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File your taxes for free Publication 957 - Main Content Table of Contents 1. File your taxes for free What is Back Pay?Reporting Back Pay Back Pay Under a Statute Nonstatutory Back Pay Format for Report to the SSA Questions 2. File your taxes for free Special Wage PaymentsReporting Special Wage Payments Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments Nonqualified Deferred Compensation and Section 457 Plans Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) PlansSpecial rule for box 11 of Form W-2 (distributions and deferral in the same year). File your taxes for free 1. File your taxes for free What is Back Pay? Back pay is pay received in a tax year(s) for actual or deemed employment in an earlier tax year(s). File your taxes for free For social security coverage and benefit purposes, all back pay, whether or not under a statute, is wages if it is payment for covered employment. File your taxes for free Damages for personal injury, interest, penalties, and legal fees included with back pay awards are not wages. File your taxes for free Report all back pay. File your taxes for free However, the tax year(s) for which back pay is credited as wages for social security purposes is different if it is awarded under a statute. File your taxes for free See Back Pay Under a Statute , later, for more information. File your taxes for free Reporting Back Pay The Internal Revenue Service (IRS) and the SSA consider back pay awards to be wages. File your taxes for free However, for income tax purposes, the IRS treats all back pay as wages in the year paid. File your taxes for free Employers should use Form W-2, Wage and Tax Statement, or electronic wage reports to report back pay as wages in the year they actually pay the employee. File your taxes for free The SSA no longer accepts reports on tapes, cartridges, and diskettes. File your taxes for free Example. File your taxes for free In 2012, Terry Morris earned wages of $50,000. File your taxes for free In the same year, she received $100,000 in settlement of a back pay case against her employer that covered the periods January 2007 through December 2011. File your taxes for free Her employer properly reflected social security wages of $110,100 and Medicare wages of $150,000 on her 2012 Form W-2. File your taxes for free However, if an employer did not include back pay wages on a previously filed Form W-2, magnetic media, or electronically filed wage report, the employer should prepare a wage correction report, Form W-2c, Corrected Wage and Tax Statement, or electronically filed report, to add the back pay award to the wages previously reported. File your taxes for free Example. File your taxes for free If, in the above example, Terry Morris' employer had prepared her 2012 Form W-2 reporting social security and Medicare wages of only $50,000 each, the employer would have to correct that report. File your taxes for free A Form W-2c correcting the 2012 Form W-2 would show previously reported social security and Medicare wages of $50,000 and the correct amount of $110,100 for social security wages and $150,000 for Medicare wages. File your taxes for free SSA treatment of back pay under a statute. File your taxes for free   Under the law, the SSA credits back pay awarded under a statute to an individual's earnings record in the period(s) the wages should have been paid. File your taxes for free This is important because wages not credited to the proper year may result in lower social security benefits or failure to meet the requirements for benefits. File your taxes for free   However, back pay under statute payments will remain posted to the employee's social security earnings record in the year reported on Form W-2 (or Form W-2c) unless the employer or employee notifies the SSA (in a separate, special report) of the back pay under a statute payment. File your taxes for free Then, the SSA can allocate the statutory back pay to the appropriate periods. File your taxes for free   If a back pay award is not made under a statute, the SSA credits back pay as wages in the year paid. File your taxes for free    If employers do notify the SSA of this payment, they should prepare a special report (with the information noted below) and send it to: Social Security Administration Attn: CPS Back Pay Staff 7-B-15 SWT 1500 Woodlawn Drive Baltimore, MD 21241-0001 Be sure to send this special report to the above address because the SSA handles it separately from other reports. File your taxes for free    If you paid the back pay award in the same tax year to which it applies, report the wages on that year's Form W-2. File your taxes for free No further action is necessary. File your taxes for free Example. File your taxes for free In 2012, Judy Wilson received a salary of $30,000 and a back pay under statute award of $2,000 for the period January through June 2012. File your taxes for free Her employer properly reported wages of $32,000 for social security and Medicare on her 2012 Form W-2. File your taxes for free No further action is necessary. File your taxes for free Information the SSA needs to properly credit back pay under a statute (special report). File your taxes for free   After you complete the special report, you or the employee should send it to the SSA when or after you submit the Form W-2 (on paper or electronically) to the SSA for the year you pay the statutory back pay to the employee. File your taxes for free