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File free state taxes only Publication 3 - Main Content Table of Contents Gross IncomeForeign Source Income Military Spouses Residency Relief Act (MSRRA) Community Property Form W-2 Codes Adjustments to IncomeArmed Forces Reservists Individual Retirement Arrangements Moving Expenses Combat Zone ExclusionCombat Zone Serving in a Combat Zone Amount of Exclusion Alien StatusResident Aliens Nonresident Aliens Dual-Status Aliens Sale of HomePeriod of suspension. File free state taxes only Qualified official extended duty. File free state taxes only ForeclosuresLump Sum Portion of Settlement Payment. File free state taxes only Interest Payment on Lump Sum Portion of Settlement Payment. File free state taxes only Lost Equity Portion of Settlement Payment. File free state taxes only The rules that apply to a lost equity payment you received for the foreclosure of a property that was not your main home are different. File free state taxes only Interest Payment on Lost Equity Portion of Settlement Payment. File free state taxes only Itemized DeductionsEmployee Business Expenses Repayments CreditsFirst-Time Homebuyer Credit Child Tax Credit Earned Income Credit Credit for Excess Social Security Tax Withheld Forgiveness of Decedent's Tax LiabilityCombat Zone Related Forgiveness Terrorist or Military Action Related Forgiveness Claims for Tax Forgiveness Filing ReturnsSame-Sex Marriage Where To File When To File Signing Returns Extension of DeadlinesService That Qualifies for an Extension of Deadline Length of Extension Actions for Which Deadlines Are Extended Deferral of Payment Maximum Rate of Interest How To Get Tax HelpLow Income Taxpayer Clinics Gross Income Members of the Armed Forces receive many different types of pay and allowances. File free state taxes only Some are included in gross income while others are excluded from gross income. File free state taxes only Included items (Table 1) are subject to tax and must be reported on your tax return. File free state taxes only Excluded items (Table 2) are not subject to tax, but may have to be shown on your tax return. File free state taxes only For information on the exclusion of pay for service in a combat zone and other tax benefits for combat zone participants, see Combat Zone Exclusion and Extension of Deadlines , later. File free state taxes only Table 1. File free state taxes only Included Items These items are included in gross income, unless the pay is for service in a combat zone. File free state taxes only Basic pay • Active duty   Bonus pay • Career status   • Attendance at a designated service school     • Enlistment  • Officer   • Back wages     • Overseas extension   • CONUS COLA       • Reenlistment   • Drills         • Reserve training         • Training duty   Other pay  • Accrued leave          • High deployment per diem Special • Aviation career incentives      • Personal money allowances paid to pay • Career sea     high-ranking officers   • Diving duty      • Student loan repayment from programs   • Foreign duty (outside the 48 contiguous     such as the Department of Defense   states and the District of Columbia)     Educational Loan Repayment Program   • Foreign language proficiency     when year's service (requirement) is not   • Hardship duty     attributable to a combat zone   • Hostile fire or imminent danger         • Medical and dental officers   Incentive pay  • Submarine   • Nuclear-qualified officers      • Flight   • Optometry      • Hazardous duty   • Pharmacy      • High altitude/Low Opening (HALO)   • Special compensation for assistance with activities of daily living (SCAADL)         • Special duty assignment pay         • Veterinarian         • Voluntary Separation Incentive       Basic allowance for housing (BAH). File free state taxes only   You can still deduct mortgage interest and real estate taxes on your home if you pay these expenses with your BAH. File free state taxes only Table 2. File free state taxes only Excluded Items The exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. File free state taxes only There is no exclusion for the personal use of a government-provided vehicle. File free state taxes only Combat  zone pay • Compensation for active service while in a combat zone Note: Limited amount for officers     • Housing and cost-of-living allowances abroad paid by the U. File free state taxes only S. File free state taxes only Government or by a foreign government         • OHA (Overseas Housing Allowance)                     Other pay • Defense counseling         • Disability, including payments received for injuries incurred as a direct result of a terrorist or military action         • Group-term life insurance   Moving • Dislocation   • Professional education   allowances • Military base realignment and   • ROTC educational and subsistence     closure benefit    allowances     (the exclusion is limited as   • State bonus pay for service in a     described above)   combat zone     • Move-in housing   • Survivor and retirement protection     • Moving household and   plan premiums     personal items   • Uniform allowances     • Moving trailers or mobile homes   • Uniforms furnished to enlisted     • Storage   personnel     • Temporary lodging and         temporary lodging expenses                 Travel • Annual round trip for dependent Death • Burial services   allowances students allowances • Death gratuity payments to     • Leave between consecutive   eligible survivors     overseas tours   • Travel of dependents to burial site     • Reassignment in a dependent         restricted status Family • Certain educational expenses for     • Transportation for you or your allowances dependents     dependents during ship overhaul   • Emergencies     or inactivation   • Evacuation to a place of safety     • Per diem   • Separation             In-kind military • Dependent-care assistance program Living • BAH (Basic Allowance for Housing)   benefits • Legal assistance allowances • BAS (Basic Allowance for Subsistence)     • Medical/dental care         • Commissary/exchange discounts         • Space-available travel on government aircraft           Death gratuity. File free state taxes only   Any death gratuity paid to a survivor of a member of the Armed Forces is excluded from gross income. File free state taxes only Differential wage payments. File free state taxes only   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and that represent all or a portion of the wages the individual would have received from the employer if the individual was performing services for the employer. File free state taxes only These amounts are taxable and cannot be excluded as combat pay. File free state taxes only Military base realignment and closure benefit. File free state taxes only   Payments made under the Homeowners Assistance Program (HAP) generally are excluded from income. File free state taxes only However, the excludable amount cannot be more than the maximum amount described in subsection (c) of 42 USC 3374 as in effect on November 6, 2009. File free state taxes only Any part of the payment that is more than this limit is included in gross income. File free state taxes only For more information about the HAP, see http://hap. File free state taxes only usace. File free state taxes only army. File free state taxes only mil/Overview. File free state taxes only html. File free state taxes only Qualified reservist distribution (QRD). File free state taxes only   A QRD is a distribution to an individual of all or part of the individual's balance in a cafeteria plan or health flexible spending arrangement if: The individual was a reservist who was ordered or called to active duty for more than 179 days or for an indefinite period, and The distribution is made no sooner than the date the reservist was ordered or called to active duty and no later than the last day reimbursements could otherwise be made under the arrangement for the plan year which includes the date of the order or the call to duty. File free state taxes only A QRD is included in gross income and is subject to employment taxes. File free state taxes only The employer must include the QRD (reduced by after-tax contributions to the health flexible spending arrangement) as wages on Form W-2, Wage and Tax Statement. File free state taxes only Thrift Savings Plan (TSP) distributions. File free state taxes only   If you participate in the Uniformed Services TSP and receive a distribution from your account, the distribution is generally included in your taxable income. File free state taxes only   If your contributions included tax-exempt combat zone pay, the part of the distribution attributable to those contributions is tax exempt. File free state taxes only However, the earnings on the tax-exempt portion of the distribution are taxable. File free state taxes only The TSP will provide a statement showing the taxable and non-taxable portions of the distribution. File free state taxes only Roth Thrift Savings Plan (TSP) balance. File free state taxes only   You may be able to contribute to a designated Roth Account through the TSP known as the Roth TSP. File free state taxes only Roth TSP contributions are after-tax contributions, subject to the same contribution limits as the traditional TSP. File free state taxes only Qualified distributions from a Roth TSP are not included in your income. File free state taxes only For more details, see Thrift Savings Accounts in Part II of Publication 721, Tax Guide to U. File free state taxes only S. File free state taxes only Civil Service Retirement Benefits. File free state taxes only State bonus payments. File free state taxes only   Bonus payments made by a state (or a political subdivision thereof) to a member or former member of the uniformed services of the United States or to a dependent of such member are considered combat pay (and therefore may not be taxable) if the payments are made only because of the member's service in a combat zone. File free state taxes only See Combat Zone , later, for a list of designated combat zones. File free state taxes only Foreign Source Income If you are a U. File free state taxes only S. File free state taxes only citizen with income from sources outside the United States (foreign income), you must report all of that income (except for amounts that U. File free state taxes only S. File free state taxes only law allows you to exclude) on your tax return. File free state taxes only This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2 or a Form 1099. File free state taxes only This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). File free state taxes only Certain taxpayers can exclude income earned in foreign countries. File free state taxes only For 2013, this exclusion amount can be as much as $97,600. File free state taxes only However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U. File free state taxes only S. File free state taxes only Government. File free state taxes only Employees of the U. File free state taxes only S. File free state taxes only Government include those who work at United States Armed Forces exchanges, commissioned and noncommissioned officers' messes, Armed Forces motion picture services, and similar personnel. File free state taxes only Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. File free state taxes only For more information on the exclusion, see Publication 54. File free state taxes only Residents of American Samoa may be able to exclude income from American Samoa. File free state taxes only This possession exclusion does not apply to wages and salaries of military and civilian employees of the U. File free state taxes only S. File free state taxes only Government. File free state taxes only If you need information on the possession exclusion, see Publication 570, Tax Guide for Individuals