis by the following. 1040 form 2011 Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. 1040 form 2011 Increase the basis by the following. 1040 form 2011 Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. 1040 form 2011 Money or property not similar or related. 1040 form 2011   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. 1040 form 2011 Example. 1040 form 2011 The state condemned your property. 1040 form 2011 The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. 1040 form 2011 You realized a gain of $5,000 ($31,000 − $26,000). 1040 form 2011 You bought replacement property similar in use to the converted property for $29,000. 1040 form 2011 You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 1040 form 2011 Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 1040 form 2011 The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. 1040 form 2011   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040 form 2011 Example. 1040 form 2011 The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. 1040 form 2011 Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. 1040 form 2011 More information. 1040 form 2011   For more information about condemnations, see Involuntary Conversions in Publication 544. 1040 form 2011 For more information about casualty and theft losses, see Publication 547. 1040 form 2011 Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040 form 2011 If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040 form 2011 A nontaxable gain or loss is also known as an unrecognized gain or loss. 1040 form 2011 Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040 form 2011 To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040 form 2011 There must also be an exchange of like-kind property. 1040 form 2011 For more information, see Like-Kind Exchanges in Publication 544. 1040 form 2011 The basis of the property you receive is the same as the basis of the property you gave up. 1040 form 2011 Example. 1040 form 2011 You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. 1040 form 2011 Your basis in the new property is the same as the basis of the old ($50,000). 1040 form 2011 Exchange expenses. 1040 form 2011   Exchange expenses are generally the closing costs you pay. 1040 form 2011 They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. 1040 form 2011 Add them to the basis of the like-kind property received. 1040 form 2011 Property plus cash. 1040 form 2011   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. 1040 form 2011 Example. 1040 form 2011 You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. 1040 form 2011 Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). 1040 form 2011 Special rules for related persons. 1040 form 2011   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040 form 2011 Each person must report any gain or loss not recognized on the original exchange. 1040 form 2011 Each person reports it on the tax return filed for the year in which the later disposition occurs. 1040 form 2011 If this rule applies, the basis of the property received in the original exchange will be its fair market value. 1040 form 2011   These rules generally do not apply to the following kinds of property dispositions. 1040 form 2011 Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. 1040 form 2011 Related persons. 1040 form 2011   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. 1040 form 2011   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. 1040 form 2011 ), see Nondeductible Loss in chapter 2 of Publication 544. 1040 form 2011 Exchange of business property. 1040 form 2011   Exchanging the assets of one business for the assets of another business is a multiple property exchange. 1040 form 2011 For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040 form 2011 Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. 1040 form 2011 The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. 1040 form 2011 Decrease the basis by the following amounts. 1040 form 2011 Any money you receive, and Any loss you recognize on the exchange. 1040 form 2011 Increase the basis by the following amounts. 1040 form 2011 Any additional costs you incur, and Any gain you recognize on the exchange. 1040 form 2011 If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040 form 2011 Example. 1040 form 2011 You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. 1040 form 2011 You realized a gain of $200 ($6,200 − $6,000). 1040 form 2011 This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). 1040 form 2011 You include all the gain in income (recognized gain) because the gain is less than the cash received. 1040 form 2011 Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. 1040 form 2011   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040 form 2011 The rest is the basis of the like property. 1040 form 2011 Example. 1040 form 2011 You had an adjusted basis of $15,000 in real estate you held for investment. 1040 form 2011 You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. 1040 form 2011 The truck is unlike property. 1040 form 2011 You realized a gain of $1,500 ($16,500 − $15,000). 1040 form 2011 This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). 1040 form 2011 You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040 form 2011 Your basis in the properties you received is figured as follows. 1040 form 2011 Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). 1040 form 2011 This is the truck's FMV. 1040 form 2011 The rest ($12,500) is the basis of the real estate. 1040 form 2011 Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040 form 2011 Example. 1040 form 2011 You are a salesperson and you use one of your cars 100% for business. 1040 form 2011 You have used this car in your sales activities for 2 years and have depreciated it. 1040 form 2011 Your adjusted basis in the car is $22,600 and its FMV is $23,100. 1040 form 2011 You are interested in a new car, which sells for $28,000. 1040 form 2011 If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). 1040 form 2011 However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. 1040 form 2011 Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). 1040 form 2011 Your basis for depreciating the new car is $27,500, the same as if you traded the old car. 1040 form 2011 Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. 1040 form 2011 The first is an exchange of like-kind property. 1040 form 2011 The second is personal-use property on which gain is recognized and loss is not recognized. 1040 form 2011 First, figure your adjusted basis in the property as if you transferred two separate properties. 1040 form 2011 Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. 1040 form 2011 Deduct the depreciation you took or could have taken from the adjusted basis of the business part. 1040 form 2011 Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. 1040 form 2011 The business part of the property is permitted to be exchanged tax free. 1040 form 2011 However, you must recognize any gain from the exchange of the nonbusiness part. 1040 form 2011 You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. 1040 form 2011 The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. 1040 form 2011 If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. 1040 form 2011 For more information, see Publication 523. 1040 form 2011 Trade of car used partly in business. 1040 form 2011   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. 1040 form 2011   For information on figuring your basis for depreciation, see Publication 463. 1040 form 2011 Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. 1040 form 2011 However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. 1040 form 2011 This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 1040 form 2011 If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. 1040 form 2011 Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. 1040 form 2011 For more information on these bonds, see Publication 550. 1040 form 2011 At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. 1040 form 2011 For more information, see Publication 504, Divorced or Separated Individuals. 1040 form 2011 Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 1040 form 2011 FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040 form 2011 Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. 1040 form 2011 Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). 1040 form 2011 If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. 