There is no statute of limitations on the filing of the special report to enable the SSA to allocate the wages. File your taxes for free The special report must include the following information. File your taxes for free The employer's name, address, and employer identification number (EIN). File your taxes for free A signed statement citing the federal or state statute under which the payment was made. File your taxes for free If the statute is not identified, the SSA will assume the payment was not under a statute and will not allocate to earlier period(s). File your taxes for free The name and telephone number of a person to contact. File your taxes for free The SSA may have additional questions concerning the back pay case or the individual employee's information. File your taxes for free A list of employees receiving the payment and the following information for each employee: The tax year you paid and reported the back pay. File your taxes for free The employee's social security number (SSN). File your taxes for free The employee's name (as shown on his or her social security card). File your taxes for free The amount of the back pay award excluding any amounts specifically designated otherwise, for example, damages for personal injury, interest, penalties, and legal fees. File your taxes for free The period(s) the back pay award covers (beginning and ending dates—month and year). File your taxes for free The other wages paid subject to social security and/or Medicare taxes and reported in the same year as the back pay award (if none, show zero)*. File your taxes for free Do not include the back pay award shown in that wage report. File your taxes for free If you originally submitted the report under an establishment number, show that number and the amount of money that is to remain under that establishment number. File your taxes for free The amount to allocate to each reporting period*. File your taxes for free This includes any amount you want allocated (if applicable) to the tax year of the award payment. File your taxes for free If you do not give the SSA specific amounts to allocate, the SSA does the allocation by dividing the back pay award by the number of months or years covered by the award. File your taxes for free *Note. File your taxes for free   For periods before January 1, 1978 (before January 1, 1981, for state and local government employers covered by a Section 218 agreement), show the wage amounts for each calendar quarter ending March 31, June 30, September 30, and December 31. File your taxes for free For all tax years, show and identify the social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) separately. File your taxes for free MQGE is applicable to federal employees beginning in 1983, and for certain state and local government employees beginning in 1986. File your taxes for free For tax years 1991 and later, list the social security and Medicare wages separately. File your taxes for free If you originally reported the individual's wages under an establishment or payroll record unit number, show the amount of wages to remain in the award year for that number and furnish that number to the SSA along with the EIN. File your taxes for free Back Pay Under a Statute Back pay awarded under a statute is a payment by an employer following an award, determination, or agreement approved or sanctioned by a court or government agency responsible for enforcing a federal or state statute that protects an employee's right to employment or wages. File your taxes for free Examples of pertinent statutes include: Age Discrimination in Employment Act, Americans with Disabilities Act, Equal Pay Act, Fair Labor Standards Act, National Labor Relations Act, State minimum wage laws, and State statutes that protect rights to employment and wages. File your taxes for free Payments based on laws that have a similar effect to those listed above also may qualify as payments made under a statute. File your taxes for free Back pay awards, under some of the statutes listed above, may be compensation for personal injury and not pay for employment. File your taxes for free Such awards are not wages for social security coverage purposes. File your taxes for free If a court-approved or sanctioned settlement agreement states that the agreement is not an admission of discrimination, liability, or act of wrongdoing, the statement does not change the nature of a back pay award. File your taxes for free The payments made in such a settlement may still be back pay and wages under the rules discussed here. File your taxes for free Nonstatutory Back Pay A payment for back wages negotiated between an employer and employee without an award, determination, or agreement approved or sanctioned by a court or government agency, the payment is not made under a statute. File your taxes for free Delayed wage payments and retroactive pay increases resulting from union negotiation or payments under local ordinances or regulations are back pay and are wages. File your taxes for free However, they are not payments made under a statute. File your taxes for free If you are uncertain whether the back pay award was under a qualified statute, you may need to contact your personnel department or legal counsel or the attorney who filed the suit. File your taxes for free Format for Report to the SSA Use the format shown in Table 1, later, to send the SSA the information needed to properly credit back pay under a statute. File your taxes