With Income From U. File free state taxes only S. File free state taxes only Possessions. File free state taxes only Military Spouses Residency Relief Act (MSRRA) If you are the civilian spouse of an active duty U. File free state taxes only S. File free state taxes only military servicemember and your domicile is the same as the servicemember's, you can choose to keep your prior residence or domicile for tax purposes when you accompany the servicemember spouse, who is relocating under military orders to a new duty station in one of the 50 states, the District of Columbia, or a U. File free state taxes only S. File free state taxes only possession. File free state taxes only See Publication 570 for more information. File free state taxes only Domicile. File free state taxes only   Your domicile is the permanent legal home you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. File free state taxes only It is not always where you presently live. File free state taxes only Community Property The pay you earn as a member of the Armed Forces may be subject to community property laws depending on your marital status, your domicile, and the nature of the payment. File free state taxes only The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. File free state taxes only Marital status. File free state taxes only   Community property rules apply to married persons whose domicile during the tax year was in a community property state. File free state taxes only The rules may affect your tax liability if you file separate returns or are divorced during the year. File free state taxes only Nevada, Washington, and California domestic partners. File free state taxes only   A registered domestic partner in Nevada, Washington, or California generally must report half the combined income of the individual and his or her domestic partner. File free state taxes only See Form 8958 and Publication 555, Community Property. File free state taxes only Nature of the payment. File free state taxes only   Active duty military pay is subject to community property laws. File free state taxes only Armed Forces retired or retainer pay may be subject to community property laws. File free state taxes only   For more information on community property laws, see Publication 555. File free state taxes only Form W-2 Codes Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. File free state taxes only Form W-2 also shows other amounts that you may find important in box 12. File free state taxes only The amounts shown in box 12 are generally preceded by a code. File free state taxes only A list of codes used in box 12 is shown, next. File free state taxes only Form W-2 Reference Guide for Box 12 Codes A Uncollected social security or RRTA J Nontaxable sick pay T Adoption benefits   tax on tips             K 20% excise tax on excess golden V Income from exercise of B Uncollected Medicare tax on tips   parachute payments   nonstatutory stock option(s)             C Taxable cost of group-term life L Substantiated employee business W Employer contributions (including   insurance over $50,000   expense reimbursements   employee contributions through a           cafeteria plan) to an employee's D Elective deferrals under a section M Uncollected social security or RRTA   health savings account (HSA)   401(k) cash or deferred arrangement   tax on taxable cost of group-term life       plan (including a SIMPLE 401(k)   insurance over $50,000 (former Y Deferrals under a section 409A   arrangement)   employees only)   nonqualified deferred           compensation plan E Elective deferrals under a section N Uncollected Medicare tax on taxable       403(b) salary reduction agreement   cost of group-term life insurance Z Income under section 409A on a       over $50,000 (former employees only)   nonqualified deferred F Elective deferrals under a section       compensation plan   408(k)(6) salary reduction SEP P Excludable moving expense           reimbursements paid directly to AA Designated Roth contributions G Elective deferrals and employer   employee   under a section 401(k) plan   contributions (including nonelective           deferrals) to a section 457(b) Q Nontaxable combat pay BB Designated Roth contributions   deferred compensation plan       under a section 403(b) plan     R Employer contributions to an Archer     H Elective deferrals to a section   MSA DD Cost of employer-sponsored   501(c)(18)(D) tax-exempt       health coverage   organization plan S Employee salary reduction contributions under a section 408(p) SIMPLE  EE  Designated Roth contributions under a governmental section 457(b) plan  Note. File free state taxes only For more information on these codes, see your Form(s) W-2. File free state taxes only Adjustments to Income Adjusted gross income is your total income minus certain adjustments. File free state taxes only The following adjustments are of particular interest to members of the Armed Forces. File free state taxes only Armed Forces Reservists If you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your unreimbursed travel expenses as an adjustment to income on line 24 of Form 1040, U. File free state taxes only S. File free state taxes only Individual Income Tax Return, rather than as a miscellaneous itemized deduction. File free state taxes only Include all unreimbursed expenses from the time you leave home until the time you return home. File free state taxes only The deduction is limited to the amount the federal government generally reimburses its employees for travel expenses. File free state taxes only For more information about this limit, see Per Diem and Car Allowances in chapter 6 of Publication 463. File free state taxes only Member of a reserve component. File free state taxes only   You are a member of a reserve component of the Armed Forces if you are in the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve, the Army National Guard of the United States, the Air National Guard of the United States, or the Reserve Corps of the Public Health Service. File free state taxes only How to report. File free state taxes only   If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses. File free state taxes only Then enter on Form 1040, line 24, the part of your expenses, up to the federal rate, included on Form 2106, line 10, or Form 2106-EZ, line 6, that is for reserve-related travel more than 100 miles from your home. File free state taxes only Subtract this amount from the total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the balance as an itemized deduction on Schedule A (Form 1040), line 21. File free state taxes only Example. File free state taxes only Captain Harris, a member of the Army Reserve, traveled to a location 220 miles from his home to perform his work in the reserves in April 2013. File free state taxes only He incurred $1,549 of unreimbursed expenses consisting of $249 for mileage (440 miles × 56. File free state taxes only 5 cents per mile), $300 for meals, and $1,000 for lodging. File free state taxes only He also had other deductible mileage expenses of $110 for several trips to a location 20 miles from his home. File free state taxes only Only 50% of his meal expenses are deductible. File free state taxes only He shows his total deductible travel expenses of $1,509 ($249 + $150 (50% of $300) + $1,000 + $110) on Form 2106, line 10. File free state taxes only He enters the $1,399 ($249 + $150 + $1,000) for travel over 100 miles from home on Form 1040, line 24. File free state taxes only He then subtracts that $1,399 from the amount on Form 2106, $1,509, and enters $110 on Schedule A (Form 1040), line 21. File free state taxes only Individual Retirement Arrangements Generally, you can deduct the lesser of the contributions to your traditional individual retirement arrangement (IRA) for the year or the general limit (or spousal IRA limit, if applicable). File free state taxes only However, if you or your spouse was covered by an employer-maintained retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. File free state taxes only The Form W-2 you or your spouse receives from an employer has a box used to indicate whether you were covered for the year. File free state taxes only The “Retirement plan” box should have a mark in it if you were covered. File free state taxes only For purposes of a deduction for contributions to a traditional IRA, Armed Forces members (including reservists on active duty for more than 90 days during the year) are considered covered by an employer-maintained retirement plan. File free state taxes only Individuals serving in the U. File free state taxes only S. File free state taxes only Armed Forces or in support of the U. File free state taxes only S. File free state taxes only Armed Forces in designated combat zones have additional time to make a qualified retirement contribution to an IRA. File free state taxes only For more information on this extension of deadline provision, see Extension of Deadlines , later. File free state taxes only For more information on IRAs, see Publication 590. File free state taxes only Combat Pay For IRA purposes, your compensation includes nontaxable combat pay. File free state taxes only This means that even though you do not have to include the combat pay in your gross income, you do include it in your compensation when figuring the limits on contributions and deductions of contributions to IRAs. File free state taxes only Qualified Reservist Distributions A qualified reservist distribution is defined below. File free state taxes only It is not subject to the 10% additional tax on early distributions from certain retirement plans. File free state taxes only Definition. File free state taxes only   A distribution you receive is a qualified reservist distribution if the following requirements are met. File free state taxes only You were ordered or called to active duty after September 11, 2001. File free state taxes only You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component (see Member of a reserve component , earlier, under Armed Forces Reservists. File free state taxes only ) The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement. File free state taxes only The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period. File free state taxes only Qualified Reservist Repayments You may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions (defined earlier) you received. File free state taxes only You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. File free state taxes only You make these repayment contributions to an IRA, even if you received the qualified reservist distribution from a section 401(k) or 403(b) plan or a similar arrangement. File free state taxes only Limit. File free state taxes only   Your qualified reservist repayments cannot be more than your qualified reservist distributions. File free state taxes only When repayment contributions can be made. File free state taxes only   You cannot make these repayment contributions after the date that is 2 years after your active duty period ends. File free state taxes only No deduction. File free state taxes only   You cannot deduct qualified reservist repayments. File free state taxes only Figuring your IRA deduction. File free state taxes only   The repayment of qualified reservist distributions does not affect the amount you can deduct as an IRA contribution. File free state taxes only Reporting the repayment. File free state taxes only   If you repay a qualified reservist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606, Nondeductible IRAs. File free state taxes only Moving Expenses To deduct moving expenses, you generally must meet certain time and distance tests. File free state taxes only However, if you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you do not have to meet these tests. File free state taxes only You can deduct your