1040 form 2011 Example. 1040 form 2011 You received an acre of land as a gift. 1040 form 2011 At the time of the gift, the land had an FMV of $8,000. 1040 form 2011 The donor's adjusted basis was $10,000. 1040 form 2011 After you received the land, no events occurred to increase or decrease your basis. 1040 form 2011 If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. 1040 form 2011 If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. 1040 form 2011 If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 1040 form 2011 For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. 1040 form 2011 If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. 1040 form 2011 Business property. 1040 form 2011   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040 form 2011 FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. 1040 form 2011 Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040 form 2011 Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. 1040 form 2011 See Adjusted Basis earlier. 1040 form 2011 Gift received before 1977. 1040 form 2011   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. 1040 form 2011 However, do not increase your basis above the FMV of the gift at the time it was given to you. 1040 form 2011 Example 1. 1040 form 2011 You were given a house in 1976 with an FMV of $21,000. 1040 form 2011 The donor's adjusted basis was $20,000. 1040 form 2011 The donor paid a gift tax of $500. 1040 form 2011 Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. 1040 form 2011 Example 2. 1040 form 2011 If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. 1040 form 2011 This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. 1040 form 2011 Gift received after 1976. 1040 form 2011   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. 1040 form 2011 Figure the increase by multiplying the gift tax paid by a fraction. 1040 form 2011 The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 1040 form 2011   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. 1040 form 2011 The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040 form 2011 For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 1040 form 2011 Example. 1040 form 2011 In 2010, you received a gift of property from your mother that had an FMV of $50,000. 1040 form 2011 Her adjusted basis was $20,000. 1040 form 2011 The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). 1040 form 2011 She paid a gift tax of $9,000. 1040 form 2011 Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . 1040 form 2011 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. 1040 form 2011 See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 1040 form 2011 If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. 1040 form 2011 The FMV of the property at the date of the individual's death. 1040 form 2011 The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. 1040 form 2011 For information on the alternate valuation date, see the Instructions for Form 706. 1040 form 2011 The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. 1040 form 2011 This method is discussed later. 1040 form 2011 The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. 1040 form 2011 For information on a qualified conservation easement, see the Instructions for Form 706. 1040 form 2011 If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040 form 2011 For more information, see the Instructions for Form 706. 1040 form 2011 Appreciated property. 1040 form 2011   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. 1040 form 2011 Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. 1040 form 2011 Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. 1040 form 2011 Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. 1040 form 2011 When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. 1040 form 2011 For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. 1040 form 2011 For example, you and your spouse owned community property that had a basis of $80,000. 1040 form 2011 When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 1040 form 2011 The FMV of the community interest was $100,000. 1040 form 2011 The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 1040 form 2011 The basis of the other half to your spouse's heirs is also $50,000. 1040 form 2011 For more information on community property, see Publication 555, Community Property. 1040 form 2011 Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. 1040 form 2011 Example. 1040 form 2011 John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. 1040 form 2011 John furnished two-thirds of the purchase price and Jim furnished one-third. 1040 form 2011 Depreciation deductions allowed before John's death were $12,000. 1040 form 2011 Under local law, each had a half interest in the income from the property. 1040 form 2011 At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. 1040 form 2011 Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. 1040 form 2011 This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. 1040 form 2011 If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. 1040 form 2011 Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. 1040 form 2011 It does not matter how much each spouse contributed to the purchase price. 1040 form 2011 Also, it does not matter which spouse dies first. 1040 form 2011 A qualified joint interest is any interest in property held by husband and wife as either of the following. 1040 form 2011 Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. 1040 form 2011 Basis. 1040 form 2011   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. 1040 form 2011 Decrease the cost by any deductions allowed to you for depreciation and depletion. 1040 form 2011 Increase the reduced cost by your basis in the half you inherited. 1040 form 2011 Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. 1040 form 2011 If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. 1040 form 2011 If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. 1040 form 2011 Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040 form 2011 Special-use valuation. 1040 form 2011   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. 1040 form 2011 Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040 form 2011 Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. 1040 form 2011 Figure all FMVs without regard to the special-use valuation. 1040 form 2011   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040 form 2011 This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. 1040 form 2011   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. 1040 form 2011 If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040 form 2011 The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. 1040 form 2011   You make the election by filing with Form 706-A a statement that does all of the following. 1040 form 2011 Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. 1040 form 2011   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. 1040 form 2011 Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 1040 form 2011 An example of changing property held for personal use to business use would be renting out your former main home. 1040 form 2011 Basis for depreciation. 1040 form 2011   The basis for depreciation is the lesser of the following amounts. 1040 form 2011 The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040 form 2011 Example. 1040 form 2011 Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. 1040 form 2011 You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. 1040 form 2011 Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 1040 form 2011 Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 1040 form 2011 On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 1040 form 2011 The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). 1040 form 2011 Sale of property. 1040 form 2011   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. 1040 form 2011 Gain. 1040 form 2011   The basis for figuring a gain is your adjusted basis when you sell the property. 1040 form 2011 Example. 1040 form 2011 Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. 1040 form 2011 Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 1040 form 2011 Loss. 1040 form 2011   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040 form 2011 Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. 1040 form 2011 Example. 1040 form 2011 Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. 