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1040nr free 28. 1040nr free   Miscellaneous Deductions Table of Contents What's New Introduction Useful Items - You may want to see: Deductions Subject to the 2% LimitUnreimbursed Employee Expenses (Line 21) Tax Preparation Fees (Line 22) Other Expenses (Line 23) Deductions Not Subject to the 2% LimitList of Deductions Nondeductible ExpensesList of Nondeductible Expenses What's New Standard mileage rate. 1040nr free  The 2013 rate for business use of a vehicle is 56½ cents per mile. 1040nr free Introduction This chapter explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040). 1040nr free You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. 1040nr free This chapter covers the following topics. 1040nr free Deductions subject to the 2% limit. 1040nr free Deductions not subject to the 2% limit. 1040nr free Expenses you cannot deduct. 1040nr free You must keep records to verify your deductions. 1040nr free You should keep receipts, canceled checks, substitute checks, financial account statements, and other documentary evidence. 1040nr free For more information on recordkeeping, get Publication 552, Record- keeping for Individuals. 1040nr free Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) 946 How To Depreciate Property Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses Deductions Subject to the 2% Limit You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040). 1040nr free You can claim the amount of expenses that is more than 2% of your adjusted gross income. 1040nr free You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. 1040nr free Your adjusted gross income is the amount on Form 1040, line 38. 1040nr free Generally, you apply the 2% limit after you apply any other deduction limit. 1040nr free For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed in chapter 26) before you apply the 2% limit. 1040nr free Deductions subject to the 2% limit are discussed in the three categories in which you report them on Schedule A (Form 1040). 1040nr free Unreimbursed employee expenses (line 21). 1040nr free Tax preparation fees (line 22). 1040nr free Other expenses (line 23). 1040nr free Unreimbursed Employee Expenses (Line 21) Generally, you can deduct on Schedule A (Form 1040), line 21, unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. 1040nr free An expense is ordinary if it is common and accepted in your trade, business, or profession. 1040nr free An expense is necessary if it is appropriate and helpful to your business. 1040nr free An expense does not have to be required to be considered necessary. 1040nr free Examples of unreimbursed employee expenses are listed next. 1040nr free The list is followed by discussions of additional unreimbursed employee expenses. 1040nr free Business bad debt of an employee. 1040nr free Education that is work related. 1040nr free (See chapter 27. 1040nr free ) Legal fees related to your job. 1040nr free Licenses and regulatory fees. 1040nr free Malpractice insurance premiums. 1040nr free Medical examinations required by an employer. 1040nr free Occupational taxes. 1040nr free Passport for a business trip. 1040nr free Subscriptions to professional journals and trade magazines related to your work. 1040nr free Travel, transportation, entertainment, and gifts related to your work. 1040nr free (See chapter 26. 1040nr free ) Business Liability Insurance You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job. 1040nr free Damages for Breach of Employment Contract If you break an employment contract, you can deduct damages you pay your former employer that are attributable to the pay you received from that employer. 1040nr free Depreciation on Computers You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: For the convenience of your employer, and Required as a condition of your employment. 1040nr free For more information about the rules and exceptions to the rules affecting the allowable deductions for a home computer, see Publication 529. 1040nr free Dues to Chambers of Commerce and Professional Societies You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. 1040nr free Similar organizations include: Boards of trade, Business leagues, Civic or public service organizations, Real estate boards, and Trade associations. 1040nr free Lobbying and political activities. 1040nr free   You may not be able to deduct that part of your dues that is for certain lobbying and political activities. 1040nr free See Dues used for lobbying under Nondeductible Expenses, later. 1040nr free Educator Expenses If you were an eligible educator in 2013, you can deduct up to $250 of qualified expenses you paid in 2013 as an adjustment to gross income on Form 1040, line 23, rather than as a miscellaneous itemized deduction. 1040nr free If you file Form 1040A, you can deduct these expenses on line 16. 1040nr free If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. 1040nr free However, neither spouse can deduct more than $250 of his or her qualified expenses. 1040nr free Home Office If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. 1040nr free You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: As your principal place of business for any trade or business, As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or In the case of a separate structure not attached to your home, in connection with your trade or business. 1040nr free The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. 1040nr free See Publication 587 for more detailed information and a worksheet. 1040nr free Job Search Expenses You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. 1040nr free You cannot deduct these expenses if: You are looking for a job in a new occupation, There was a substantial break between the ending of your last job and your looking for a new one, or You are looking for a job for the first time. 1040nr free Employment and outplacement agency fees. 1040nr free   You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. 1040nr free Employer pays you back. 1040nr free   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. 1040nr free (See Recoveries in chapter 12. 1040nr free ) Employer pays the employment agency. 1040nr free   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. 1040nr free Résumé. 1040nr free   You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation. 1040nr free Travel and transportation expenses. 1040nr free   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. 1040nr free You can deduct the travel expenses if the trip is primarily to look for a new job. 1040nr free The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. 1040nr free   Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area. 1040nr free   You can choose to use the standard mileage rate to figure your car expenses. 1040nr free The 2013 rate for business use of a vehicle is 56½ cents per mile. 1040nr free See chapter 26 for more information. 1040nr free Licenses and Regulatory Fees You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. 1040nr free Occupational Taxes You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. 1040nr free If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return. 1040nr free Repayment of Income Aid Payment An “income aid payment” is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. 1040nr free If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment. 1040nr free Research Expenses of a College Professor If you are a college professor, you can deduct research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to your teaching duties. 1040nr free You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. 1040nr free However, you cannot deduct the cost of travel as a form of education. 1040nr free Tools Used in Your Work Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. 1040nr free You can depreciate the cost of tools that have a useful life substantially beyond the tax year. 1040nr free For more information about depreciation, see Publication 946. 1040nr free Union Dues and Expenses You can deduct dues and initiation fees you pay for union membership. 1040nr free You can also deduct assessments for benefit payments to unemployed union members. 1040nr free However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. 1040nr free Also, you cannot deduct contributions to a pension fund, even if the union requires you to make the contributions. 1040nr free You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. 1040nr free See Lobbying Expenses under Nondeductible Expenses, later. 1040nr free Work Clothes and Uniforms You can deduct the cost and upkeep of work clothes if the following two requirements are met. 1040nr free You must wear them as a condition of your employment. 1040nr free The clothes are not suitable for everyday wear. 1040nr free It is not enough that you wear distinctive clothing. 1040nr free The clothing must be specifically required by your employer. 