unreimbursed moving expenses on Form 3903. File free state taxes only Permanent change of station. File free state taxes only   A permanent change of station includes: A move from your home to your first post of active duty, A move from one permanent post of duty to another, and A move from your last post of duty to your home or to a nearer point in the United States. File free state taxes only The move must occur within 1 year of ending your active duty or within the period allowed under the Joint Federal Travel Regulations. File free state taxes only Spouse and dependents. File free state taxes only   If you are the spouse or dependent of a member of the Armed Forces who deserts, is imprisoned, or dies, a permanent change of station for you includes a move to: The member's place of enlistment or induction, Your, or the member's, home of record, or A nearer point in the United States. File free state taxes only   If the military moves you to or from a different location than the member, the moves are treated as a single move to your new main job location. File free state taxes only Services or reimbursements provided by the government. File free state taxes only   Do not include in your income the value of moving and storage services provided by the government because of a permanent change of station. File free state taxes only Similarly, do not include in income amounts received as a dislocation allowance, temporary lodging expense, temporary lodging allowance, or move-in housing allowance. File free state taxes only   Generally, if the total reimbursements or allowances that you receive from the government because of the move are more than your actual moving expenses, the excess is included in your wages on Form W-2. File free state taxes only However, if any reimbursements or allowances (other than dislocation, temporary lodging, temporary lodging expense, or move-in housing allowances) exceed the cost of moving and the excess is not included in your wages on Form W-2, the excess still must be included in gross income on Form 1040, line 7. File free state taxes only   Use Form 3903 to deduct qualified expenses that exceed your reimbursements and allowances (including dislocation, temporary lodging, temporary lodging expense, or move-in housing allowances that are excluded from gross income). File free state taxes only   If you must relocate and your spouse and dependents move to or from a different location, do not include in income reimbursements, allowances, or the value of moving and storage services provided by the government to move you and your spouse and dependents to and from the separate locations. File free state taxes only   Do not deduct any expenses for moving services that were provided by the government. File free state taxes only Also, do not deduct any expenses that were reimbursed by an allowance you did not include in income. File free state taxes only Deductible Moving Expenses If you move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving you and members of your household. File free state taxes only You can deduct expenses (if not reimbursed or furnished in kind) for: Moving household goods and personal effects, and Travel. File free state taxes only Moving household goods and personal effects. File free state taxes only   You can deduct the expenses of moving your household goods and personal effects, including expenses for hauling a trailer, packing, crating, in-transit storage, and insurance. File free state taxes only You cannot deduct expenses for moving furniture or other goods you bought on the way from your old home to your new home. File free state taxes only Storing and insuring household goods and personal effects. File free state taxes only   You can include only the cost of storing and insuring your household goods and personal effects within any period of 30 consecutive days after the day these goods and effects are moved from your former home and before they are delivered to your new home. File free state taxes only Travel. File free state taxes only   You can deduct the expenses of traveling (including lodging but not meals) from your old home to your new home, including car expenses and air fare. File free state taxes only You can deduct as car expenses either: Your actual out-of-pocket expenses such as gas and oil, or The standard mileage rate of 24 cents a mile. File free state taxes only   You can add parking fees and tolls to the amount claimed under either method. File free state taxes only You cannot deduct any expenses for meals. File free state taxes only You cannot deduct the cost of unnecessary side trips or lavish and extravagant lodging. File free state taxes only Member of your household. File free state taxes only   A member of your household is anyone who has both your former home and your new home as his or her main home. File free state taxes only It does not include a tenant or employee unless you can claim that person as a dependent. File free state taxes only Foreign Moves A foreign move is a move from the United States or its possessions to a foreign country or from one foreign country to another foreign country. File free state taxes only A move from a foreign country to the United States or its possessions is not a foreign move. File free state taxes only For a foreign move, the deductible moving expenses described earlier are expanded to include the reasonable expenses of: Moving your household goods and personal effects to and from storage, and Storing these items for part or all of the time the new job location remains your main job location. File free state taxes only The new job location must be outside the United States. File free state taxes only Reporting Moving Expenses Figure moving expense deductions on Form 3903. File free state taxes only Carry the deduction from Form 3903 to Form 1040, line 26. File free state taxes only For more information, see Publication 521 and Form 3903. File free state taxes only Combat Zone Exclusion If you are a member of the U. File free state taxes only S. File free state taxes only Armed Forces who serves in a combat zone (defined later), you can exclude certain pay from your income. File free state taxes only This pay is generally referred to as “combat pay. File free state taxes only ” You do not actually need to show the exclusion on your tax return because income that qualifies for the combat zone exclusion is not included in the wages reported on your Form W-2. File free state taxes only (See Form W-2 , later. File free state taxes only ) The month for which you receive the pay must be a month in which you either served in a combat zone or were hospitalized as a result of wounds, disease, or injury incurred while serving in the combat zone. File free state taxes only You do not have to receive the excluded pay while you are in a combat zone, are hospitalized, or in the same year you served in a combat zone. File free state taxes only If you are an enlisted member, warrant officer, or commissioned warrant officer, you can exclude the following amounts from your income. File free state taxes only (Other officer personnel are discussed under Amount of Exclusion , later. File free state taxes only ) Active duty pay earned in any month you served in a combat zone. File free state taxes only Imminent danger/hostile fire pay. File free state taxes only A reenlistment bonus if the voluntary extension or reenlistment occurs in a month you served in a combat zone. File free state taxes only Pay for accrued leave earned in any month you served in a combat zone. File free state taxes only The Department of Defense must determine that the unused leave was earned during that period. File free state taxes only Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other nonappropriated fund activities. File free state taxes only The pay must be earned in a month you served in a combat zone. File free state taxes only Awards for suggestions, inventions, or scientific achievements you are entitled to because of a submission you made in a month you served in a combat zone. File free state taxes only Student loan repayments. File free state taxes only If the entire year of service required to earn the repayment was performed in a combat zone, the entire repayment made because of that year of service is excluded. File free state taxes only If only part of that year of service was performed in a combat zone, only part of the repayment qualifies for exclusion. File free state taxes only For example, if you served in a combat zone for 5 months, 5/12 of your repayment qualifies for exclusion. File free state taxes only Retirement pay and pensions do not qualify for the combat zone exclusion. File free state taxes only Partial (month) service. File free state taxes only   If you serve in a combat zone for any part of one or more days during a particular month, you are entitled to an exclusion for that entire month. File free state taxes only Form W-2. File free state taxes only   The wages shown in box 1 of your 2013 Form W-2 should not include military pay excluded from your income under the combat zone exclusion provisions. File free state taxes only If it does, you will need to get a corrected Form W-2 from your finance office. File free state taxes only   You cannot exclude as combat pay any wages shown in box 1 of Form W-2. File free state taxes only Combat Zone A combat zone is any area the President of the United States designates by Executive Order as an area in which the U. File free state taxes only S. File free state taxes only Armed Forces are engaging or have engaged in combat. File free state taxes only An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order. File free state taxes only Afghanistan area. File free state taxes only   By Executive Order No. File free state taxes only 13239, Afghanistan (and airspace above) was designated as a combat zone beginning September 19, 2001. File free state taxes only On December 14, 2001, the following countries were certified by the Department of Defense for combat zone tax benefits due to their direct support of military operations in the Afghanistan combat zone. File free state taxes only Djibouti. File free state taxes only Jordan. File free state taxes only Kyrgyzstan. File free state taxes only Pakistan. File free state taxes only Somalia. File free state taxes only Syria. File free state taxes only Tajikistan. File free state taxes only Uzbekistan. File free state taxes only Yemen. File free state taxes only The Philippines. File free state taxes only  Note. File free state taxes only For the Philippines only, the personnel must be deployed in conjunction with Operation Enduring Freedom supporting military operations in the Afghanistan combat zone. File free state taxes only The Kosovo area. File free state taxes only   By Executive Order No. File free state taxes only 13119, the following locations (including airspace above) were designated as a combat zone beginning March 24, 1999. File free state taxes only Federal Republic of Yugoslavia (Serbia/Montenegro). File free state taxes only Albania. File free state taxes only Kosovo. File free state taxes only The Adriatic Sea. File free state taxes only The Ionian Sea—north of the 39th parallel. File free state taxes only Note. File free state taxes only The combat zone designation for Montenegro and Kosovo (previously a province within Serbia) under Executive Order 13119 remains in force even though Montenegro and Kosovo became independent nations since EO 13119 was signed. File free state taxes only Arabian peninsula. File free state taxes only   By Executive Order No. File free state taxes only 12744, the following locations (and airspace above) were designated as a combat zone beginning January 17, 1991. File free state taxes only The Persian Gulf. File free state taxes only The Red Sea. File free state taxes only The