1040 form 2011 In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. 1040 form 2011 Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). 1040 form 2011 How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. 1040 form 2011 By selecting the method that is best for you, you will have quick and easy access to tax help. 1040 form 2011 Contacting your Taxpayer Advocate. 1040 form 2011   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. 1040 form 2011 We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. 1040 form 2011 Here are seven things every taxpayer should know about TAS. 1040 form 2011 TAS is your voice at the IRS. 1040 form 2011 Our service is free, confidential, and tailored to meet your needs. 1040 form 2011 You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. 1040 form 2011 We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. 1040 form 2011 This includes businesses as well as individuals. 1040 form 2011 Our employees know the IRS and how to navigate it. 1040 form 2011 If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 1040 form 2011 We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. 1040 form 2011 You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. 1040 form 2011 irs. 1040 form 2011 gov/advocate. 1040 form 2011 You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 1040 form 2011 You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. 1040 form 2011 taxtoolkit. 1040 form 2011 irs. 1040 form 2011 gov. 1040 form 2011 You can get updates on hot tax topics by visiting our YouTube channel at www. 1040 form 2011 youtube. 1040 form 2011 com/tasnta and our Facebook page at www. 1040 form 2011 facebook. 1040 form 2011 com/YourVoiceAtIRS, or by following our tweets at www. 1040 form 2011 twitter. 1040 form 2011 com/YourVoiceAtIRS. 1040 form 2011 Low Income Taxpayer Clinics (LITCs). 1040 form 2011   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. 1040 form 2011 LITCs are independent from the IRS. 1040 form 2011 Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. 1040 form 2011 If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. 1040 form 2011 For more information, see Publication 4134, Low Income Taxpayer Clinic List. 1040 form 2011 This publication is available at IRS. 1040 form 2011 gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. 1040 form 2011 Free tax services. 1040 form 2011   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 1040 form 2011 Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 1040 form 2011 The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 1040 form 2011 The majority of the information and services listed in this publication are available to you free of charge. 1040 form 2011 If there is a fee associated with a resource or service, it is listed in the publication. 1040 form 2011   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d
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The 1040 Form 2011

1040 form 2011 4. 1040 form 2011   Qualified Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Kinds of PlansDefined Contribution Plan Defined Benefit Plan Qualification RulesEarly retirement. 1040 form 2011 Loan secured by benefits. 1040 form 2011 Waiver of survivor benefits. 1040 form 2011 Waiver of 30-day waiting period before annuity starting date. 1040 form 2011 Involuntary cash-out of benefits not more than dollar limit. 1040 form 2011 Exception for certain loans. 1040 form 2011 Exception for QDRO. 1040 form 2011 SIMPLE and safe harbor 401(k) plan exception. 1040 form 2011 Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. 1040 form 2011 Installment percentage. 1040 form 2011 Extended period for making contributions. 1040 form 2011 ContributionsEmployer Contributions Employee Contributions When Contributions Are Considered Made Employer DeductionDeduction Limits Deduction Limit for Self-Employed Individuals Where To Deduct Contributions Carryover of Excess Contributions Excise Tax for Nondeductible (Excess) Contributions Elective Deferrals (401(k) Plans)Limit on Elective Deferrals Automatic Enrollment Treatment of Excess Deferrals Qualified Roth Contribution ProgramElective Deferrals Qualified Distributions Reporting Requirements DistributionsRequired Distributions Distributions From 401(k) Plans Tax Treatment of Distributions Tax on Early Distributions Tax on Excess Benefits Excise Tax on Reversion of Plan Assets Notification of Significant Benefit Accrual Reduction Prohibited TransactionsTax on Prohibited Transactions Reporting RequirementsOne-participant plan. 1040 form 2011 Caution: Form 5500-EZ not required. 1040 form 2011 Form 5500. 1040 form 2011 Electronic filing of Forms 5500 and 5500-SF. 1040 form 2011 Topics - This chapter discusses: Kinds of plans Qualification rules Setting up a qualified plan Minimum funding requirement Contributions Employer deduction Elective deferrals (401(k) plans) Qualified Roth contribution program Distributions Prohibited transactions Reporting requirements Useful Items - You may want to see: Publications 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 3066 Have you had your Check-up this year? for Retirement Plans 3998 Choosing A Retirement Solution for Your Small Business 4222 401(k) Plans for Small Businesses 4530 Designated Roth Accounts under a 401(k), 403(b), or governmental 457(b) plans 4531 401(k) Plan Checklist 4674 Automatic Enrollment 401(k) Plans for Small Businesses 4806 Profit Sharing Plans for Small Businesses Forms (and Instructions) www. 1040 form 2011 dol. 1040 form 2011 gov/ebsa/pdf/2013-5500. 1040 form 2011 pdf www. 1040 form 2011 dol. 1040 form 2011 gov/ebsa/pdf/2013-5500-SF. 1040 form 2011 pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 1040 form 2011 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040 form 2011 1040 U. 1040 form 2011 S. 1040 form 2011 Individual Income Tax Return Schedule C (Form 1040) Profit or Loss From Business Schedule F (Form 1040) Profit or Loss From Farming 5300 Application for Determination for Employee Benefit Plan 5310 Application for Determination for Terminating Plan 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans 5500 Annual Return/Report of Employee Benefit Plan. 1040 form 2011 For copies of this form, go to: 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. 1040 form 2011 For copies of this form, go to: 8717 User Fee for Employee Plan Determination Letter Request 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H. 1040 form 2011 R. 1040 form 2011 10 plans. 1040 form 2011 A sole proprietor or a partnership can set up one of these plans. 1040 form 2011 A common-law employee or a partner cannot set up one of these plans. 1040 form 2011 The plans described here can also be set up and maintained by employers that are corporations. 1040 form 2011 All the rules discussed here apply to corporations except where specifically limited to the self-employed. 1040 form 2011 The plan must be for the exclusive benefit of employees or their beneficiaries. 1040 form 2011 These qualified plans can include coverage for a self-employed individual. 1040 form 2011 As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. 1040 form 2011 The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. 1040 form 2011 Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. 1040 form 2011 You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later. 1040 form 2011 Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. 1040 form 2011 It provides benefits to a participant largely based on the amount contributed to that participant's account. 1040 form 2011 Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. 1040 form 2011 A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. 1040 form 2011 Profit-sharing plan. 1040 form 2011   Although it is called a “profit-sharing plan,” you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). 1040 form 2011 A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. 1040 form 2011 An employer may even make no contribution to the plan for a given year. 1040 form 2011   The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. 1040 form 2011   In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later). 1040 form 2011 Money purchase pension plan. 1040 form 2011   Contributions to a money purchase pension plan are fixed and are not based on your business profits. 1040 form 2011 For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. 1040 form 2011 This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. 1040 form 2011 Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. 