1040nr free Nor is it enough that you do not, in fact, wear your work clothes away from work. 1040nr free The clothing must not be suitable for taking the place of your regular clothing. 1040nr free Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc. 1040nr free ). 1040nr free Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear. 1040nr free However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. 1040nr free Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible. 1040nr free Protective clothing. 1040nr free   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. 1040nr free   Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers. 1040nr free Military uniforms. 1040nr free   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. 1040nr free However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. 1040nr free In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses. 1040nr free   If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive. 1040nr free   You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school. 1040nr free Tax Preparation Fees (Line 22) You can usually deduct tax preparation fees in the year you pay them. 1040nr free Thus, on your 2013 return, you can deduct fees paid in 2013 for preparing your 2012 return. 1040nr free These fees include the cost of tax preparation software programs and tax publications. 1040nr free They also include any fee you paid for electronic filing of your return. 1040nr free Other Expenses (Line 23) You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr free On Schedule A (Form 1040), line 23, you can deduct expenses that you pay: To produce or collect income that must be included in your gross income, To manage, conserve, or maintain property held for producing such income, or To determine, contest, pay, or claim a refund of any tax. 1040nr free You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonably and closely related to these purposes. 1040nr free Some of these other expenses are explained in the following discussions. 1040nr free If the expenses you pay produce income that is only partially taxable, see Tax-Exempt Income Expenses , later, under Nondeductible Expenses. 1040nr free Appraisal Fees You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property. 1040nr free Casualty and Theft Losses You can deduct a casualty or theft loss as a miscellaneous itemized deduction subject to the 2% limit if you used the damaged or stolen property in performing services as an employee. 1040nr free First report the loss in Section B of Form 4684, Casualties and Thefts. 1040nr free You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. 1040nr free To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. 1040nr free For other casualty and theft losses, see chapter 25. 1040nr free Clerical Help and Office Rent You can deduct office expenses, such as rent and clerical help, that you have in connection with your investments and collecting the taxable income on them. 1040nr free Credit or Debit Card Convenience Fees You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. 1040nr free The fees are deductible in the year paid. 1040nr free Depreciation on Home Computer You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). 1040nr free You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. 1040nr free But if you work as an employee and also use the computer in that work, see Publication 946. 1040nr free Excess Deductions of an Estate If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. 1040nr free Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. 1040nr free The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. 1040nr free For more information, see Termination of Estate in Publication 559, Survivors, Executors, and Administrators. 1040nr free Fees to Collect Interest and Dividends You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. 1040nr free But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. 1040nr free You must add the fee to the cost of the property. 1040nr free You cannot deduct the fee you pay to a broker to sell securities. 1040nr free You can use the fee only to figure gain or loss from the sale. 1040nr free See the Instructions for Form 8949 for information on how to report the fee. 1040nr free Hobby Expenses You can generally deduct hobby expenses, but only up to the amount of hobby income. 1040nr free A hobby is not a business because it is not carried on to make a profit. 1040nr free See Activity not for profit in chapter 12 under Other Income. 1040nr free Indirect Deductions of Pass-Through Entities Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. 1040nr free Deductions of pass-through entities are passed through to the partners or shareholders. 1040nr free The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr free Example. 1040nr free You are a member of an investment club that is formed solely to invest in securities. 1040nr free The club is treated as a partnership. 1040nr free The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. 1040nr free In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr free However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income. 1040nr free Publicly offered mutual funds. 1040nr free   Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. 1040nr free A mutual fund is “publicly offered” if it is: Continuously offered pursuant to a public offering, Regularly traded on an established securities market, or Held by or for at least 500 persons at all times during the tax year. 1040nr free   A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). 1040nr free This net figure is the amount you report on your return as income. 1040nr free You cannot further deduct investment expenses related to publicly offered mutual funds because they are already included as part of the net income amount. 1040nr free Information returns. 1040nr free   You should receive information returns from pass-through entities. 1040nr free Partnerships and S corporations. 1040nr free   These entities issue Schedule K-1, which lists the items and amounts you must report and identifies the tax return schedules and lines to use. 1040nr free Nonpublicly offered mutual funds. 1040nr free   These funds will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing your share of gross income and investment expenses. 1040nr free You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit. 1040nr free Investment Fees and Expenses You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income. 1040nr free Legal Expenses You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax. 1040nr free You can also deduct legal expenses that are: Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, For tax advice related to a divorce, if the bill specifies how much is for tax advice and it is determined in a reasonable way, or To collect taxable alimony. 1040nr free You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F), on the appropriate schedule. 1040nr free You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040). 1040nr free See Tax Preparation Fees , earlier. 1040nr free Loss on Deposits For information on whether, and if so, how, you may deduct a loss on your deposit in a qualified financial institution, see Loss on Deposits in chapter 25. 1040nr free Repayments of Income If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. 1040nr free If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. 1040nr free If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later. 1040nr free Repayments of Social Security Benefits For information on how to deduct your repayments of certain social security benefits, see Repayments More Than Gross Benefits in chapter 11. 1040nr free Safe Deposit Box Rent You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. 1040nr free You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities. 1040nr free Service Charges on Dividend Reinvestment Plans You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. 1040nr free These service charges include payments for: Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. 1040nr free Trustee's Administrative Fees for IRA Trustee's administrative fees that are billed separately and paid by you in connection with your individual retirement arrangement (IRA) are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit. 1040nr free For more information about IRAs, see chapter 17. 1040nr free Deductions Not Subject to the 2% Limit You can deduct the items listed below as miscellaneous itemized deductions. 1040nr free They are not subject to the 2% limit. 1040nr free Report these items on Schedule A (Form 1040), line 28. 1040nr free List of Deductions Each of the following items is discussed in detail after the list (except where indicated). 1040nr free Amortizable premium on taxable bonds. 1040nr free Casualty and theft losses from income- producing property. 1040nr free Federal estate tax on income in respect of a decedent. 