Gulf of Oman. File free state taxes only The part of the Arabian Sea that is north of 10 degrees north latitude and west of 68 degrees east longitude. File free state taxes only The Gulf of Aden. File free state taxes only The total land areas of Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, and the United Arab Emirates. File free state taxes only Jordan which is in direct support of the Arabian Peninsula. File free state taxes only Serving in a Combat Zone You are considered to be serving in a combat zone if you are either assigned on official temporary duty to a combat zone or you qualify for hostile fire/imminent danger pay while in a combat zone. File free state taxes only Service in a combat zone includes any periods you are absent from duty because of sickness, wounds, or leave. File free state taxes only If, as a result of serving in a combat zone, a person becomes a prisoner of war or is missing in action, that person is considered to be serving in the combat zone so long as he or she keeps that status for military pay purposes. File free state taxes only Hospitalized While Serving in a Combat Zone If you are hospitalized while serving in a combat zone, the wound, disease, or injury causing the hospitalization will be presumed to have been incurred while serving in the combat zone unless there is clear evidence to the contrary. File free state taxes only Example. File free state taxes only You are hospitalized for a specific disease in a combat zone where you have been serving for 3 weeks, and the disease for which you are hospitalized has an incubation period of 2 to 4 weeks. File free state taxes only The disease is presumed to have been incurred while you were serving in the combat zone. File free state taxes only On the other hand, if the incubation period of the disease is 1 year, the disease would not have been incurred while you were serving in the combat zone. File free state taxes only Hospitalized After Leaving a Combat Zone In some cases, the wound, disease, or injury may have been incurred while you were serving in the combat zone, even though you were not hospitalized until after you left. File free state taxes only In that case, you can exclude military pay earned while you are hospitalized as a result of the wound, disease, or injury. File free state taxes only Example. File free state taxes only You were hospitalized for a specific disease 3 weeks after you left the combat zone. File free state taxes only The incubation period of the disease is from 2 to 4 weeks. File free state taxes only The disease is presumed to have been incurred while serving in the combat zone. File free state taxes only Nonqualifying Presence in Combat Zone None of the following types of military service qualify as service in a combat zone. File free state taxes only Presence in a combat zone while on leave from a duty station located outside the combat zone. File free state taxes only Passage over or through a combat zone during a trip between two points that are outside a combat zone. File free state taxes only Presence in a combat zone solely for your personal convenience. File free state taxes only Service Outside Combat Zone Considered Service in Combat Zone Military service outside a combat zone is considered to be performed in a combat zone if: The Department of Defense designates that the service is in direct support of military operations in the combat zone, and The service qualifies you for special military pay for duty subject to hostile fire or imminent danger. File free state taxes only Military pay received for this service will qualify for the combat zone exclusion if all of the requirements (other than service in a combat zone) are met and the pay is verifiable by reference to military pay records. File free state taxes only Amount of Exclusion If you are an enlisted member, warrant officer, or commissioned warrant officer and you serve in a combat zone during any part of a month, you can exclude all of your military pay for that month. File free state taxes only It should not be included in the wages reported on your Form W-2. File free state taxes only You also can exclude military pay earned while you are hospitalized as a result of wounds, disease, or injury incurred in the combat zone. File free state taxes only If you are hospitalized, you cannot exclude any military pay received for any month of service that begins more than 2 years after the end of combat activities in the combat zone. File free state taxes only Your hospitalization does not have to be in the combat zone. File free state taxes only If you are a commissioned officer (other than a commissioned warrant officer), you can exclude your pay according to the rules just discussed. File free state taxes only However, the amount of your exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay you received) for each month during any part of which you served in a combat zone or were hospitalized as a result of your service there. File free state taxes only Alien Status For tax purposes, an alien is an individual who is not a U. File free state taxes only S. File free state taxes only citizen. File free state taxes only An alien is in one of three categories: resident, nonresident, or dual-status. File free state taxes only Placement in the correct category is crucial in determining what income to report and what forms to file. File free state taxes only Under peacetime enlistment rules, you generally cannot enlist in the Armed Forces unless you are a citizen or have been legally admitted to the United States for permanent residence. File free state taxes only If you are an alien enlistee in the Armed Forces, you are probably a resident alien. File free state taxes only If, under an income tax treaty, you are considered a resident of a foreign country, see your base legal officer. File free state taxes only Other aliens who are in the United States only because of military assignments and who have a home outside the United States are nonresident aliens. File free state taxes only Guam and Puerto Rico have special rules. File free state taxes only Residents of those areas should contact their taxing authority with their questions. File free state taxes only Most members of the Armed Forces are U. File free state taxes only S. File free state taxes only citizens or resident aliens. File free state taxes only However, if you have questions about your alien status or the alien status of your dependents or spouse, you should read the information in the following paragraphs and see Publication 519. File free state taxes only Resident Aliens You are considered a resident alien of the United States for tax purposes if you meet either the “green card test” or the “substantial presence test” for the calendar year (January 1–December 31). File free state taxes only If you meet the substantial presence test for 2014, you did not meet either the green card test or the substantial presence test for 2012 or 2013, and you did not choose to be treated as a resident for part of 2012, you may be able to choose to be treated as a U. File free state taxes only S. File free state taxes only resident for part of 2013. File free state taxes only See First-Year Choice in Publication 519. File free state taxes only These tests are explained in Publication 519. File free state taxes only Generally, resident aliens are taxed on their worldwide income and file the same tax forms as U. File free state taxes only S. File free state taxes only citizens. File free state taxes only Treating nonresident alien spouse as resident alien. File free state taxes only   A nonresident alien spouse can be treated as a resident alien if all the following conditions are met. File free state taxes only One spouse is a U. File free state taxes only S. File free state taxes only citizen or resident alien at the end of the tax year. File free state taxes only That spouse is married to the nonresident alien at the end of the tax year. File free state taxes only You both choose to treat the nonresident alien spouse as a resident alien. File free state taxes only Making the choice. File free state taxes only   Both you and your spouse must sign a statement and attach it to your joint return for the first tax year for which the choice applies. File free state taxes only Include in the statement: A declaration that one spouse was a nonresident alien and the other was a U. File free state taxes only S. File free state taxes only citizen or resident alien on the last day of the year, A declaration that both spouses choose to be treated as U. File free state taxes only S. File free state taxes only residents for the entire tax year, and The name, address, and taxpayer identification number (social security number or individual taxpayer identification number) of each spouse. File free state taxes only If the nonresident alien spouse is not eligible to get a social security number, he or she should file Form W-7, Application for IRS Individual Taxpayer Identification Number. File free state taxes only    Once you make this choice, the nonresident alien spouse's worldwide income is subject to U. File free state taxes only S. File free state taxes only tax. File free state taxes only If the nonresident alien spouse has substantial foreign income, there may be no advantage to making this choice. File free state taxes only Ending the choice. File free state taxes only   Once you make this choice, it applies to all later years unless one of the following situations occurs. File free state taxes only You or your spouse revokes the choice. File free state taxes only You or your spouse dies. File free state taxes only You and your spouse become legally separated under a decree of divorce or separate maintenance. File free state taxes only The Internal Revenue Service ends the choice because you or your spouse kept inadequate records. File free state taxes only For specific details on these situations, see Publication 519. File free state taxes only   If the choice is ended for any of these reasons, neither spouse can make the choice for any later year. File free state taxes only Choice not made. File free state taxes only   If you and your nonresident alien spouse do not make this choice: You cannot file a joint return. File free state taxes only You can file as married filing separately, or head of household if you qualify. File free state taxes only You can claim an exemption for your nonresident alien spouse if he or she has no gross income for U. File free state taxes only S. File free state taxes only tax purposes and is not another taxpayer's dependent. File free state taxes only The nonresident alien spouse generally does not have to file a federal income tax return if he or she had no income from sources in the United States. File free state taxes only If a return has to be filed, see the next discussion. File free state taxes only The nonresident alien spouse is not eligible for the earned income credit if he or she has to file a return. File free state taxes only Nonresident Aliens If you are an alien who does not meet the requirements discussed earlier to be a resident alien, you are a nonresident alien. File free state taxes only If you are required to file a federal tax return, you must file either Form 1040NR, U. File free state taxes only S. File free state taxes only Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U. File free state taxes only S. File free state taxes only Income Tax Return for Certain Nonresident Aliens With No Dependents. File free state taxes only See the form instructions for information on who must file and filing status. File free state taxes only If you are a nonresident alien, you generally must pay tax on income from sources in the United States. File free state taxes only Your income from conducting a trade or business in the United States is taxed at graduated