for free In a cover letter, include: Name and address of the employer, Statute under which you paid the back pay, Name and telephone number of the employer contact, and Signature of the reporting official. File your taxes for free Under certain circumstances, back pay may be a special wage payment and excluded from wages counted under the social security earnings test. File your taxes for free If you pay back pay to an employee age 61 or older, report it to the SSA in accordance with this section. File your taxes for free Read Special Wage Payments, later, for additional reporting instructions. File your taxes for free Questions If you have questions concerning back pay under a statute, call the SSA at 1-800-772-6270. File your taxes for free Exception. File your taxes for free   If you are a state or local government employer who was covered by an agreement under Section 218 of the Social Security Act before January 1, 1987, and you paid a back pay award before January 1, 1987, which you did not report to the SSA, contact your state Social Security Administrator's office. File your taxes for free Table 1. File your taxes for free Format for Report (Under Covering Letter) to Request SSA to Allocate Back Pay Under Statute Wages Employer's EIN: xx-xxxxxxx Tax Year in Which Award Payment Was Paid: 2012 (1) SSN and Employee Name (2)1 Award Amount and Period(s) (3)2,3 Other Soc. File your taxes for free Sec. File your taxes for free /Med. File your taxes for free Wages Paid In Award Year (4)3 Allocation     Soc. File your taxes for free Sec. File your taxes for free Med. File your taxes for free /MQGE Year Soc. File your taxes for free Sec. File your taxes for free Med. File your taxes for free /MQGE xxx-xx-xxxx HELEN T. File your taxes for free SMITH $100,000 1/2009 - 12/2012 $40,000 $40,000 2009 2010 2011 2012 $20,000 25,000 27,000 28,000 $20,000 25,000 27,000 28,000 xxx-xx-xxxx SAM W. File your taxes for free EVANS 30,000 7/89-12/91 -0- -0- 1989 1990 1991   6,000 12,000 12,000 xxx-xx-xxxx ROLAND S. File your taxes for free ADAMS 15,000 7/80-12/81 -0- -0- 9/80 12/80 1981 3,500 3,500 8,000   1Exclude amounts specifically designated as damages, penalties, etc. File your taxes for free  2Exclude the amount of back pay, if any, included in that amount. File your taxes for free  3For periods before January 1, 1978 (and for state and local government (Section 218) employers before January 1, 1981), show the wage amounts by calendar quarters. File your taxes for free The social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) must be shown separately FOR ALL YEARS. File your taxes for free (Wages subject ONLY to MQGE would be shown in the Medicare/MQGE column; no wages would be shown in the Soc. File your taxes for free Sec. File your taxes for free column. File your taxes for free ) For tax years 1991 and later, the social security and Medicare wages must be listed separately. File your taxes for free Explanation of examples. File your taxes for free Helen T. File your taxes for free Smith–The back pay award, excluding interest, was $100,000 for the periods 1/2009-12/2012. File your taxes for free In 2012, this employee was also paid $40,000 in other wages. File your taxes for free (Her Form W-2 for 2012 reported $110,100 for social security and $140,000 for Medicare. File your taxes for free The SSA allocation will result in adjusted posted wages of $68,000 for social security and $68,000 for Medicare for 2012. File your taxes for free ) Sam W. File your taxes for free Evans–The back pay award was $30,000 for the periods 7/89-12/91. File your taxes for free This employee was hired in 1989 and was subject to MQGE only. File your taxes for free He was no longer employed by this governmental employer in 2012. File your taxes for free (His Form W-2 for 2012 reported $30,000 for social security and $30,000 for Medicare. File your taxes for free After the SSA allocation, he will not have any net posted wages for 2012. File your taxes for free ) Roland S. File your taxes for free Adams–The back pay award was $15,000 for the periods 7/80-12/81. File your taxes for free He was no longer employed by this state and local government (Section 218) employer in 2012. File your taxes for free (His Form W-2 for 2012 reported $15,000 for social security and $15,000 for Medicare; after the SSA allocation, he will not have any net posted wages for 2012. File your taxes for free ) If the state Social Security Administrator's office needs more information, they can contact the SSA at the following address:   Social Security Administration Office of Income Security Programs Office of Earnings and Program Integrity Policy 6401 Security Boulevard 2506 OPS Baltimore, MD 21235 2. File your taxes for free Special Wage Payments A special wage payment (SWP) is an amount paid by an employer to an employee (or former employee) for services performed in a prior year. File your taxes for free Employers should report to the SSA special wage payments made to employees and former employees who are recipients of social security retirement benefits. File your taxes for free Special wage payments made to a retired employee receiving social security or to an employee who continues to work while receiving social security benefits may reduce the benefits the individual receives if not reported to the SSA. File your taxes for free Special wage payments may include (but are not limited to): Accumulated sick and vacation pay, Back pay, Bonuses, Deferred