1040 form 2011 Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. 1040 form 2011 Actuarial assumptions and computations are required to figure these contributions. 1040 form 2011 Generally, you will need continuing professional help to have a defined benefit plan. 1040 form 2011 Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. 1040 form 2011 Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. 1040 form 2011 The following is a brief overview of important qualification rules that generally have not yet been discussed. 1040 form 2011 It is not intended to be all-inclusive. 1040 form 2011 See Setting Up a Qualified Plan , later. 1040 form 2011 Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. 1040 form 2011 A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan. 1040 form 2011 Plan assets must not be diverted. 1040 form 2011   Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. 1040 form 2011 As a general rule, the assets cannot be diverted to the employer. 1040 form 2011 Minimum coverage requirement must be met. 1040 form 2011   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. 1040 form 2011 50 employees, or The greater of: 40% of all employees, or Two employees. 1040 form 2011 If there is only one employee, the plan must benefit that employee. 1040 form 2011 Contributions or benefits must not discriminate. 1040 form 2011   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. 1040 form 2011 Contributions and benefits must not be more than certain limits. 1040 form 2011   Your plan must not provide for contributions or benefits that are more than certain limits. 1040 form 2011 The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. 1040 form 2011 These limits are discussed later in this chapter under Contributions. 1040 form 2011 Minimum vesting standard must be met. 1040 form 2011   Your plan must satisfy certain requirements regarding when benefits vest. 1040 form 2011 A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. 1040 form 2011 A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. 1040 form 2011 Special rules apply to forfeited benefit amounts. 1040 form 2011 In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions. 1040 form 2011   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. 1040 form 2011 Forfeitures must be used instead to reduce employer contributions. 1040 form 2011 Participation. 1040 form 2011   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. 1040 form 2011 Has reached age 21. 1040 form 2011 Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit). 1040 form 2011 A plan cannot exclude an employee because he or she has reached a specified age. 1040 form 2011 Leased employee. 1040 form 2011   A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. 1040 form 2011 These rules include those in all the following areas. 1040 form 2011 Nondiscrimination in coverage, contributions, and benefits. 1040 form 2011 Minimum age and service requirements. 1040 form 2011 Vesting. 1040 form 2011 Limits on contributions and benefits. 1040 form 2011 Top-heavy plan requirements. 1040 form 2011 Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. 1040 form 2011 Benefit payment must begin when required. 1040 form 2011   Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods. 1040 form 2011 The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. 1040 form 2011 The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. 1040 form 2011 The plan year in which the participant separates from service. 1040 form 2011 Early retirement. 1040 form 2011   Your plan can provide for payment of retirement benefits before the normal retirement age. 1040 form 2011 If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements. 1040 form 2011 Satisfies the service requirement for the early retirement benefit. 1040 form 2011 Separates from service with a nonforfeitable right to an accrued benefit. 1040 form 2011 The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. 1040 form 2011 Required minimum distributions. 1040 form 2011   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. 1040 form 2011 See Required Distributions , under Distributions, later. 1040 form 2011 Survivor benefits. 1040 form 2011   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. 1040 form 2011 A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. 1040 form 2011 A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. 1040 form 2011   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. 1040 form 2011 The participant does not choose benefits in the form of a life annuity. 1040 form 2011 The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies. 1040 form 2011 The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. 1040 form 2011 Loan secured by benefits. 1040 form 2011   If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan. 1040 form 2011 Waiver of survivor benefits. 1040 form 2011   Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. 1040 form 2011 The plan also must allow the participant to withdraw the waiver. 1040 form 2011 The spouse's consent must be witnessed by a plan representative or notary public. 1040 form 2011 Waiver of 30-day waiting period before annuity starting date. 1040 form 2011    A plan may permit a participant to waive (with spousal consent) the 30-day minimum waiting period after a written explanation of the terms and conditions of a joint and survivor annuity is provided to each participant. 1040 form 2011   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. 1040 form 2011 Involuntary cash-out of benefits not more than dollar limit. 1040 form 2011   A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. 1040 form 2011   However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. 1040 form 2011 If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit. 1040 form 2011   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. 1040 form 2011   A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. 1040 form 2011 A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. 1040 form 2011 See Section 402(f) Notice under Distributions, later, for more details. 1040 form 2011 Consolidation, merger, or transfer of assets or liabilities. 1040 form 2011   Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. 1040 form 2011 (if the plan had then terminated). 1040 form 2011 Benefits must not be assigned or alienated. 1040 form 2011   Your plan must provide that a participant's or beneficiary's benefits under the plan cannot be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules. 1040 form 2011 Exception for certain loans. 1040 form 2011   A loan from the plan (not from a third party) to a participant or beneficiary is not treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. 1040 form 2011 A disqualified person is defined later in this chapter under Prohibited Transactions. 1040 form 2011 Exception for QDRO. 1040 form 2011   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. 1040 form 2011   Payments to an alternate payee under a QDRO before the participant attains age 59½ are not subject to the 10% additional tax that would otherwise apply under certain circumstances. 1040 form 2011 Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity. 1040 form 2011 No benefit reduction for social security increases. 1040 form 2011   Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. 1040 form 2011 This rule also applies to plans supplementing the benefits provided by other federal or state laws. 1040 form 2011 Elective deferrals must be limited. 1040 form 2011   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. 1040 form 2011 See Limit on Elective Deferrals later in this chapter. 1040 form 2011 Top-heavy plan requirements. 1040 form 2011   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. 1040 form 2011   A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. 1040 form 2011 Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. 1040 form 2011   Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. 1040 form 2011 These qualification requirements for top-heavy plans are explained in section 416 and its regulations. 1040 form 2011 SIMPLE and safe harbor 401(k) plan exception. 1040 form 2011   The top-heavy plan requirements do not apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. 1040 form 2011 QACAs (discussed later) also are not subject to top-heavy requirements. 1040 form 2011 Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. 