U. File free state taxes only S. File free state taxes only tax rates. File free state taxes only Other income from U. File free state taxes only S. File free state taxes only sources is taxed at a flat 30% (or lower treaty) rate. File free state taxes only For example, dividends from a U. File free state taxes only S. File free state taxes only corporation paid to a nonresident alien generally are subject to a 30% (or lower treaty) rate. File free state taxes only Dual-Status Aliens You can be both a nonresident and resident alien during the same tax year. File free state taxes only This usually occurs in the year you arrive in or depart from the United States. File free state taxes only If you are a dual-status alien, you are taxed on income from all sources for the part of the year you are a resident alien. File free state taxes only Generally, for the part of the year you are a nonresident alien, you are taxed only on income from sources in the United States. File free state taxes only Sale of Home You may not have to pay tax on all or part of the gain from the sale of your main home. File free state taxes only Usually, your main home is the one you live in most of the time. File free state taxes only It can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. File free state taxes only You generally can exclude up to $250,000 of gain ($500,000, in most cases, if married filing a joint return) realized on the sale or exchange of a main home in 2013. File free state taxes only The exclusion is allowed each time you sell or exchange a main home, but generally not more than once every 2 years. File free state taxes only To be eligible, during the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years (the ownership test), and lived in the home as your main home for at least 2 years (the use test). File free state taxes only Exception to ownership and use tests. File free state taxes only   You can exclude gain, but the maximum amount of gain you can exclude will be reduced if you do not meet the ownership and use tests due to a move to a new permanent duty station. File free state taxes only 5-year test period suspended. File free state taxes only   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as a member of the Armed Forces. File free state taxes only This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. File free state taxes only Example. File free state taxes only David bought and moved into a home in 2005. File free state taxes only He lived in it as his main home for 2½ years. File free state taxes only For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. File free state taxes only He then sold the home at a gain in 2013. File free state taxes only To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty. File free state taxes only This means he can disregard those 6 years. File free state taxes only Therefore, David's 5-year test period consists of the 5 years before he went on qualifying official extended duty. File free state taxes only He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. File free state taxes only Period of suspension. File free state taxes only   The period of suspension cannot last more than 10 years. File free state taxes only You cannot suspend the 5-year period for more than one property at a time. File free state taxes only You can revoke your choice to suspend the 5-year period at any time. File free state taxes only Qualified official extended duty. File free state taxes only   You are on qualified official extended duty if you serve on extended duty either: At a duty station at least 50 miles from your main home, or While you live in Government quarters under Government orders. File free state taxes only   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. File free state taxes only Property used for rental or business. File free state taxes only   You may be able to exclude your gain from the sale of a home that you have used as a rental property or for business. File free state taxes only However, you must meet the ownership and use tests discussed in Publication 523. File free state taxes only Nonqualified use. File free state taxes only   If the sale of your main home results in a gain that is allocated to one or more period(s) of nonqualified use, you cannot exclude that gain from your income. File free state taxes only   Nonqualified use means any period after 2008 when neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions. File free state taxes only For example, a period of nonqualified use does not include any period (not to exceed a total of 10 years) during which you or your spouse is serving on qualified official extended duty. File free state taxes only Loss. File free state taxes only   You cannot deduct a loss from the sale of your main home. File free state taxes only More information. File free state taxes only   For more information, see Publication 523. File free state taxes only Foreclosures There may be tax consequences as a result of compensation payments for foreclosures. File free state taxes only Payments made for violations of the Service Members Civil Relief Act (SCRA). File free state taxes only   All service members who received a settlement payment reported on a Form 1099 may need to report the amount on their tax return. File free state taxes only Generally, you must include settlement payments in income. File free state taxes only However, the tax treatment of settlement payments will depend on the facts and circumstances. File free state taxes only Lump Sum Portion of Settlement Payment. File free state taxes only    Generally, you must include the lump sum payment in gross income. File free state taxes only In limited circumstances you may be able to exclude part or all of the lump sum payment from gross income. File free state taxes only For example, you may qualify to exclude part or all of the payment from gross income if you can show that the payment was made to reimburse specific nondeductible expenses (such as living expenses) you incurred because of the SCRA violation. File free state taxes only Interest Payment on Lump Sum Portion of Settlement Payment. File free state taxes only    You must include any interest on the lump sum portion of your settlement payment in your income. File free state taxes only Lost Equity Portion of Settlement Payment. File free state taxes only    If you lost your main home in foreclosure, you should treat the lost equity payment as an additional amount you received on the foreclosure of the home. File free state taxes only You will have a gain on the foreclosure only if the sum of the lost equity payment and the value of the main home at foreclosure is more than what you paid for the home. File free state taxes only In many cases, this gain may be excluded from income. File free state taxes only For more information on the rules for excluding all or part of any gain from the sale (including a foreclosure) of a main home, see Pub. File free state taxes only 523, Selling Your Home. File free state taxes only The rules that apply to a lost equity payment you received for the foreclosure of a property that was not your main home are different. File free state taxes only    To find rules for reporting gain or loss on the foreclosure of property that was not your main home, see Pub. File free state taxes only 544, Sales and Other Dispositions of Assets. File free state taxes only Interest Payment on Lost Equity Portion of Settlement Payment. File free state taxes only    You must include any interest on the lost equity portion of your settlement payment in your income. File free state taxes only Itemized Deductions To figure your taxable income, you must subtract either your standard deduction or your itemized deductions from adjusted gross income. File free state taxes only For information on the standard deduction, see Publication 501. File free state taxes only Itemized deductions are figured on Schedule A (Form 1040). File free state taxes only This chapter discusses miscellaneous itemized deductions of particular interest to members of the Armed Forces. File free state taxes only For information on other itemized deductions, see the publications listed below. File free state taxes only Publication 502, Medical and Dental Expenses. File free state taxes only Publication 526, Charitable Contributions. File free state taxes only Publication 547, Casualties, Disasters, and Thefts. File free state taxes only Publication 550, Investment Income and Expenses. File free state taxes only You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. File free state taxes only For information on deductions that are not subject to the 2% limit, see Publication 529. File free state taxes only Employee Business Expenses Deductible employee business expenses generally are miscellaneous itemized deductions subject to the 2% limit. File free state taxes only Certain employee business expenses are deductible as adjustments to income. File free state taxes only For information on many employee business expenses, see Publication 463. File free state taxes only Generally, you must file Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, to claim these expenses. File free state taxes only You do not have to file Form 2106 or Form 2106-EZ if you are claiming only unreimbursed expenses for uniforms, professional society dues, and work-related educational expenses (all discussed later). File free state taxes only You can deduct these expenses directly on Schedule A (Form 1040). File free state taxes only Reimbursement. File free state taxes only   Generally, to receive advances, reimbursements, or other allowances from the government, you must adequately account for your expenses and return any excess reimbursement. File free state taxes only Your reimbursed expenses are not deductible. File free state taxes only   If your expenses are more than your reimbursement, the excess expenses are deductible (subject to the 2% limit) if you can prove them. File free state taxes only You must file Form 2106 to report these expenses. File free state taxes only   You can use the shorter Form 2106-EZ if you meet all three of the following conditions. File free state taxes only You are an employee deducting expenses related to your job. File free state taxes only You were not reimbursed by your employer for your expenses. File free state taxes only (Amounts included in box 1 of Form W-2 are not considered reimbursements. File free state taxes only ) If you claim car expenses, you use the standard mileage rate. File free state taxes only    For 2013, the standard mileage rate is 56. File free state taxes only 5 cents a mile for all business miles driven. File free state taxes only This rate is adjusted periodically. File free state taxes only Travel Expenses You can deduct unreimbursed travel expenses only if they are incurred while you are traveling away from home. File free state taxes only If you are a member of the U. File free state taxes only S. File free state taxes only Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. File free state taxes only You cannot deduct your expenses for meals and lodging while at your permanent duty station. File free state taxes only You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. File free state taxes only A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a home aboard ship for travel expense purposes. File free state taxes only To be deductible, your travel expenses must be work related. File free state taxes only You cannot deduct any expenses for personal travel, such as visits to family while on furlough, leave, or liberty. File free state taxes only Away from home. File free state taxes only   Home is your permanent duty station (which can be a ship or base), regardless of where you or your family live. File free state taxes only You are away from home if you are away