1040nr free Gambling losses up to the amount of gambling winnings. 1040nr free Impairment-related work expenses of persons with disabilities. 1040nr free Loss from other activities from Schedule K-1 (Form 1065-B), box 2. 1040nr free Losses from Ponzi-type investment schemes. 1040nr free See Losses from Ponzi-type investment schemes under Theft in chapter 25. 1040nr free Repayments of more than $3,000 under a claim of right. 1040nr free Unrecovered investment in an annuity. 1040nr free Amortizable Premium on Taxable Bonds In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. 1040nr free You can elect to amortize the premium on taxable bonds. 1040nr free The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item. 1040nr free Part of the premium on some bonds may be a miscellaneous deduction not subject to the 2% limit. 1040nr free For more information, see Amortizable Premium on Taxable Bonds in Publication 529, and Bond Premium Amortization in chapter 3 of Publication 550, Investment Income and Expenses. 1040nr free Casualty and Theft Losses of Income-Producing Property You can deduct a casualty or theft loss as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). 1040nr free First, report the loss in Form 4684, Section B. 1040nr free You may also have to include the loss on Form 4797, Sales of Business Property if you are otherwise required to file that form. 1040nr free To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. 1040nr free For more information on casualty and theft losses, see chapter 25. 1040nr free Federal Estate Tax on Income in Respect of a Decedent You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. 1040nr free Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. 1040nr free See Publication 559 for more information. 1040nr free Gambling Losses Up to the Amount of Gambling Winnings You must report the full amount of your gambling winnings for the year on Form 1040, line 21. 1040nr free You deduct your gambling losses for the year on Schedule A (Form 1040), line 28. 1040nr free You cannot deduct gambling losses that are more than your winnings. 1040nr free You cannot reduce your gambling winnings by your gambling losses and report the difference. 1040nr free You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. 1040nr free Therefore, your records should show your winnings separately from your losses. 1040nr free Diary of winnings and losses. 1040nr free You must keep an accurate diary or similar record of your losses and winnings. 1040nr free Your diary should contain at least the following information. 1040nr free The date and type of your specific wager or wagering activity. 1040nr free The name and address or location of the gambling establishment. 1040nr free The names of other persons present with you at the gambling establishment. 1040nr free The amount(s) you won or lost. 1040nr free See Publication 529 for more information. 1040nr free Impairment-Related Work Expenses If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. 1040nr free Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at your place of work and for other expenses in connection with your place of work that are necessary for you to be able to work. 1040nr free Self-employed. 1040nr free   If you are self-employed, enter your impairment-related work expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. 1040nr free Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss, report it on Schedule A (Form 1040), line 28. 1040nr free It is not subject to the passive activity limitations. 1040nr free Repayments Under Claim of Right If you had to repay more than $3,000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid or take a credit against your tax. 1040nr free See Repayments in chapter 12 for more information. 1040nr free Unrecovered Investment in Annuity A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. 1040nr free If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. 1040nr free See chapter 10 for more information about the tax treatment of pensions and annuities. 1040nr free Nondeductible Expenses Examples of nondeductible expenses are listed next. 1040nr free The list is followed by discussions of additional nondeductible expenses. 1040nr free List of Nondeductible Expenses Broker's commissions that you paid in connection with your IRA or other investment property. 1040nr free Burial or funeral expenses, including the cost of a cemetery lot. 1040nr free Capital expenses. 1040nr free Fees and licenses, such as car licenses, marriage licenses, and dog tags. 1040nr free Hobby losses, but see Hobby Expenses , earlier. 1040nr free Home repairs, insurance, and rent. 1040nr free Illegal bribes and kickbacks. 1040nr free See Bribes and kickbacks in chapter 11 of Publication 535. 1040nr free Losses from the sale of your home, furniture, personal car, etc. 1040nr free Personal disability insurance premiums. 1040nr free Personal, living, or family expenses. 1040nr free The value of wages never received or lost vacation time. 1040nr free Adoption Expenses You cannot deduct the expenses of adopting a child, but you may be able to take a credit for those expenses. 1040nr free See chapter 37. 1040nr free Campaign Expenses You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. 1040nr free These include qualification and registration fees for primary elections. 1040nr free Legal fees. 1040nr free   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign. 1040nr free Check-Writing Fees on Personal Account If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest. 1040nr free Club Dues Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. 1040nr free This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. 1040nr free You cannot deduct dues paid to an organization if one of its main purposes is to: Conduct entertainment activities for members or their guests, or Provide members or their guests with access to entertainment facilities. 1040nr free Dues paid to airline, hotel, and luncheon clubs are not deductible. 1040nr free Commuting Expenses You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). 1040nr free If you haul tools, instruments, or other items, in your car to and from work, you can deduct only the additional cost of hauling the items such as the rent on a trailer to carry the items. 1040nr free Fines or Penalties You cannot deduct fines or penalties you pay to a governmental unit for violating a law. 1040nr free This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). 1040nr free Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike. 1040nr free Health Spa Expenses You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer. 1040nr free Home Security System You cannot deduct the cost of a home security system as a miscellaneous deduction. 1040nr free However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. 1040nr free See Home Office under Unreimbursed Employee Expenses, earlier, and Security System under Deducting Expenses in Publication 587. 1040nr free Investment-Related Seminars You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes. 1040nr free Life Insurance Premiums You cannot deduct premiums you pay on your life insurance. 1040nr free You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. 1040nr free See chapter 18 for information on alimony. 1040nr free Lobbying Expenses You generally cannot deduct amounts paid or incurred for lobbying expenses. 1040nr free These include expenses to: Influence legislation, Participate or intervene in any political campaign for, or against, any candidate for public office, Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials. 1040nr free Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities. 1040nr free Dues used for lobbying. 1040nr free   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. 1040nr free See Lobbying Expenses in Publication 529 for information on exceptions. 1040nr free Lost or Mislaid Cash or Property You cannot deduct a loss based on the mere disappearance of money or property. 1040nr free However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. 1040nr free See chapter 25. 1040nr free Example. 1040nr free A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. 1040nr free The diamond falls from the ring and is never found. 1040nr free The loss of the diamond is a casualty. 1040nr free Lunches with Co-workers You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. 1040nr free See chapter 26 for information on deductible expenses while traveling away from home. 1040nr free Meals While Working Late You cannot deduct the cost of meals while working late. 1040nr free However, you may be able to claim a deduction if the cost of meals is a deductible entertainment expense, or if you are traveling away from home. 1040nr free See chapter 26 for information on deductible entertainment expenses and expenses while traveling away from home. 1040nr free Personal Legal Expenses You cannot deduct personal legal expenses such as those for the following. 