1040 form 2011 First you adopt a written plan. 1040 form 2011 Then you invest the plan assets. 1040 form 2011 You, the employer, are responsible for setting up and maintaining the plan. 1040 form 2011 If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. 1040 form 2011 If you have employees, see Participation, under Qualification Rules, earlier. 1040 form 2011 Set-up deadline. 1040 form 2011   To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers). 1040 form 2011 Credit for startup costs. 1040 form 2011   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2013. 1040 form 2011 For more information, see Credit for startup costs under Reminders, earlier. 1040 form 2011 Adopting a Written Plan You must adopt a written plan. 1040 form 2011 The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. 1040 form 2011 Or it can be an individually designed plan. 1040 form 2011 Written plan requirement. 1040 form 2011   To qualify, the plan you set up must be in writing and must be communicated to your employees. 1040 form 2011 The plan's provisions must be stated in the plan. 1040 form 2011 It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. 1040 form 2011 Master or prototype plans. 1040 form 2011   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. 1040 form 2011 Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). 1040 form 2011 Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. 1040 form 2011 Under a prototype plan, a separate trust or custodial account is established for each employer. 1040 form 2011 Plan providers. 1040 form 2011   The following organizations generally can provide IRS-approved master or prototype plans. 1040 form 2011 Banks (including some savings and loan associations and federally insured credit unions). 1040 form 2011 Trade or professional organizations. 1040 form 2011 Insurance companies. 1040 form 2011 Mutual funds. 1040 form 2011 Individually designed plan. 1040 form 2011   If you prefer, you can set up an individually designed plan to meet specific needs. 1040 form 2011 Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. 1040 form 2011 You may need professional help for this. 1040 form 2011 See Rev. 1040 form 2011 Proc. 1040 form 2011 2014-6, 2014-1 I. 1040 form 2011 R. 1040 form 2011 B. 1040 form 2011 198, available at www. 1040 form 2011 irs. 1040 form 2011 gov/irb/2014-1_IRB/ar10. 1040 form 2011 html, as annually updated, that may help you decide whether to apply for approval. 1040 form 2011 Internal Revenue Bulletins are available on the IRS website at IRS. 1040 form 2011 gov They are also available at most IRS offices and at certain libraries. 1040 form 2011 User fee. 1040 form 2011   The fee mentioned earlier for requesting a determination letter does not apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. 1040 form 2011 At least one of them must be a non-highly compensated employee participating in the plan. 1040 form 2011 The fee does not apply to requests made by the later of the following dates. 1040 form 2011 The end of the 5th plan year the plan is in effect. 1040 form 2011 The end of any remedial amendment period for the plan that begins within the first 5 plan years. 1040 form 2011 The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. 1040 form 2011   For more information about whether the user fee applies, see Rev. 1040 form 2011 Proc. 1040 form 2011 2014-8, 2014-1 I. 1040 form 2011 R. 1040 form 2011 B. 1040 form 2011 242, available at www. 1040 form 2011 irs. 1040 form 2011 gov/irb/2014-1_IRB/ar12. 1040 form 2011 html, as may be annually updated; Notice 2003-49, 2003-32 I. 1040 form 2011 R. 1040 form 2011 B. 1040 form 2011 294, available at www. 1040 form 2011 irs. 1040 form 2011 gov/irb/2003-32_IRB/ar13. 1040 form 2011 html; and Notice 2011-86, 2011-45 I. 1040 form 2011 R. 1040 form 2011 B. 1040 form 2011 698, available at www. 1040 form 2011 irs. 1040 form 2011 gov/irb/2011-45_IRB/ar11. 1040 form 2011 html. 1040 form 2011 Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. 1040 form 2011 You can establish a trust or custodial account to invest the funds. 1040 form 2011 You, the trust, or the custodial account can buy an annuity contract from an insurance company. 1040 form 2011 Life insurance can be included only if it is incidental to the retirement benefits. 1040 form 2011 You set up a trust by a legal instrument (written document). 1040 form 2011 You may need professional help to do this. 1040 form 2011 You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. 1040 form 2011 You do not need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. 1040 form 2011 If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. 1040 form 2011 Other plan requirements. 1040 form 2011   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. 1040 form 2011 Minimum Funding Requirement In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. 1040 form 2011 Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. 1040 form 2011 For information on this funding requirement, see section 412 and its regulations. 1040 form 2011 Quarterly installments of required contributions. 1040 form 2011   If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. 1040 form 2011 If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. 1040 form 2011 Due dates. 1040 form 2011   The due dates for the installments are 15 days after the end of each quarter. 1040 form 2011 For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). 1040 form 2011 Installment percentage. 1040 form 2011   Each quarterly installment must be 25% of the required annual payment. 1040 form 2011 Extended period for making contributions. 1040 form 2011   Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year. 1040 form 2011 Contributions A qualified plan is generally funded by your contributions. 1040 form 2011 However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. 1040 form 2011 See Employee Contributions and Elective Deferrals later. 1040 form 2011 Contributions deadline. 1040 form 2011   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. 1040 form 2011 Self-employed individual. 1040 form 2011   You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. 1040 form 2011 Your net earnings must be from your personal services, not from your investments. 1040 form 2011 If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation. 1040 form 2011 Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. 1040 form 2011 There are also limits on the amount you can deduct. 1040 form 2011 See Deduction Limits , later. 1040 form 2011 Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. 1040 form 2011 The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. 1040 form 2011 Defined benefit plan. 1040 form 2011   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. 1040 form 2011 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. 1040 form 2011 $205,000 ($210,000 for 2014). 1040 form 2011 Defined contribution plan. 1040 form 2011   For 2013, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts. 1040 form 2011 100% of the participant's compensation. 1040 form 2011 $51,000 ($52,000 for 2014). 1040 form 2011   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. 1040 form 2011 Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. 1040 form 2011 Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. 1040 form 2011 Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. 1040 form 2011 See Regulations sections 1. 1040 form 2011 401(k)-2 and 1. 1040 form 2011 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). 1040 form 2011 When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. 1040 form 2011 But you can apply them to the previous year if all the following requirements are met. 1040 form 2011 You make them by the due date of your tax return for the previous year (plus extensions). 1040 form 2011 The plan was established by the end of the previous year. 1040 form 2011 The plan treats the contributions as though it had received them on the last day of the previous year. 1040 form 2011 You do either of the following. 1040 form 2011 You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. 1040 form 2011 You deduct the contributions on your tax return for the previous year. 1040 form 2011 A partnership shows contributions for partners on Form 1065. 1040 form 2011 Employer's promissory note. 1040 form 2011   Your promissory note made out to the plan is not a payment that qualifies for the deduction. 1040 form 2011 Also, issuing this note is a prohibited transaction subject to tax. 1040 form 2011 See Prohibited Transactions , later. 