from your permanent duty station substantially longer than an ordinary day's work and you need to get sleep or rest to meet the demands of your work while away from home. File free state taxes only   Examples of deductible travel expenses include: Expenses for business-related meals (generally limited to 50% of your unreimbursed cost), lodging, taxicabs, business telephone calls, tips, laundry, and dry cleaning while you are away from home on temporary duty or temporary additional duty, and Expenses of carrying out official business while on “No Cost” orders. File free state taxes only    You cannot deduct any expenses for travel away from home if the temporary assignment in a single location is realistically expected to last (and does in fact last) for more than 1 year. File free state taxes only This rule may not apply if you are participating in a federal crime investigation or prosecution. File free state taxes only For more information, see Publication 463 and the Form 2106 instructions. File free state taxes only Transportation Expenses These expenses include the ordinary and necessary costs of: Getting from one workplace to another when you are not away from home, Going to a business meeting away from your regular workplace, and Getting from your home to a temporary workplace when you have a regular place of work. File free state taxes only These expenses include the costs of transportation by air, bus, rail, taxi, and driving and maintaining your car. File free state taxes only Transportation expenses incurred while traveling away from home are included with your travel expenses, discussed earlier. File free state taxes only However, if you use your car while traveling away from home overnight, see the rules in chapter 4 of Publication 463 to figure your car expense deduction. File free state taxes only If you must go from one workplace to another while on duty (for example, as a courier or to attend meetings) without being away from home, your unreimbursed transportation expenses are deductible. File free state taxes only However, the expenses of getting to and from your regular place of work (commuting) are not deductible. File free state taxes only Temporary work location. File free state taxes only   If you have one or more regular places of business away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location. File free state taxes only   Generally, if your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary. File free state taxes only   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. File free state taxes only If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. File free state taxes only    If you do not have a regular place of business, but you ordinarily work in the metropolitan area where you live, you can deduct daily transportation expenses between your home and a temporary work site outside your metropolitan area. File free state taxes only However, you cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. File free state taxes only These are nondeductible commuting costs. File free state taxes only Armed Forces reservists. File free state taxes only   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. File free state taxes only You can deduct the expense of getting from one workplace to the other. File free state taxes only You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. File free state taxes only In this case, your transportation generally is a nondeductible commuting expense. File free state taxes only However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. File free state taxes only   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. File free state taxes only If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. File free state taxes only See Armed Forces Reservists under Adjustments to Income, earlier. File free state taxes only Uniforms You usually cannot deduct the expenses for uniform cost and upkeep. File free state taxes only Generally, you must wear uniforms when on duty and you are allowed to wear them when off duty. File free state taxes only If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of the uniforms, but you must reduce your expenses by any allowance or reimbursement you receive. File free state taxes only Unreimbursed expenses for the cost and upkeep of the following articles are deductible. File free state taxes only Military battle dress uniforms and utility uniforms that you cannot wear when off duty. File free state taxes only Articles not replacing regular clothing, including insignia of rank, corps devices, epaulets, aiguillettes, and swords. File free state taxes only Reservists' uniforms if you can wear the uniform only while performing duties as a reservist. File free state taxes only Professional Dues You can deduct unreimbursed dues paid to professional societies directly related to your military position. File free state taxes only However, you cannot deduct amounts paid to an officers' club or a noncommissioned officers' club. File free state taxes only Example. File free state taxes only Lieutenant Margaret Allen, an electrical engineer at Maxwell Air Force Base, can deduct professional dues paid to the American Society of Electrical Engineers. File free state taxes only Educational Expenses You can deduct the unreimbursed costs of qualifying work-related education. File free state taxes only This is education that meets at least one of the following two tests. File free state taxes only The education is required by your employer or the law to keep your present salary, status, or job. File free state taxes only The required education must serve a bona fide business purpose of your employer. File free state taxes only The education maintains or improves skills needed in your present work. File free state taxes only However, even if the education meets one or both of the above tests, it is not qualifying education if it: Is needed to meet the minimum educational requirements of your present trade or business, or Is part of a program of study that will qualify you for a new trade or business. File free state taxes only You can deduct the expenses for qualifying work-related education even if the education could lead to a degree. File free state taxes only Example 1. File free state taxes only Lieutenant Colonel Mason has a degree in financial management and is in charge of base finances at her post of duty. File free state taxes only She took an advanced finance course. File free state taxes only She already meets the minimum qualifications for her job. File free state taxes only By taking the course, she is improving skills in her current position. File free state taxes only The course does not qualify her for a new trade or business. File free state taxes only She can deduct educational expenses that are more than the educational allowance she received. File free state taxes only Example 2. File free state taxes only Major Williams worked in the military base legal office as a legal intern. File free state taxes only He was placed in excess leave status by his employer to attend law school. File free state taxes only He paid all his educational expenses and was not reimbursed. File free state taxes only After obtaining his law degree, he passed the state bar exam and worked as a judge advocate. File free state taxes only His educational expenses are not deductible because the law degree qualified him for a new trade or business, even though the education maintained and improved his skills in his work. File free state taxes only Travel to obtain education. File free state taxes only   If your work-related education qualifies, you can deduct the costs of travel, including meals (subject to the 50% limit), and lodging, if the main purpose of the trip is to obtain the education. File free state taxes only   You cannot deduct the cost of travel that is itself a form of education, even if it is directly related to your duties in your work or business. File free state taxes only Transportation for education. File free state taxes only   If your work-related education qualifies for a deduction, you can deduct the costs of transportation to obtain that education. File free state taxes only However, you cannot deduct the cost of services provided in kind, such as base-provided transportation to or from class. File free state taxes only Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. File free state taxes only   If you need more information on educational expenses, see Publication 970. File free state taxes only Repayments If you had to repay to your employer an amount that you included in your income in an earlier year, you may be able to deduct the repaid amount from your income for the year in which you repaid it. File free state taxes only Repayment of $3,000 or less. File free state taxes only   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. File free state taxes only If you reported it as wages, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. File free state taxes only Repayment over $3,000. File free state taxes only   If the amount you repaid was more than $3,000, see Repayments in Publication 525. File free state taxes only Credits After you have figured your taxable income and tax liability, you can determine if you are entitled to any tax credits. File free state taxes only This publication discusses the first-time homebuyer credit, child tax credit, earned income credit, and credit for excess social security tax withheld. File free state taxes only For information on other credits, see your tax form instructions. File free state taxes only First-Time Homebuyer Credit The first-time homebuyer credit is not available for homes purchased after 2011. File free state taxes only In 2011, this credit had already expired for most taxpayers, however, certain members of the uniformed services and Foreign Service and certain employees of the intelligence community could claim the credit for homes purchased in 2011. File free state taxes only If you bought the home (and claimed the credit) after 2008, you generally must repay the credit if you dispose of the home or the home stops being your main home within the 36-month period beginning on the purchase date. File free state taxes only If the home continues to be your main home for at least 36 months beginning on the purchase date, you do not have to repay any of the credit. File free state taxes only If you bought your home in 2008, you generally must repay the credit over a 15-year period in 15 equal installments. File free state taxes only For more information, see Form 5405, Repayment of the First-Time Homebuyer Credit, and its instructions. File free state taxes only Child Tax Credit The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children. File free state taxes only The additional child tax credit is a credit you may be able to take if you are not able to claim the full amount of the child tax credit. File free state taxes only The child tax credit is not the same as the credit for child and dependent care expenses. File free state taxes only See Publication 503 for information on the credit for child and dependent care expenses. File free state taxes only Qualifying Child A qualifying child for purposes of the child tax credit is a child who: Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew), Was under age 17 at the end of 2013, Did not provide over half of his or her own support for 2013, Lived with you for more than half of 2013 (see Exceptions to time lived with you, later), Is claimed as a dependent on your return, Does not file a joint return for the year (or files it only as a claim for refund), and Was a U. File free state taxes only S. File free state taxes only citizen, a U. File free state taxes only S. File free state taxes only national, or a U. File free state taxes only S. File free state taxes only resident alien. File