1040nr free Custody of children. 1040nr free Breach of promise to marry suit. 1040nr free Civil or criminal charges resulting from a personal relationship. 1040nr free Damages for personal injury, except for certain unlawful discrimination and whistleblower claims. 1040nr free Preparation of a title (or defense or perfection of a title). 1040nr free Preparation of a will. 1040nr free Property claims or property settlement in a divorce. 1040nr free You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property. 1040nr free Political Contributions You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. 1040nr free Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible. 1040nr free Professional Accreditation Fees You cannot deduct professional accreditation fees such as the following. 1040nr free Accounting certificate fees paid for the initial right to practice accounting. 1040nr free Bar exam fees and incidental expenses in securing initial admission to the bar. 1040nr free Medical and dental license fees paid to get initial licensing. 1040nr free Professional Reputation You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation. 1040nr free Relief Fund Contributions You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job. 1040nr free Residential Telephone Service You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business. 1040nr free Stockholders' Meetings You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. 1040nr free You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments. 1040nr free Tax-Exempt Income Expenses You cannot deduct expenses to produce tax-exempt income. 1040nr free You cannot deduct interest on a debt incurred or continued to buy or carry  tax-exempt securities. 1040nr free If you have expenses to produce both taxable and tax-exempt income, but you cannot identify the expenses that produce each type of income, you must divide the expenses based on the amount of each type of income to determine the amount that you can deduct. 1040nr free Example. 1040nr free During the year, you received taxable interest of $4,800 and tax-exempt interest of $1,200. 1040nr free In earning this income, you had total expenses of $500 during the year. 1040nr free You cannot identify the amount of each expense item that is for each income item. 1040nr free Therefore, 80% ($4,800/$6,000) of the expense is for the taxable interest and 20% ($1,200/$6,000) is for the tax-exempt interest. 1040nr free You can deduct, subject to the 2% limit, expenses of $400 (80% of $500). 1040nr free Travel Expenses for Another Individual You generally cannot deduct travel expenses you pay or incur for a spouse, dependent, or other individual who accompanies you (or your employee) on business or personal travel unless the spouse, dependent, or other individual is an employee of the taxpayer, the travel is for a bona fide business purpose, and such expenses would otherwise be deductible by the spouse, dependent, or other individual. 1040nr free See chapter 26 for more information on deductible travel expenses. 1040nr free Voluntary Unemployment Benefit Fund Contributions You cannot deduct voluntary unemployment benefit fund contributions you make to a union fund or a private fund. 1040nr free However, you can deduct contributions as taxes if state law requires you to make them to a state unemployment fund that covers you for the loss of wages from unemployment caused by business conditions. 1040nr free Wristwatches You cannot deduct the cost of a wristwatch, even if there is a job requirement that you know the correct time to properly perform your duties. 1040nr free Prev  Up  Next   Home   More Online Publications
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1040nr free 4. 1040nr free   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. 1040nr free Loan secured by benefits. 1040nr free Waiver of survivor benefits. 1040nr free Waiver of 30-day waiting period before annuity starting date. 1040nr free Involuntary cash-out of benefits not more than dollar limit. 1040nr free Exception for certain loans. 1040nr free Exception for QDRO. 1040nr free SIMPLE and safe harbor 401(k) plan exception. 1040nr free Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. 1040nr free Installment percentage. 1040nr free Extended period for making contributions. 1040nr free 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. 1040nr free Caution: Form 5500-EZ not required. 1040nr free Form 5500. 1040nr free Electronic filing of Forms 5500 and 5500-SF. 1040nr free 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. 1040nr free dol. 1040nr free gov/ebsa/pdf/2013-5500. 1040nr free pdf www. 1040nr free dol. 1040nr free gov/ebsa/pdf/2013-5500-SF. 1040nr free pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 1040nr free 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040nr free 1040 U. 1040nr free S. 1040nr free 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. 1040nr free 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. 1040nr free 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. 1040nr free R. 1040nr free 10 plans. 1040nr free A sole proprietor or a partnership can set up one of these plans. 1040nr free A common-law employee or a partner cannot set up one of these plans. 1040nr free The plans described here can also be set up and maintained by employers that are corporations. 1040nr free All the rules discussed here apply to corporations except where specifically limited to the self-employed. 1040nr free The plan must be for the exclusive benefit of employees or their beneficiaries. 1040nr free These qualified plans can include coverage for a self-employed individual. 1040nr free As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. 1040nr free The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. 1040nr free Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. 1040nr free 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. 1040nr free Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. 1040nr free It provides benefits to a participant largely based on the amount contributed to that participant's account. 1040nr free Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. 1040nr free A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. 1040nr free Profit-sharing plan. 1040nr free   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). 1040nr free 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. 1040nr free An employer may even make no contribution to the plan for a given year. 1040nr free   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. 1040nr free   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). 1040nr free Money purchase pension plan. 1040nr free   Contributions to a money purchase pension plan are fixed and are not based on your business profits. 1040nr free 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. 1040nr free This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. 1040nr free Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. 1040nr free Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. 1040nr free Actuarial assumptions and computations are required to figure these contributions. 1040nr free Generally, you will need continuing professional help to have a defined benefit plan. 1040nr free Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. 1040nr free 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. 1040nr free The following is a brief overview of important qualification rules that generally have not yet been discussed. 1040nr free It is not intended to be all-inclusive. 1040nr free See Setting Up a Qualified Plan , later. 1040nr free Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. 1040nr free 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. 1040nr free Plan assets must not be diverted. 1040nr free   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. 1040nr free As a general rule, the assets cannot be diverted to the employer. 1040nr free Minimum coverage requirement must be met. 1040nr free   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. 1040nr free 50 employees, or The greater of: 40% of all employees, or Two employees. 1040nr free If there is only one employee, the plan must benefit that employee. 1040nr free Contributions or benefits must not discriminate. 1040nr free   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. 1040nr free Contributions and benefits must not be more than certain limits. 1040nr free   Your plan must not provide for contributions or benefits that are more than certain limits. 1040nr free 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. 1040nr free These limits are discussed later in this chapter under Contributions. 1040nr free Minimum vesting standard must be met. 1040nr free   Your plan must satisfy certain requirements regarding when benefits vest. 1040nr free A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. 1040nr free A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. 