1040 form 2011 Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. 1040 form 2011 The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. 1040 form 2011 Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. 1040 form 2011 Defined contribution plans. 1040 form 2011   The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. 1040 form 2011 If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. 1040 form 2011 See Deduction Limit for Self-Employed Individuals , later. 1040 form 2011   When figuring the deduction limit, the following rules apply. 1040 form 2011 Elective deferrals (discussed later) are not subject to the limit. 1040 form 2011 Compensation includes elective deferrals. 1040 form 2011 The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). 1040 form 2011 Defined benefit plans. 1040 form 2011   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. 1040 form 2011 Consequently, an actuary must figure your deduction limit. 1040 form 2011    In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits, earlier. 1040 form 2011 Table 4–1. 1040 form 2011 Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Year Participants' compensation Participants' share of required contribution (10% of annual profit) Deductible  limit for current year (25% of compensation) Contribution Excess contribution carryover used1 Total  deduction including carryovers Excess contribution carryover available at end of year 2010 $1,000 $100 $250 $100 $ 0 $100 $ 0 2011 400 165 100 165 0 100 65 2012 500 100 125 100 25 125 40 2013 600 100 150 100 40 140 0  1There were no carryovers from years before 2010. 1040 form 2011 Deduction Limit for Self-Employed Individuals If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. 1040 form 2011 Compensation is your net earnings from self-employment, defined in chapter 1. 1040 form 2011 This definition takes into account both the following items. 1040 form 2011 The deduction for the deductible part of your self-employment tax. 1040 form 2011 The deduction for contributions on your behalf to the plan. 1040 form 2011 The deduction for your own contributions and your net earnings depend on each other. 1040 form 2011 For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. 1040 form 2011 To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. 1040 form 2011 Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. 1040 form 2011 Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 1040 form 2011 For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120, or Form 1120S. 1040 form 2011 Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 1040 form 2011 (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. 1040 form 2011 ) Carryover of Excess Contributions If you contribute more to the plans than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. 1040 form 2011 Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. 1040 form 2011 For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. 1040 form 2011 However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. 1040 form 2011 See Deduction Limit for Self-Employed Individuals, earlier. 1040 form 2011 The amount you carry over and deduct may be subject to the excise tax discussed next. 1040 form 2011 Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. 1040 form 2011 Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. 1040 form 2011 In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. 1040 form 2011 Special rule for self-employed individuals. 1040 form 2011   The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. 1040 form 2011 Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. 1040 form 2011 See Minimum Funding Requirement , earlier. 1040 form 2011 Reporting the tax. 1040 form 2011   You must report the tax on your nondeductible contributions on Form 5330. 1040 form 2011 Form 5330 includes a computation of the tax. 1040 form 2011 See the separate instructions for completing the form. 1040 form 2011 Elective Deferrals (401(k) Plans) Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. 1040 form 2011 A plan with this type of arrangement is popularly known as a “401(k) plan. 1040 form 2011 ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. 1040 form 2011 ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. 1040 form 2011 In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. 1040 form 2011 A profit-sharing plan. 1040 form 2011 A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. 1040 form 2011 Partnership. 1040 form 2011   A partnership can have a 401(k) plan. 1040 form 2011 Restriction on conditions of participation. 1040 form 2011   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. 1040 form 2011 Matching contributions. 1040 form 2011   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. 1040 form 2011 For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. 1040 form 2011 Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. 1040 form 2011 Nonelective contributions. 1040 form 2011   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. 1040 form 2011 These are called nonelective contributions. 1040 form 2011 Employee compensation limit. 1040 form 2011   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. 1040 form 2011 This limit is $260,000 in 2014. 1040 form 2011 SIMPLE 401(k) plan. 1040 form 2011   If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. 1040 form 2011 A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. 1040 form 2011 For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. 1040 form 2011 Distributions. 1040 form 2011   Certain rules apply to distributions from 401(k) plans. 1040 form 2011 See Distributions From 401(k) Plans , later. 1040 form 2011 Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. 1040 form 2011 This limit applies without regard to community property laws. 1040 form 2011 Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. 1040 form 2011 For 2013 and 2014, the basic limit on elective deferrals is $17,500. 1040 form 2011 This limit applies to all salary reduction contributions and elective deferrals. 1040 form 2011 If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. 1040 form 2011 Catch-up contributions. 1040 form 2011   A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 1040 form 2011 The catch-up contribution limit for 2013 and 2014 is $5,500. 1040 form 2011 Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). 1040 form 2011 However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 1040 form 2011 The catch-up contribution limit. 1040 form 2011 The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 1040 form 2011 Treatment of contributions. 1040 form 2011   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. 1040 form 2011 Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. 1040 form 2011 Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. 1040 form 2011 Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. 1040 form 2011 Forfeiture. 1040 form 2011   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. 1040 form 2011 Reporting on Form W-2. 1040 form 2011   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. 1040 form 2011 You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 1040 form 2011 You must also include them in box 12. 1040 form 2011 Mark the “Retirement plan” checkbox in box 13. 1040 form 2011 For more information, see the Form W-2 instructions. 1040 form 2011 Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. 1040 form 2011 Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. 1040 form 2011 These contributions are elective deferrals. 1040 form 2011 An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). 1040 form 2011 For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. 1040 form 2011 Eligible automatic contribution arrangement. 1040 form 2011   Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. 1040 form 2011 This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). 1040 form 2011 There is no required deferral percentage. 1040 form 2011 Withdrawals. 1040 form 2011   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. 1040 form 2011 The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. 1040 form 2011 The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. 1040 form 2011   If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. 1040 form 2011 The additional 10% tax on early distributions will not apply to the distribution. 1040 form 2011 Notice requirement. 