compensation, Payments because of retirement, Sales commissions, Severance pay, and Stock options. File your taxes for free Note. File your taxes for free Payments made after retirement that are part of the normal payroll cycle should not be routinely reported as special wage payments. File your taxes for free Earnings Test. File your taxes for free   Benefits paid to a social security beneficiary under full retirement age may be reduced if the beneficiary continues to work. File your taxes for free The SSA uses the information in boxes 1, 3, and 5 of Form W-2 to determine the beneficiary's current year earnings. File your taxes for free Special wage payments, which are for services performed in a prior year, will increase the current year earnings on Form W-2, which also may result in a reduction in the beneficiary's benefits. File your taxes for free If a benefit is reduced because of a special wage payment, the beneficiary must get documentation from the employer before the SSA can restore the deducted portion. File your taxes for free Therefore, employer reports of special wage payments help prevent incorrect benefit reductions. File your taxes for free Reporting Special Wage Payments Employers must report special wage payments for income tax purposes and social security and Medicare taxes in the year received. File your taxes for free Report income, social security, and/or Medicare taxes for special wage payments on Form W-2. File your taxes for free See Nonqualified Deferred Compensation and Section 457 Plans, later, for reporting nonqualified deferred compensation plan deferrals and payments on Form W-2. File your taxes for free In addition, report to the SSA special wage payments made during the reporting year to retired employees and employees who continue to work while receiving social security benefits. File your taxes for free Submit reports after the close of the tax year. File your taxes for free To avoid delays in processing, submit reports in time to reach the SSA by April 1. File your taxes for free Use one of the following reporting methods. File your taxes for free Electronic reporting. File your taxes for free   Special wage payment files can be sent electronically by logging onto Business Services Online (BSO) via the socialsecurity. File your taxes for free gov website. File your taxes for free BSO enables organizations and authorized individuals to conduct business with and submit confidential information to the Social Security Administration. File your taxes for free You must register to use this website. File your taxes for free The web address is www. File your taxes for free socialsecurity. File your taxes for free gov/bso/bsowelcome. File your taxes for free htm. File your taxes for free   Use the specifications and record layout shown in  Table 2, later. File your taxes for free Only one file at a time may be submitted. File your taxes for free If your file is large (>10MB), or you have a slow internet connection, the transmission will be faster if the file is zipped. File your taxes for free A zipped file contains a file that has been compressed to reduce its file size. File your taxes for free WinZip and PKZIP are examples of acceptable compression packages. File your taxes for free   Electronic submissions not meeting the specifications in Table 2 will be rejected. File your taxes for free Paper listing. File your taxes for free   A paper listing can be used to report special wage payments to several employees. File your taxes for free Use the format shown in Table 3, later. File your taxes for free Submit paper listings to the local SSA office nearest your place of business. File your taxes for free Visit www. File your taxes for free socialsecurity. File your taxes for free gov/locator to find a Social Security office near you. File your taxes for free Form SSA-131. File your taxes for free   Use Form SSA-131 to report special wage payments made to an employee. File your taxes for free Also use this form to report nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in box 11 of Form W-2. File your taxes for free    This image is too large to be displayed in the current screen. File your taxes for free Please click the link to view the image. File your taxes for free Publication 957 Reporting Back Pay to the Social Security Administration Instructions for Form SSA–131   EMPLOYER INSTRUCTIONS FOR COMPLETING SPECIAL WAGE PAYMENT FORM 1. File your taxes for free Provide the EIN that was used or will be used to report the employee's wages on the Form W-2. File your taxes for free 2. File your taxes for free Enter the date the employee retired. File your taxes for free Enter “Not Retired” if the employee has not retired. File your taxes for free 3. File your taxes for free Enter the date that the employee last performed services; was not expected to return to work; and was not subject to recall to render additional services. File your taxes for free This date should be the same as or earlier than the date in item “2”. File your taxes for free Enter “Not Retired” if the employee has not retired. File your taxes for free 4. File your taxes for free Enter the wages that were paid to the employee in the tax year that were for services that were performed in years prior to the tax year or that were paid on account of retirement. File your taxes for free  Examples (not all inclusive) of payments to be included: Payments in lieu of vacation that were earned in a year prior to the tax