1040nr free Special rules apply to forfeited benefit amounts. 1040nr free 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. 1040nr free   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. 1040nr free Forfeitures must be used instead to reduce employer contributions. 1040nr free Participation. 1040nr free   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. 1040nr free Has reached age 21. 1040nr free 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). 1040nr free A plan cannot exclude an employee because he or she has reached a specified age. 1040nr free Leased employee. 1040nr free   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. 1040nr free These rules include those in all the following areas. 1040nr free Nondiscrimination in coverage, contributions, and benefits. 1040nr free Minimum age and service requirements. 1040nr free Vesting. 1040nr free Limits on contributions and benefits. 1040nr free Top-heavy plan requirements. 1040nr free Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. 1040nr free Benefit payment must begin when required. 1040nr free   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. 1040nr free The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. 1040nr free The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. 1040nr free The plan year in which the participant separates from service. 1040nr free Early retirement. 1040nr free   Your plan can provide for payment of retirement benefits before the normal retirement age. 1040nr free 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. 1040nr free Satisfies the service requirement for the early retirement benefit. 1040nr free Separates from service with a nonforfeitable right to an accrued benefit. 1040nr free The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. 1040nr free Required minimum distributions. 1040nr free   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. 1040nr free See Required Distributions , under Distributions, later. 1040nr free Survivor benefits. 1040nr free   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. 1040nr free A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. 1040nr free A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. 1040nr free   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. 1040nr free The participant does not choose benefits in the form of a life annuity. 1040nr free 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. 1040nr free The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. 1040nr free Loan secured by benefits. 1040nr free   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. 1040nr free Waiver of survivor benefits. 1040nr free   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. 1040nr free The plan also must allow the participant to withdraw the waiver. 1040nr free The spouse's consent must be witnessed by a plan representative or notary public. 1040nr free Waiver of 30-day waiting period before annuity starting date. 1040nr free    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. 1040nr free   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. 1040nr free Involuntary cash-out of benefits not more than dollar limit. 1040nr free   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. 1040nr free   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. 1040nr free 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. 1040nr free   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. 1040nr free   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. 1040nr free A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. 1040nr free See Section 402(f) Notice under Distributions, later, for more details. 1040nr free Consolidation, merger, or transfer of assets or liabilities. 1040nr free   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. 1040nr free (if the plan had then terminated). 1040nr free Benefits must not be assigned or alienated. 1040nr free   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. 1040nr free Exception for certain loans. 1040nr free   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. 1040nr free A disqualified person is defined later in this chapter under Prohibited Transactions. 1040nr free Exception for QDRO. 1040nr free   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. 1040nr free   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. 1040nr free 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. 1040nr free No benefit reduction for social security increases. 1040nr free   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. 1040nr free This rule also applies to plans supplementing the benefits provided by other federal or state laws. 1040nr free Elective deferrals must be limited. 1040nr free   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. 1040nr free See Limit on Elective Deferrals later in this chapter. 1040nr free Top-heavy plan requirements. 1040nr free   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. 1040nr free   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. 1040nr free Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. 1040nr free   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. 1040nr free These qualification requirements for top-heavy plans are explained in section 416 and its regulations. 1040nr free SIMPLE and safe harbor 401(k) plan exception. 1040nr free   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. 1040nr free QACAs (discussed later) also are not subject to top-heavy requirements. 1040nr free Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. 1040nr free First you adopt a written plan. 1040nr free Then you invest the plan assets. 1040nr free You, the employer, are responsible for setting up and maintaining the plan. 1040nr free If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. 1040nr free If you have employees, see Participation, under Qualification Rules, earlier. 1040nr free Set-up deadline. 1040nr free   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). 1040nr free Credit for startup costs. 1040nr free   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. 1040nr free For more information, see Credit for startup costs under Reminders, earlier. 1040nr free Adopting a Written Plan You must adopt a written plan. 1040nr free The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. 1040nr free Or it can be an individually designed plan. 1040nr free Written plan requirement. 1040nr free   To qualify, the plan you set up must be in writing and must be communicated to your employees. 1040nr free The plan's provisions must be stated in the plan. 1040nr free It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. 1040nr free Master or prototype plans. 1040nr free   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. 1040nr free Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). 1040nr free 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. 1040nr free Under a prototype plan, a separate trust or custodial account is established for each employer. 1040nr free Plan providers. 1040nr free   The following organizations generally can provide IRS-approved master or prototype plans. 1040nr free Banks (including some savings and loan associations and federally insured credit unions). 1040nr free Trade or professional organizations. 1040nr free Insurance companies. 1040nr free Mutual funds. 1040nr free Individually designed plan. 1040nr free   If you prefer, you can set up an individually designed plan to meet specific needs. 1040nr free Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. 1040nr free You may need professional help for this. 1040nr free See Rev. 1040nr free Proc. 1040nr free 2014-6, 2014-1 I. 1040nr free R. 1040nr free B. 1040nr free 198, available at www. 1040nr free irs. 1040nr free gov/irb/2014-1_IRB/ar10. 1040nr free html, as annually updated, that may help you decide whether to apply for approval. 1040nr free Internal Revenue Bulletins are available on the IRS website at IRS. 1040nr free gov They are also available at most IRS offices and at certain libraries. 1040nr free User fee. 1040nr free   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. 1040nr free At least one of them must be a non-highly compensated employee participating in the plan. 1040nr free The fee does not apply to requests made by the later of the following dates. 1040nr free The end of the 5th plan year the plan is in effect. 1040nr free The end of any remedial amendment period for the plan that begins within the first 5 plan years. 1040nr free The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. 1040nr free   For more information about whether the user fee applies, see Rev. 1040nr free Proc. 1040nr free 2014-8, 2014-1 I. 1040nr free R. 1040nr free B. 1040nr free 242, available at www. 1040nr free irs. 1040nr free gov/irb/2014-1_IRB/ar12. 1040nr free html, as may be annually updated; Notice 2003-49, 2003-32 I. 1040nr free R. 1040nr free B. 1040nr free 294, available at www. 1040nr free irs. 1040nr free gov/irb/2003-32_IRB/ar13. 