free state taxes only If the child was adopted, see Adopted child . File free state taxes only For each qualifying child you must check the box on Form 1040 or Form 1040A, line 6c, column (4). File free state taxes only Exceptions to time lived with you. File free state taxes only   A child is considered to have lived with you for all of 2013 if the child was born or died in 2013 and your home was this child's home for the entire time he or she was alive. File free state taxes only Temporary absences by you or the child for special circumstances, such as school, vacation, business, medical care, military service, or detention in a juvenile facility, count as time the child lived with you. File free state taxes only   There are also exceptions for kidnapped children and children of divorced or separated parents. File free state taxes only For details, see Publication 501. File free state taxes only Qualifying child of more than one person. File free state taxes only   A special rule applies if your qualifying child is the qualifying child of more than one person. File free state taxes only For details, see Publication 501. File free state taxes only Adopted child. File free state taxes only   An adopted child is always treated as your own child. File free state taxes only An adopted child includes a child lawfully placed with you for legal adoption. File free state taxes only   If you are a U. File free state taxes only S. File free state taxes only citizen or U. File free state taxes only S. File free state taxes only national and your adopted child lived with you as a member of your household all year, that child meets condition (7) above to be a qualifying child for the child tax credit. File free state taxes only Amount of Credit The maximum amount you can claim for the credit is $1,000 for each qualifying child. File free state taxes only Limits on the credit. File free state taxes only   You must reduce your child tax credit if either (1) or (2), below, applies. File free state taxes only The amount on Form 1040, line 46, or Form 1040A, line 28, is less than the credit. File free state taxes only If the amount is zero, you cannot take this credit because there is no tax to reduce. File free state taxes only However, you may be able to take the additional child tax credit. File free state taxes only See Additional Child Tax Credit , later. File free state taxes only Your modified adjusted gross income (AGI) is more than the amount shown below for your filing status. File free state taxes only Married filing jointly — $110,000. File free state taxes only Single, head of household,  or qualifying widow(er) — $75,000. File free state taxes only Married filing separately — $55,000. File free state taxes only Modified AGI. File free state taxes only   For purposes of the child tax credit, your modified AGI is the amount on Form 1040, line 38, or Form 1040A, line 22, plus the following amounts that may apply to you. File free state taxes only Any amount excluded from income because of the exclusion of income from Puerto Rico. File free state taxes only Any amount on line 45 or line 50 of Form 2555, Foreign Earned Income. File free state taxes only Any amount on line 18 of Form 2555-EZ, Foreign Earned Income Exclusion. File free state taxes only Any amount on line 15 of Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa. File free state taxes only   If you do not have any of the above, your modified AGI is the same as your AGI. File free state taxes only Claiming the Credit To claim the child tax credit, you must file Form 1040 or Form 1040A. File free state taxes only For more information on the child tax credit, see the instructions for Form 1040 or Form 1040A. File free state taxes only Also attach Schedule 8812, Child Tax Credit, if required. File free state taxes only Additional Child Tax Credit This credit is for certain individuals who get less than the full amount of the child tax credit. File free state taxes only The additional child tax credit may give you a refund even if you do not owe any tax. File free state taxes only For more information, see the instructions for Form 1040 or Form 1040A, and Schedule 8812. File free state taxes only Earned Income Credit The earned income credit (EIC) is a cr
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File free state taxes only 2. File free state taxes only   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. File free state taxes only How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. File free state taxes only Deferral percentage. File free state taxes only Employee compensation. File free state taxes only Compensation of self-employed individuals. File free state taxes only Choice not to treat deferrals as compensation. File free state taxes only Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. File free state taxes only Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. File free state taxes only S. File free state taxes only Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. File free state taxes only Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. File free state taxes only A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. File free state taxes only SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). File free state taxes only A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). File free state taxes only Eligible employee. File free state taxes only   An eligible employee is an individual who meets all the following requirements. File free state taxes only Has reached age 21. File free state taxes only Has worked for you in at least 3 of the last 5 years. File free state taxes only Has received at least $550 in compensation from you in 2013. File free state taxes only This amount remains the same in 2014. File free state taxes only    You can use less restrictive participation requirements than those listed, but not more restrictive ones. File free state taxes only Excludable employees. File free state taxes only   The following employees can be excluded from coverage under a SEP. File free state taxes only Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. File free state taxes only Nonresident alien employees who have received no U. File free state taxes only S. File free state taxes only source wages, salaries, or other personal services compensation from you. File free state taxes only For more information about nonresident aliens, see Publication 519, U. File free state taxes only S. File free state taxes only Tax Guide for Aliens. File free state taxes only Setting Up a SEP There are three basic steps in setting up a SEP. File free state taxes only You must execute a formal written agreement to provide benefits to all eligible employees. File free state taxes only You must give each eligible employee certain information about the SEP. File free state taxes only A SEP-IRA must be set up by or for each eligible employee. File free state taxes only Many financial institutions will help you set up a SEP. File free state taxes only Formal written agreement. File free state taxes only   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. File free state taxes only You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. File free state taxes only However, see When not to use Form 5305-SEP, below. File free state taxes only   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. File free state taxes only Keep the original form. File free state taxes only Do not file it with the IRS. File free state taxes only Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. File free state taxes only See the Form 5305-SEP instructions for details. File free state taxes only If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. File free state taxes only When not to use Form 5305-SEP. File free state taxes only   You cannot use Form 5305-SEP if any of the following apply. File free state taxes only You currently maintain any other qualified retirement plan other than another SEP. File free state taxes only You have any eligible employees for whom IRAs have not been set up. File free state taxes only You use the services of leased employees, who are not your common-law employees (as described in chapter 1). File free state taxes only You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. File free state taxes only An affiliated service group described in section 414(m). File free state taxes only A controlled group of corporations described in section 414(b). File free state taxes only Trades or businesses under common control described in section 414(c). File free state taxes only You do not pay the cost of the SEP contributions. File free state taxes only Information you must give to employees. File free state taxes only   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. File free state taxes only An IRS model SEP is not considered adopted until you give each employee this information. File free state taxes only Setting up the employee's SEP-IRA. File free state taxes only   A SEP-IRA must be set up by or for each eligible employee. File free state taxes only SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. File free state taxes only You send SEP contributions to the financial institution where the SEP-IRA is maintained. File free state taxes only Deadline for setting up a SEP. File free state taxes only   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. File free state taxes only Credit for startup costs. File free state taxes only   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. File free state taxes only For more information, see Credit for startup costs under Reminders, earlier. File free state taxes only How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. File free state taxes only If you are self-employed, you can contribute to your own SEP-IRA. File free state taxes only Contributions must be in the form of money (cash, check, or money order). File free state taxes only You cannot contribute property. File free state taxes only However, participants may be able to transfer or roll over certain property from one retirement plan to another. File free state taxes only See Publication 590 for more information about rollovers. File free state taxes only You do not have to make contributions every year. File free state taxes only But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). File free state taxes only When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. File free state taxes only Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. File free state taxes only A SEP-IRA cannot be a Roth IRA. File free state taxes only Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. File free state taxes only Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. File free state taxes only If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. File free state taxes only Participants age 70½ or over must take required minimum distributions. File free state taxes only Time limit for making contributions. File free state taxes only   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. File free state taxes only Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. File free state taxes only Compensation generally does not include your contributions to the SEP. File free state taxes only The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. File free state taxes only Example. File free state taxes only Your employee, Mary Plant, earned $21,000 for 2013. File free state taxes only The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). File free state taxes only Contributions for yourself. File free state taxes only   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. File free state taxes only However, special rules apply when figuring your maximum deductible contribution. File free state taxes only See Deduction Limit for Self-Employed Individuals , later. File free