year. File your taxes for free Accumulated sick payments which were paid in a lump sum based on “retirement” as the sole condition of payment. File your taxes for free Accumulated sick payments paid at or after the date in item 3, which were earned in a year prior to the tax year. File your taxes for free Payments “on account of retirement”–dismissal, severance or termination pay paid because of retirement. File your taxes for free Bonuses which are paid pursuant to a prior contract, agreement or promise causing the employee to expect such payments regularly; or announced to induce the employee to work more steadily, rapidly or efficiently or to remain with the employer. File your taxes for free Stock Options. File your taxes for free   Do not include in item “4” payments: For annual, sick, holiday, or vacation pay if used (absence from work) prior to the date of retirement (earlier of items “2” or “3”). File your taxes for free That were reported or will be reported under “Nonqualified Plans” on the Form W-2. File your taxes for free That were deducted from the employee's wages and paid to a deferred compensation plan (e. File your taxes for free g. File your taxes for free , 401k). File your taxes for free Employees health and dental plan benefits (non-covered/non-taxable for Social Security Wages). File your taxes for free Bonuses earned and paid in the tax year. File your taxes for free 5. File your taxes for free Check whether payments listed in item 4 will be made for years after the tax year. File your taxes for free If yes, please show the amounts and years in which these will be paid, if known. File your taxes for free 6. File your taxes for free Nonqualified deferred compensation and section 457 plans only. File your taxes for free If you were unable to report nonqualified deferred compensation or section 457 plan payments and deferrals (contributions) on Form W-2 because both payments and deferrals occurred during the year, show the amount of wages earned by the employee during the tax year. File your taxes for free Generally, the wages earned will be the compensation reported in block 1 of Form W-2 less payments from a nonqualified deferred compensation (or 457) plan, but including any amounts deferred under the plan during the tax year (See IRS Publication 957). File your taxes for free Paperwork/Privacy Act Notice: This report is authorized by regulation 20 CFR 404. File your taxes for free 702. File your taxes for free The information that you provide will be used in making a determination regarding the amount of Social Security benefits payable to the above named individual. File your taxes for free While your response is voluntary, if you do not respond we may not be able to make a correct determination regarding the amount of Social Security benefits payable to the above named individual for the year in question. File your taxes for free We may also use the information you give us when we match records by computer. File your taxes for free Matching programs compare our records with those of other Federal, State, or local government agencies. File your taxes for free Many agencies may use matching programs to find or prove that a person qualifies for benefits paid by the Federal Government. File your taxes for free The law allows us to do this even if you do not agree to it. File your taxes for free Explanations about these and other reasons why information you provide us may be used or given out are available in Social Security Offices. File your taxes for free If you want to learn more about this, contact any Social Security Office. File your taxes for free The Paperwork Reduction Act: This information collection meets the clearance requirements of 44 U. File your taxes for free S. File your taxes for free C. File your taxes for free §3507, as amended by Section 2 of the Paperwork Reduction Act of 1995. File your taxes for free You are not required to answer these questions unless we display a valid Office of Management and Budget control number. File your taxes for free We estimate that it will take you about 20 minutes to read the instructions, gather the necessary facts, and answer the questions. File your taxes for free Form SSA-131 (8-2001) EF (06-2002)   Submit Form SSA-131 to the SSA office nearest your place of business. File your taxes for free Or, the employee can submit it to the SSA office handling the claim. File your taxes for free You or the employee must submit this form before the SSA can exclude the special wage payments for purposes of the earnings test. File your taxes for free If reporting on more than one employee, complete a separate Form SSA-131 for each employee or use the paper listing format (except for reporting nonqualified and section 457 plan deferrals and payments) in Table 3. File your taxes for free Do not report payments from nonqualified deferred compensation or section 457 plans that were reported in box 11 of Form W-2. File your taxes for free Use Form SSA-131 if deferrals to and payments from nonqualified or section 457 plans occurred during the tax year. File your taxes for free Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments A nonstatutory (nonqualified) option to purchase stock which is exercised in a year after the year in which the option was earned is a special wage payment. File your taxes for free It should not count for the social security earnings test. File your taxes for free Nonstatutory (nonqualified) options exercised as special