1040nr free html; and Notice 2011-86, 2011-45 I. 1040nr free R. 1040nr free B. 1040nr free 698, available at www. 1040nr free irs. 1040nr free gov/irb/2011-45_IRB/ar11. 1040nr free html. 1040nr free Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. 1040nr free You can establish a trust or custodial account to invest the funds. 1040nr free You, the trust, or the custodial account can buy an annuity contract from an insurance company. 1040nr free Life insurance can be included only if it is incidental to the retirement benefits. 1040nr free You set up a trust by a legal instrument (written document). 1040nr free You may need professional help to do this. 1040nr free 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. 1040nr free 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. 1040nr free If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. 1040nr free Other plan requirements. 1040nr free   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. 1040nr free 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. 1040nr free 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. 1040nr free For information on this funding requirement, see section 412 and its regulations. 1040nr free Quarterly installments of required contributions. 1040nr free   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. 1040nr free If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. 1040nr free Due dates. 1040nr free   The due dates for the installments are 15 days after the end of each quarter. 1040nr free For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). 1040nr free Installment percentage. 1040nr free   Each quarterly installment must be 25% of the required annual payment. 1040nr free Extended period for making contributions. 1040nr free   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. 1040nr free Contributions A qualified plan is generally funded by your contributions. 1040nr free However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. 1040nr free See Employee Contributions and Elective Deferrals later. 1040nr free Contributions deadline. 1040nr free   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. 1040nr free Self-employed individual. 1040nr free   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. 1040nr free Your net earnings must be from your personal services, not from your investments. 1040nr free 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. 1040nr free Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. 1040nr free There are also limits on the amount you can deduct. 1040nr free See Deduction Limits , later. 1040nr free Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. 1040nr free The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. 1040nr free Defined benefit plan. 1040nr free   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. 1040nr free 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. 1040nr free $205,000 ($210,000 for 2014). 1040nr free Defined contribution plan. 1040nr free   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. 1040nr free 100% of the participant's compensation. 1040nr free $51,000 ($52,000 for 2014). 1040nr free   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. 1040nr free Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. 1040nr free Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. 1040nr free 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. 1040nr free See Regulations sections 1. 1040nr free 401(k)-2 and 1. 1040nr free 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). 1040nr free When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. 1040nr free But you can apply them to the previous year if all the following requirements are met. 1040nr free You make them by the due date of your tax return for the previous year (plus extensions). 1040nr free The plan was established by the end of the previous year. 1040nr free The plan treats the contributions as though it had received them on the last day of the previous year. 1040nr free You do either of the following. 1040nr free You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. 1040nr free You deduct the contributions on your tax return for the previous year. 1040nr free A partnership shows contributions for partners on Form 1065. 1040nr free Employer's promissory note. 1040nr free   Your promissory note made out to the plan is not a payment that qualifies for the deduction. 1040nr free Also, issuing this note is a prohibited transaction subject to tax. 1040nr free See Prohibited Transactions , later. 1040nr free Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. 1040nr free The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. 1040nr free Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. 1040nr free Defined contribution plans. 1040nr free   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. 1040nr free If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. 1040nr free See Deduction Limit for Self-Employed Individuals , later. 1040nr free   When figuring the deduction limit, the following rules apply. 1040nr free Elective deferrals (discussed later) are not subject to the limit. 1040nr free Compensation includes elective deferrals. 1040nr free The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). 1040nr free Defined benefit plans. 1040nr free   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. 1040nr free Consequently, an actuary must figure your deduction limit. 1040nr free    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. 1040nr free Table 4–1. 1040nr free 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. 1040nr free 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. 1040nr free Compensation is your net earnings from self-employment, defined in chapter 1. 1040nr free This definition takes into account both the following items. 1040nr free The deduction for the deductible part of your self-employment tax. 1040nr free The deduction for contributions on your behalf to the plan. 1040nr free The deduction for your own contributions and your net earnings depend on each other. 1040nr free For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. 1040nr free To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. 1040nr free Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. 1040nr free Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 1040nr free 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. 1040nr free Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 1040nr free (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. 1040nr free ) 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. 1040nr free Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. 1040nr free For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. 1040nr free However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. 1040nr free See Deduction Limit for Self-Employed Individuals, earlier. 1040nr free The amount you carry over and deduct may be subject to the excise tax discussed next. 1040nr free Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. 1040nr free 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. 1040nr free In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. 1040nr free Special rule for self-employed individuals. 1040nr free   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. 1040nr free 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. 1040nr free See Minimum Funding Requirement , earlier. 1040nr free Reporting the tax. 1040nr free   You must report the tax on your nondeductible contributions on Form 5330. 1040nr free Form 5330 includes a computation of the tax. 1040nr free See the separate instructions for completing the form. 1040nr free 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. 1040nr free A plan with this type of arrangement is popularly known as a “401(k) plan. 1040nr free ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. 1040nr free ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. 1040nr free In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. 1040nr free A profit-sharing plan. 1040nr free A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. 1040nr free Partnership. 1040nr free   A partnership can have a 401(k) plan. 1040nr free Restriction on conditions of participation. 1040nr free   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. 1040nr free Matching contributions. 1040nr free   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. 1040nr free 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. 1040nr free Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. 1040nr free Nonelective contributions. 1040nr free   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. 1040nr free These are called nonelective contributions. 1040nr free Employee compensation limit. 1040nr free   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. 1040nr free This limit is $260,000 in 2014. 