state taxes only Annual compensation limit. File free state taxes only   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. File free state taxes only However, $51,000 is the maximum contribution for an eligible employee. File free state taxes only These limits are $260,000 and $52,000, respectively, in 2014. File free state taxes only Example. File free state taxes only Your employee, Susan Green, earned $210,000 for 2013. File free state taxes only Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. File free state taxes only More than one plan. File free state taxes only   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. File free state taxes only When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. File free state taxes only Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. File free state taxes only Tax treatment of excess contributions. File free state taxes only   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. File free state taxes only 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). File free state taxes only $51,000. File free state taxes only Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. File free state taxes only For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. File free state taxes only Reporting on Form W-2. File free state taxes only   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). File free state taxes only Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. File free state taxes only If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. File free state taxes only Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. File free state taxes only Your contributions (including any excess contributions carryover). File free state taxes only 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. File free state taxes only In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. File free state taxes only Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. File free state taxes only When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. File free state taxes only The deduction for the deductible part of your self-employment tax. File free state taxes only The deduction for contributions to your own SEP-IRA. File free state taxes only The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. File free state taxes only For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. File free state taxes only To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. File free state taxes only Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. File free state taxes only Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. File free state taxes only However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. File free state taxes only If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. File free state taxes only Excise tax. File free state taxes only   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. File free state taxes only For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. File free state taxes only When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. File free state taxes only If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. File free state taxes only If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. File free state taxes only Example. File free state taxes only You are a fiscal year taxpayer whose tax year ends June 30. File free state taxes only You maintain a SEP on a calendar year basis. File free state taxes only You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. File free state taxes only Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. File free state taxes only For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. File free state taxes only S. File free state taxes only Return of Partnership Income; and corporations deduct them on Form 1120, U. File free state taxes only S. File free state taxes only Corporation Income Tax Return, or Form 1120S, U. File free state taxes only S. File free state taxes only Income Tax Return for an S Corporation. File free state taxes only Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. File free state taxes only (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. File free state taxes only , you receive from the partnership. File free state taxes only ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. File free state taxes only Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. File free state taxes only (See the Caution, next. File free state taxes only ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. File free state taxes only This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. File free state taxes only You are not allowed to set up a SARSEP after 1996. File free state taxes only However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. File free state taxes only If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. File free state taxes only Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. File free state taxes only At least 50% of your employees eligible to participate choose to make elective deferrals. File free state taxes only You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. File free state taxes only The elective deferrals of your highly compensated employees meet the SARSEP ADP test. File free state taxes only SARSEP ADP test. File free state taxes only   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. File free state taxes only A highly compensated employee is defined in chapter 1. File free state taxes only Deferral percentage. File free state taxes only   The deferral percentage for an employee for a year is figured as follows. File free state taxes only   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. File free state taxes only Employee compensation. File free state taxes only   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. File free state taxes only Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. File free state taxes only See Compensation in chapter 1. File free state taxes only Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. File free state taxes only Compensation of self-employed individuals. File free state taxes only   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. File free state taxes only   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. File free state taxes only Choice not to treat deferrals as compensation. File free state taxes only   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. File free state taxes only Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. File free state taxes only 25% of the participant's compensation (limited to $255,000 of the participant's compensation). File free state taxes only $17,500. File free state taxes only The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. File free state taxes only Cash or deferred arrangement (section 401(k) plan). File free state taxes only Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). File free state taxes only SIMPLE IRA plan. File free state taxes only In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. File free state taxes only Catch-up contributions. File free state taxes only   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. File free state taxes only The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. File free state taxes only Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). File free state taxes only However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. File free state taxes only The catch-up contribution limit. File free state taxes only The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. File free state taxes only   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). File free state taxes only Overall limit on SEP contributions. File free state taxes only   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). File free state taxes only The same rule applies to contributions you make to your own SEP-IRA. File free state taxes only See Contribution Limits , earlier. File free state taxes only Figuring the elective deferral. File free state taxes only   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. File free state taxes only Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. File free state taxes only However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. File free state taxes only Excess deferrals. File free state taxes only   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. File free state taxes only For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. File free state taxes only The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. File free state taxes only See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. File free state taxes only Excess SEP contributions. File free state taxes only   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. File free state taxes only You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. File free state taxes only If you do not notify them within this time period, you must pay a 10% tax on the excess. File free state taxes only For an explanation of the notification requirements, see Rev. File free state taxes only Proc. File free state taxes only 91-44, 1991-2 C. File free state taxes only B. File free state taxes only 733. File free state taxes only If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. File free state taxes only Reporting on Form W-2. File free state taxes only   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. File free state taxes only You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. File free state taxes only You must also include them in box 12. File free state taxes only Mark the “Retirement plan” checkbox in box 13. File free state taxes only For more information, see the Form W-2 instructions. File free state taxes only Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. File free state taxes only Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. File free state taxes only Distributions are subject to IRA rules. File free state taxes only Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. File free state taxes only For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. File free state taxes only Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. File free state taxes only Making excess contributions. File free state taxes only Making early withdrawals. File free state taxes only Not making required withdrawals. File free state taxes only For information about these taxes, see chapter 1 in Publication 590. File free state taxes only Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. File free state taxes only Prohibited transaction. File free state taxes only   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. File free state taxes only In that case, the SEP-IRA will no longer qualify as an IRA. File free state taxes only For a list of prohibited transactions, see Prohibited Transactions in chapter 4. File free state taxes only Effects on employee. File free state taxes only   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. File free state taxes only The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. File free state taxes only Also, the employee may have to pay the additional tax for making early withdrawals. File free state taxes only Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. File free state taxes only See Setting Up a SEP , earlier. File free state taxes only Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. File free state taxes only You must also give them notice of any excess contributions. File free state taxes only For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). File free state taxes only Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. File free state taxes only For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. File free state taxes only Prev  Up  Next   Home   More Online Publications