wage payments by retired employees or employees who continue to work while receiving social security benefits should be reported by employers using the above reporting methods. File your taxes for free Nonqualified Deferred Compensation and Section 457 Plans A nonqualified deferred compensation plan is a plan or arrangement established and maintained by an employer for one or more of its employees that provides for the deferral of compensation, but does not meet the requirements for a tax-qualified deferred compensation plan. File your taxes for free For social security and Medicare purposes, deferred compensation plans for employees of state and local governments (section 457 plans) are treated the same as nonqualified plans. File your taxes for free Nonqualified and section 457 plans are reported differently than other special wage payments. File your taxes for free See Reporting Amounts Deferred to Nonqualified and Section 457 Plans below for specific instructions. File your taxes for free Reporting Amounts Deferred to Nonqualified and Section 457 Plans Generally, when the related services are performed, nonqualified deferred compensation is subject to social security and Medicare tax when deferred. File your taxes for free However, if nonqualified and section 457 plans contain provisions that delay the employee's right to receive payments from the plan, a period of substantial risk of forfeiture exists. File your taxes for free The plans' deferrals, or contributions, are not subject to social security and Medicare taxes until the period of substantial risk of forfeiture ends. File your taxes for free No risk of forfeiture. File your taxes for free   If there is no risk of forfeiture, report wage amounts deferred to a nonqualified deferred compensation or section 457 plan in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. File your taxes for free Example. File your taxes for free Company X's nonqualified deferred compensation plan allows the deferral of up to $20,000 of employee salaries each year. File your taxes for free The plan has no risk of forfeiture. File your taxes for free In 2012, Employee A defers $20,000 to the plan from a total salary of $200,000. File your taxes for free Form W-2 Completion Amount Box 1 $200,000 Box 3* 110,100 Box 5 200,000 *Wage base maximum for tax year 2012 Risk of forfeiture lapses before retirement. File your taxes for free   If the substantial risk of forfeiture lapses before the employee retires, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. File your taxes for free The accumulated deferrals are reported along with any other social security and Medicare wages earned during the year. File your taxes for free   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. File your taxes for free If the employee continues working, future deferrals are social security and Medicare wages when they are earned. File your taxes for free    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. File your taxes for free Risk of forfeiture lapses at retirement. File your taxes for free   When an employee's right to a payment is contingent upon working until retirement, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, as social security and/or Medicare wages in the year of retirement. File your taxes for free Add the amount to other wages paid in that year, and enter in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. File your taxes for free   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. File your taxes for free    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. File your taxes for free Example—risk of forfeiture. File your taxes for free At the end of the risk-of-forfeiture period for Company Y's nonqualified deferred compensation plan, Employee B's accumulated deferrals, plus interest earned by the plan, are $120,000, not including B's $20,000 deferral for this year. File your taxes for free B's wages, including this year's deferred amount, are $80,000. File your taxes for free Form W-2 Completion Amount Box 1 $60,000 Box 3* 110,100 Box 5 200,000 Box 11 120,000 *Wage base maximum for tax year 2012 Reporting Payments From Nonqualified and Nongovernmental Section 457 Plans When an employee or former employee retires and begins receiving payments (distributions) from a nonqualified or nongovernmental section 457 plan, report the payments in boxes 1 and 11 of Form W-2. File your taxes for free Report payments (distributions) from a governmental section 457 plan on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. File your taxes for free Example. File your taxes for free Employee D retired from the XYZ company and began receiving social security benefits. File your taxes for free XYZ paid D a $12,000 bonus upon retirement for sales made in a prior year, and D received $25,000 in payments from XYZ's nonqualified deferred compensation plan. File your taxes for free In addition, D agreed to continue performing services for XYZ, but on a part-time basis for wages of $15,000 per year. File your taxes for free D made no deferrals to the nonqualified plan this year. File your taxes for free Form W-2 Completion Amount Box 1 $52,000 Box 3 27,000 Box 5 27,000 Box 11 25,000 Report the $12,000 bonus to the SSA using electronic reporting, a paper listing, or Form SSA-131. File your taxes for free For more information, see Reporting Special Wage Payments , earlier. File your taxes for free Reporting Payments and Deferrals in the Same Year Do not complete