1040 form 2011   Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. 1040 form 2011 The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. 1040 form 2011 The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. 1040 form 2011 The notice also must explain how contributions will be invested in the absence of an investment election by the employee. 1040 form 2011 Qualified automatic contribution arrangement. 1040 form 2011    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. 1040 form 2011 It contains an automatic enrollment feature, and mandatory employer contributions are required. 1040 form 2011 If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). 1040 form 2011 Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. 1040 form 2011 Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. 1040 form 2011 In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). 1040 form 2011 If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. 1040 form 2011 It must be applied uniformly. 1040 form 2011 It must not exceed 10%. 1040 form 2011 It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. 1040 form 2011 It must increase to at least 4% in the following plan year. 1040 form 2011 It must increase to at least 5% in the following plan year. 1040 form 2011 It must increase to at least 6% in subsequent plan years. 1040 form 2011 Matching or nonelective contributions. 1040 form 2011   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. 1040 form 2011 Matching contributions. 1040 form 2011 You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. 1040 form 2011 An amount equal to 100% of elective deferrals, up to 1% of compensation. 1040 form 2011 An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. 1040 form 2011 Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. 1040 form 2011 The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. 1040 form 2011 Nonelective contributions. 1040 form 2011 You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation. 1040 form 2011 Vesting requirements. 1040 form 2011   All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. 1040 form 2011 These contributions are subject to special withdrawal restrictions, discussed later. 1040 form 2011 Notice requirements. 1040 form 2011   Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. 1040 form 2011 The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. 1040 form 2011 The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. 1040 form 2011 Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. 1040 form 2011 The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA. 1040 form 2011 Treatment of Excess Deferrals If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. 1040 form 2011 He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. 1040 form 2011 The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. 1040 form 2011 Excess withdrawn by April 15. 1040 form 2011   If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. 1040 form 2011 However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. 1040 form 2011 The distribution is not subject to the additional 10% tax on early distributions. 1040 form 2011   If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income. 1040 form 2011   Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. 1040 form 2011 Excess not withdrawn by April 15. 1040 form 2011   If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. 1040 form 2011 In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. 1040 form 2011 Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified. 1040 form 2011 Reporting corrective distributions on Form 1099-R. 1040 form 2011   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. 1040 form 2011 For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. 1040 form 2011 Tax on excess contributions of highly compensated employees. 1040 form 2011   The law provides tests to detect discrimination in a plan. 1040 form 2011 If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. 1040 form 2011 Report the tax on Form 5330. 1040 form 2011 The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. 1040 form 2011 Also, the ACP test does not apply to these plans if certain additional requirements are met. 1040 form 2011   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. 1040 form 2011 Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test. 1040 form 2011   See Regulations sections 1. 1040 form 2011 401(k)-2 and 1. 1040 form 2011 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). 1040 form 2011    If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified. 1040 form 2011 Safe harbor 401(k) plan. 1040 form 2011 If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. 1040 form 2011 For your plan to be a safe harbor plan, you must meet the following conditions. 1040 form 2011 Matching or nonelective contributions. 1040 form 2011 You must make matching or nonelective contributions according to one of the following formulas. 1040 form 2011 Matching contributions. 1040 form 2011 You must make matching contributions according to the following rules. 1040 form 2011 You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. 1040 form 2011 You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. 1040 form 2011 The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. 1040 form 2011 Nonelective contributions. 1040 form 2011 You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation. 1040 form 2011 These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. 1040 form 2011 Notice requirement. 1040 form 2011 You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year. 1040 form 2011 The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan. 1040 form 2011 Qualified Roth Contribution Program Under this program an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. 1040 form 2011 Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. 1040 form 2011 However, unlike other elective deferrals, designated Roth contributions are not excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income. 1040 form 2011 Elective Deferrals Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2013 and 2014, $17,500 if under age 50 and $23,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions. 1040 form 2011 Designated Roth deferrals are treated the same as pre-tax elective deferrals for most purposes, including: The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $17,500 for 2013 and 2014, with an additional $5,500 if age 50 or over for 2013 and 2014, Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $51,000 for 2013 ($52,000 for 2014), Nondiscrimination testing, Required distributions, and Elective deferrals not taken into account for purposes of deduction limits. 1040 form 2011 Qualified Distributions A qualified distribution is a distribution that is made after the employee's nonexclusion period and: On or after the employee attains age   59½, On account of the employee's being disabled, or On or after the employee's death. 1040 form 2011 An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. 1040 form 2011 The first tax year in which the employee made a contribution to his or her Roth account in the plan, or If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account. 1040 form 2011 Rollover. 1040 form 2011   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. 1040 form 2011 For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. 1040 form 2011 R. 1040 form 2011 B. 1040 form 2011 872, available at www. 1040 form 2011 irs. 1040 form 2011 gov/irb/2010-51_IRB/ar11. 1040 form 2011 html, and Notice 2013-74. 1040 form 2011 A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. 1040 form 2011 Rollover amounts do not apply toward the annual deferral limit. 1040 form 2011 Reporting Requirements You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. 1040 form 2011 See the Form W-2 and 1099-R instructions for detailed information. 1040 form 2011 Distributions Amounts paid to plan participants from a qualified plan are called distributions. 1040 form 2011 Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. 1040 form 2011 Also, certain loans may be treated as distributions. 1040 form 2011 See Loans Treated as Distributions in Publication 575. 1040 form 2011 Required Distributions A qualified plan must provide that each participant will either: Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period). 1040 form 2011 These distribution rules apply individually to each qualified plan. 1040 form 2011 You cannot satisfy the requirement for one plan by taking a distribution from another. 