1040nr free SIMPLE 401(k) plan. 1040nr free   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. 1040nr free A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. 1040nr free For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. 1040nr free Distributions. 1040nr free   Certain rules apply to distributions from 401(k) plans. 1040nr free See Distributions From 401(k) Plans , later. 1040nr free Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. 1040nr free This limit applies without regard to community property laws. 1040nr free Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. 1040nr free For 2013 and 2014, the basic limit on elective deferrals is $17,500. 1040nr free This limit applies to all salary reduction contributions and elective deferrals. 1040nr free If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. 1040nr free Catch-up contributions. 1040nr free   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. 1040nr free The catch-up contribution limit for 2013 and 2014 is $5,500. 1040nr free 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). 1040nr free However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 1040nr free The catch-up contribution limit. 1040nr free The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 1040nr free Treatment of contributions. 1040nr free   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. 1040nr free Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. 1040nr free Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. 1040nr free Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. 1040nr free Forfeiture. 1040nr free   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. 1040nr free Reporting on Form W-2. 1040nr free   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. 1040nr free You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 1040nr free You must also include them in box 12. 1040nr free Mark the “Retirement plan” checkbox in box 13. 1040nr free For more information, see the Form W-2 instructions. 1040nr free Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. 1040nr free 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. 1040nr free These contributions are elective deferrals. 1040nr free An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). 1040nr free For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. 1040nr free Eligible automatic contribution arrangement. 1040nr free   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. 1040nr free This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). 1040nr free There is no required deferral percentage. 1040nr free Withdrawals. 1040nr free   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. 1040nr free The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. 1040nr free The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. 1040nr free   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. 1040nr free The additional 10% tax on early distributions will not apply to the distribution. 1040nr free Notice requirement. 1040nr free   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. 1040nr free 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. 1040nr free 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. 1040nr free The notice also must explain how contributions will be invested in the absence of an investment election by the employee. 1040nr free Qualified automatic contribution arrangement. 1040nr free    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. 1040nr free It contains an automatic enrollment feature, and mandatory employer contributions are required. 1040nr free If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). 1040nr free Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. 1040nr free 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. 1040nr free In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). 1040nr free If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. 1040nr free It must be applied uniformly. 1040nr free It must not exceed 10%. 1040nr free It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. 1040nr free It must increase to at least 4% in the following plan year. 1040nr free It must increase to at least 5% in the following plan year. 1040nr free It must increase to at least 6% in subsequent plan years. 1040nr free Matching or nonelective contributions. 1040nr free   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. 1040nr free Matching contributions. 1040nr free You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. 1040nr free An amount equal to 100% of elective deferrals, up to 1% of compensation. 1040nr free An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. 1040nr free Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. 1040nr free The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. 1040nr free Nonelective contributions. 1040nr free 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. 1040nr free Vesting requirements. 1040nr free   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. 1040nr free These contributions are subject to special withdrawal restrictions, discussed later. 1040nr free Notice requirements. 1040nr free   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. 1040nr free The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. 1040nr free 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. 1040nr free Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. 1040nr free 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. 1040nr free 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. 1040nr free 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. 1040nr free The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. 1040nr free Excess withdrawn by April 15. 1040nr free   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. 1040nr free However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. 1040nr free The distribution is not subject to the additional 10% tax on early distributions. 1040nr free   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. 1040nr free   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. 1040nr free Excess not withdrawn by April 15. 1040nr free   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. 1040nr free In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. 1040nr free 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. 1040nr free Reporting corrective distributions on Form 1099-R. 1040nr free   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. 1040nr free For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. 1040nr free Tax on excess contributions of highly compensated employees. 1040nr free   The law provides tests to detect discrimination in a plan. 1040nr free 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. 1040nr free Report the tax on Form 5330. 1040nr free The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. 1040nr free Also, the ACP test does not apply to these plans if certain additional requirements are met. 1040nr free   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. 1040nr free 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. 1040nr free   See Regulations sections 1. 1040nr free 401(k)-2 and 1. 1040nr free 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). 1040nr free    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. 1040nr free Safe harbor 401(k) plan. 1040nr free 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. 1040nr free For your plan to be a safe harbor plan, you must meet the following conditions. 1040nr free Matching or nonelective contributions. 1040nr free You must make matching or nonelective contributions according to one of the following formulas. 1040nr free Matching contributions. 1040nr free You must make matching contributions according to the following rules. 1040nr free You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. 1040nr free You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. 1040nr free The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. 1040nr free Nonelective contributions. 1040nr free 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. 1040nr free These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. 1040nr free Notice requirement. 1040nr free 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. 1040nr free 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. 1040nr free 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. 1040nr free Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. 1040nr free 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. 1040nr free 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. 1040nr free 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. 1040nr free 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. 1040nr free An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. 1040nr free 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. 1040nr free Rollover. 1040nr free   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. 1040nr free For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. 1040nr free R. 1040nr free B. 1040nr free 872, available at www. 1040nr free irs. 1040nr free gov/irb/2010-51_IRB/ar11. 1040nr free html, and Notice 2013-74. 1040nr free A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. 1040nr free Rollover amounts do not apply toward the annual deferral limit. 1040nr free 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. 1040nr free See the Form W-2 and 1099-R instructions for detailed information. 1040nr free Distributions Amounts paid to plan participants from a qualified plan are called distributions. 1040nr free Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. 1040nr free Also, certain loans may be treated as distributions. 1040nr free See Loans Treated as Distributions in Publication 575. 1040nr free 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). 1040nr free These distribution rules apply individually to each qualified plan. 1040nr free You cannot satisfy the requirement for one plan by taking a distribution from another. 1040nr free The plan must provide that these rules override any inconsistent distribution options previously offered. 1040nr free Minimum distribution. 1040nr free   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. 1040nr free This minimum is figured by dividing the account balance by the applicable life expectancy. 1040nr free The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. 1040nr free For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. 1040nr free Required beginning date. 1040nr free   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. 1040nr free   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. 1040nr free Calendar year in which he or she reaches age 70½. 1040nr free Calendar year in which he or she retires from employment with the employer maintaining the plan. 1040nr free 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. 1040nr free   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. 1040nr free For more information, see Tax on Excess Accumulation in Publication 575. 1040nr free Distributions after the starting year. 1040nr free   The distribution required to be made by April 1 is treated as a distribution for the starting year. 1040nr free (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. 1040nr free ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. 1040nr free 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). 1040nr free Distributions after participant's death. 1040nr free   See Publication 575 for the special rules covering distributions made after the death of a participant. 1040nr free Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. 1040nr free The employee retires, dies, becomes disabled, or otherwise severs employment. 1040nr free The plan ends and no other defined contribution plan is established or continued. 1040nr free 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. 1040nr free For the rules on hardship distributions, including the limits on them, see Regulations section 1. 1040nr free 401(k)-1(d). 1040nr free The employee becomes eligible for a qualified reservist distribution (defined next). 1040nr free Certain distributions listed above may be subject to the tax on early distributions discussed later. 1040nr free Qualified reservist distributions. 1040nr free   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. 1040nr free All or part of a qualified reservist distribution can be recontributed to an IRA. 1040nr free The additional 10% tax on early distributions does not apply to a qualified reservist distribution. 1040nr free 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. 1040nr free Since most recipients have no cost basis, a distribution is generally fully taxable. 1040nr free An exception is a distribution that is properly rolled over as discussed under Rollover, next. 1040nr free The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. 1040nr free 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. 1040nr free Note. 1040nr free 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. 1040nr free Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. 1040nr free See Qualified distributions under Qualified Roth Contribution Program, earlier. 1040nr free Rollover. 1040nr free   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. 1040nr free However, it may be subject to withholding as discussed under Withholding requirement, later. 1040nr free 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. 1040nr free Eligible rollover distribution. 1040nr free   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. 1040nr free A required minimum distribution. 1040nr free See Required Distributions , earlier. 1040nr free Any of a series of substantially equal payments made at least once a year over any of the following periods. 1040nr free The employee's life or life expectancy. 1040nr free The joint lives or life expectancies of the employee and beneficiary. 1040nr free A period of 10 years or longer. 1040nr free A hardship distribution. 1040nr free The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. 1040nr free See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. 1040nr free Loans treated as distributions. 1040nr free Dividends on employer securities. 1040nr free The cost of any life insurance coverage provided under a qualified retirement plan. 1040nr free Similar items designated by the IRS in published guidance. 1040nr free See, for example, the Instructions for Forms 1099-R and 5498. 1040nr free Rollover of nontaxable amounts. 1040nr free   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. 1040nr free 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. 1040nr free If the rollover is to an IRA, the transfer can be made by any rollover method. 1040nr free Note. 1040nr free A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. 1040nr free 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). 1040nr free More information. 1040nr free   For more information about rollovers, see Rollovers in Pubs. 1040nr free 575 and 590. 1040nr free Withholding requirement. 1040nr free   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. 1040nr free Exceptions. 1040nr free   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. 1040nr free   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. 1040nr free Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). 1040nr free However, the participant can choose not to have tax withheld from these distributions. 1040nr free If the participant does not make this choice, the following withholding rules apply. 1040nr free For periodic distributions, withholding is based on their treatment as wages. 1040nr free For nonperiodic distributions, 10% of the taxable part is withheld. 1040nr free Estimated tax payments. 1040nr free   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. 1040nr free For more information, see Withholding Tax and Estimated Tax in Publication 575. 1040nr free Section 402(f) Notice. 1040nr free   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. 1040nr free That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. 1040nr free That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. 1040nr free 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. 1040nr free Certain other rules that may be applicable. 1040nr free   Notice 2009-68, 2009-39 I. 1040nr free R. 1040nr free B. 1040nr free 423, available at www. 1040nr free irs. 1040nr free gov/irb/2009-39_IRB/ar14. 1040nr free html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. 1040nr free If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. 1040nr free Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. 1040nr free Timing of notice. 1040nr free   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. 1040nr free Method of notice. 1040nr free   The written notice must be provided individually to each distributee of an eligible rollover distribution. 1040nr free Posting of the notice is not sufficient. 1040nr free However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. 1040nr free See Regulations section 1. 1040nr free 401(a)-21. 1040nr free Tax on failure to give notice. 1040nr free   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. 1040nr free The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. 1040nr free 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. 1040nr free This tax applies to the amount received that the employee must include in income. 1040nr free Exceptions. 1040nr free   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. 1040nr free Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. 1040nr free Made due to the employee having a qualifying disability. 1040nr free 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. 1040nr free (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. 1040nr free ) Made to an employee after separation from service if the separation occurred during o