1040 form 2011 The plan must provide that these rules override any inconsistent distribution options previously offered. 1040 form 2011 Minimum distribution. 1040 form 2011   If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. 1040 form 2011 This minimum is figured by dividing the account balance by the applicable life expectancy. 1040 form 2011 The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. 1040 form 2011 For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. 1040 form 2011 Required beginning date. 1040 form 2011   Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date. 1040 form 2011   A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years. 1040 form 2011 Calendar year in which he or she reaches age 70½. 1040 form 2011 Calendar year in which he or she retires from employment with the employer maintaining the plan. 1040 form 2011 However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70½ even if the participant has not retired. 1040 form 2011   If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70½. 1040 form 2011 For more information, see Tax on Excess Accumulation in Publication 575. 1040 form 2011 Distributions after the starting year. 1040 form 2011   The distribution required to be made by April 1 is treated as a distribution for the starting year. 1040 form 2011 (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. 1040 form 2011 ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. 1040 form 2011 If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). 1040 form 2011 Distributions after participant's death. 1040 form 2011   See Publication 575 for the special rules covering distributions made after the death of a participant. 1040 form 2011 Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. 1040 form 2011 The employee retires, dies, becomes disabled, or otherwise severs employment. 1040 form 2011 The plan ends and no other defined contribution plan is established or continued. 1040 form 2011 In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. 1040 form 2011 For the rules on hardship distributions, including the limits on them, see Regulations section 1. 1040 form 2011 401(k)-1(d). 1040 form 2011 The employee becomes eligible for a qualified reservist distribution (defined next). 1040 form 2011 Certain distributions listed above may be subject to the tax on early distributions discussed later. 1040 form 2011 Qualified reservist distributions. 1040 form 2011   A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. 1040 form 2011 All or part of a qualified reservist distribution can be recontributed to an IRA. 1040 form 2011 The additional 10% tax on early distributions does not apply to a qualified reservist distribution. 1040 form 2011 Tax Treatment of Distributions Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. 1040 form 2011 Since most recipients have no cost basis, a distribution is generally fully taxable. 1040 form 2011 An exception is a distribution that is properly rolled over as discussed under Rollover, next. 1040 form 2011 The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. 1040 form 2011 See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution. 1040 form 2011 Note. 1040 form 2011 A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. 1040 form 2011 Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. 1040 form 2011 See Qualified distributions under Qualified Roth Contribution Program, earlier. 1040 form 2011 Rollover. 1040 form 2011   The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. 1040 form 2011 However, it may be subject to withholding as discussed under Withholding requirement, later. 1040 form 2011 A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account. 1040 form 2011 Eligible rollover distribution. 1040 form 2011   This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following. 1040 form 2011 A required minimum distribution. 1040 form 2011 See Required Distributions , earlier. 1040 form 2011 Any of a series of substantially equal payments made at least once a year over any of the following periods. 1040 form 2011 The employee's life or life expectancy. 1040 form 2011 The joint lives or life expectancies of the employee and beneficiary. 1040 form 2011 A period of 10 years or longer. 1040 form 2011 A hardship distribution. 1040 form 2011 The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. 1040 form 2011 See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. 1040 form 2011 Loans treated as distributions. 1040 form 2011 Dividends on employer securities. 1040 form 2011 The cost of any life insurance coverage provided under a qualified retirement plan. 1040 form 2011 Similar items designated by the IRS in published guidance. 1040 form 2011 See, for example, the Instructions for Forms 1099-R and 5498. 1040 form 2011 Rollover of nontaxable amounts. 1040 form 2011   You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. 1040 form 2011 If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. 1040 form 2011 If the rollover is to an IRA, the transfer can be made by any rollover method. 1040 form 2011 Note. 1040 form 2011 A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. 1040 form 2011 If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). 1040 form 2011 More information. 1040 form 2011   For more information about rollovers, see Rollovers in Pubs. 1040 form 2011 575 and 590. 1040 form 2011 Withholding requirement. 1040 form 2011   If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax. 1040 form 2011 Exceptions. 1040 form 2011   If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required. 1040 form 2011   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. 1040 form 2011 Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). 1040 form 2011 However, the participant can choose not to have tax withheld from these distributions. 1040 form 2011 If the participant does not make this choice, the following withholding rules apply. 1040 form 2011 For periodic distributions, withholding is based on their treatment as wages. 1040 form 2011 For nonperiodic distributions, 10% of the taxable part is withheld. 1040 form 2011 Estimated tax payments. 1040 form 2011   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. 1040 form 2011 For more information, see Withholding Tax and Estimated Tax in Publication 575. 1040 form 2011 Section 402(f) Notice. 1040 form 2011   If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions. 1040 form 2011 That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. 1040 form 2011 That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. 1040 form 2011 That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution. 1040 form 2011 Certain other rules that may be applicable. 1040 form 2011   Notice 2009-68, 2009-39 I. 1040 form 2011 R. 1040 form 2011 B. 1040 form 2011 423, available at www. 1040 form 2011 irs. 1040 form 2011 gov/irb/2009-39_IRB/ar14. 1040 form 2011 html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. 1040 form 2011 If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. 1040 form 2011 Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. 1040 form 2011 Timing of notice. 1040 form 2011   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. 1040 form 2011 Method of notice. 1040 form 2011   The written notice must be provided individually to each distributee of an eligible rollover distribution. 1040 form 2011 Posting of the notice is not sufficient. 1040 form 2011 However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. 1040 form 2011 See Regulations section 1. 1040 form 2011 401(a)-21. 1040 form 2011 Tax on failure to give notice. 1040 form 2011   Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. 1040 form 2011 The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. 1040 form 2011 Tax on Early Distributions If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. 1040 form 2011 This tax applies to the amount received that the employee must include in income. 1040 form 2011 Exceptions. 1040 form 2011   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. 1040 form 2011 Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. 1040 form 2011 Made due to the employee having a qualifying disability. 1040 form 2011 Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. 1040 form 2011 (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period. 1040 form 2011 ) Made to an employee after separation from service if the separation occurred during o