box 11 when payments (distributions) are made from a nonqualified plan and deferrals are reported in boxes 3 and/or 5 of Form W-2 (including current year deferrals). File your taxes for free Report to the SSA on Form SSA-131 the total amount the employee earned during the tax year. File your taxes for free Normally, the amount earned is the amount reported in box 1 of Form W-2 less payments from a nonqualified or section 457 plan, but including any amounts deferred under the plan during the tax year. File your taxes for free See Form SSA-131 and its instructions, earlier. File your taxes for free Example. File your taxes for free Employee K retired this year from Company XYZ and began receiving social security benefits. File your taxes for free During the year he earned wages of $50,000 and deferred $35,000 of the wages into the company's nonqualified deferred compensation plan. File your taxes for free K also received $75,000 in payments from the company's nonqualified plan. File your taxes for free Form W-2 Completion Amount Special Wage Payment $75,000 Wages 50,000 Minus: deferral 35,000 Total reported in Box 1 $90,000     Wages including deferral reported in  Boxes 3 and 5 $50,000     Leave Box 11 blank. File your taxes for free File Form SSA-131 -0-     Form SSA-131 Completion Amount from Box 1 of Form W-2 $90,000 Minus: payments from a nonqualified plan 75,000 Plus: amounts deferred into the plan during the year 35,000 Total wages earned for purposes of Form SSA-131 (item 6) $50,000 Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) Plans It is not necessary to show amounts deferred during the year under an NQDC plan subject to section 409A. File your taxes for free If you report section 409A deferrals, show the amount in box 12 of Form W-2 using code Y. File your taxes for free For more information, see Notice 2008-115, 2008-52 I. File your taxes for free R. File your taxes for free B. File your taxes for free 1367, available at www. File your taxes for free irs. File your taxes for free gov/irb/2008-52_IRB/ar10. File your taxes for free html. File your taxes for free Special reporting rules apply when an NQDC plan is not compliant with section 409A (when there has been a “plan failure”). File your taxes for free Income included under section 409A from an NQDC plan is reported in box 1 and box 12 of Form W-2 using code Z. File your taxes for free See Notice 2008-115. File your taxes for free The following examples use small dollar amounts for illustrative purposes. File your taxes for free However, the amount reported in box 3 of Form W-2 is always limited by the social security earnings wage base (for example, $110,100 for 2012). File your taxes for free The term “vested” in the following examples means that the amount deferred is not subject to a substantial risk of forfeiture. File your taxes for free Conversely, the term “not vested” means that the amount deferred is subject to a substantial risk of forfeiture. File your taxes for free The examples assume that the NQDC plan is in compliance with section 409A, and that amounts deferred under the plan are not includible in gross income as they are deferred. File your taxes for free For purposes of the examples, it is assumed that the regular pay of the employee is remuneration for employment and wages for employment tax purposes except to the extent the deferral of a portion of the regular pay results in a reduction in wages. File your taxes for free Example 1: Deferral that is immediately vested (no substantial risk of forfeiture) with no distributions and no vesting of prior-year deferrals. File your taxes for free For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into her employer’s NQDC plan. File your taxes for free The deferral of $20 was vested upon deferral and there was an employer match of $10 under the plan, which was also vested. File your taxes for free Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10. File your taxes for free Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 vested deferral) $180 Box 3 ($200 Regular pay plus $10 Employer match, vested) 210 Box 5 ($200 Regular pay plus $10 Employer match, vested) 210 Box 11 -0- Example 2: Deferral with delayed vesting (substantial risk of forfeiture) of employee and employer portions (no distributions and no vesting of prior-year deferrals). File your taxes for free For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. File your taxes for free The deferral of $20 was not vested upon deferral, and there was an employer match of $10 under the plan, which was also not vested. File your taxes for free Regular pay = $200; Deferral, not vested = $20; Employer match, not vested = $10. File your taxes for free Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, not vested) $180 Box 3 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 5 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 11 -0- Example 3: Deferral that is immediately vested with prior-year deferrals and investment earnings on the prior-year deferrals that are now vesting (no distributions). File your taxes for free For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. File your taxes for free The deferral of $20 was vested upon deferral. File your taxes for free During the year, $100 of prior-year deferrals and $15 of investment earnings on the $100 of prior-year deferrals became vested. File your taxes for free Regular pay = $200; Deferral, vested = $20; Vesting of prior-year deferrals = $100; Vesting of investment earnings on $100 of prior-year deferral = $15. File your taxes for free Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, vested) $180 Box 3 ($200 Regular pay plus $100 vested prior-year deferral plus $15 earnings on deferral) 315 Box 5 ($200 Regular pay plus $100 vested prior-year deferral plus $15 vested investment earnings on prior year deferral) 315 Box 11 ($100 vested prior-year deferral plus $15 earnings) 115 Example 4: No deferrals but there are distributions (no vesting of prior-year deferrals). File your taxes for free For the year, the employee’s regular pay was $100, and the employee deferred no pay into the employer’s NQDC plan. File your taxes for free There was no vesting of prior-year deferrals under the plan. File your taxes for free During the year, there were total distributions of $50 from the plan to the employee. File your taxes for free Regular pay = $100; Distribution = $50. File your taxes for free Form W-2 Completion Amount Box 1 ($100 Regular pay plus $50 Distribution) $150 Box 3 ($100 Regular pay ) 100 Box 5 ($100 Regular pay) 100 Box 11 ($50 Distribution) 50 Special rule for box 11 of Form W-2 (distributions and deferral in the same year). File your taxes for free   If, in the same year, there are NQDC distributions and there are deferrals that are reportable in boxes 3 and/or 5 (current or prior-year deferrals) of Form W-2, do not complete box 11. File your taxes for free Instead, report on Form SSA-131 the total amount the employee earned during the year. File your taxes for free * Submit the SSA-131 to the nearest SSA office or give it to the employee. File your taxes for free   *Generally, the amount earned by the employee during the tax year for purposes of item 6 of Form SSA-131 is the amount reported in box 1 of Form W-2 plus current-year deferrals that are vested (employee and employer portions) less distributions. File your taxes for free Do not consider prior-year deferrals that are vesting in the current year. File your taxes for free If there was a plan failure, the box 1 amount in this calculation should be as if there were no plan failure. File your taxes for free Example 5: Deferral that is immediately vested and there are distributions (no vesting of prior-year deferrals). File your taxes for free For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. File your taxes for free There was also an employer match of $10. File your taxes for free The deferral and employer match were vested upon deferral. File your taxes for free There was no vesting of prior-year deferrals under the plan. File your taxes for free During the year, there were total distributions of $50 from the plan to the employee. File your taxes for free Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10; Distribution = $50. File your taxes for free Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, vested) $230 Boxes 3 and 5 ($200 Regular pay plus $10 vested employer match) 210 Leave Box 11 blank. File your taxes for free File Form SSA-131 -0-     Form SSA-131 Completion Item 6 - amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $30 vested current year employee deferral and employer match) $210 Example 6: Deferral with delayed vesting and there are distributions (no vesting of prior-year deferrals). File your taxes for free For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. File your taxes for free The deferral was not vested upon deferral. File your taxes for free There was no vesting of prior-year deferrals under the plan. File your taxes for free During the year, there were total distributions of $50 from the plan to the employee. File your taxes for free Regular pay = $200; Deferral, not vested = $20; Distribution = $50. File your taxes for free Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay minus $20 deferral that is not vested) 180 Box 11 ($50 Distribution). File your taxes for free 50 Example 7: Deferral that is immediately vested and there are distributions (also vesting of prior-year deferrals and earnings on those prior-year deferrals). File your taxes for free For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. File your taxes for free The deferral was vested upon deferral. File your taxes for free There was vesting of $100 of prior-year deferrals and $15 of earnings on the $100 prior-year deferral under the plan. File your taxes for free During the year, there were total distributions of $50 from the plan to the employee. File your taxes for free Regular pay = $200; Deferral, vested = $20; Distribution = $50; Vesting of prior-year deferrals ($100) and earnings on those prior-year deferrals ($15) = $115. File your taxes for free Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 vested deferral $230 Boxes 3 and 5 ($200 Regular pay Plus $115 vested prior deferral (with vested earnings on the deferral)) 315 Leave Box 11 blank. File your taxes for free File Form SSA-131 -0-     Form SSA-131 Completion Item 6, amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $20 vested current year deferral) $200 Example 8: Deferral with delayed vesting and there are distributions (vesting of prior-year deferrals, including employer matches, and earnings on those deferrals). File your taxes for free For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. File your taxes for free The deferral was not vested upon deferral. File your taxes for free There was also vesting of prior-year deferrals and employer matches and earnings on these amounts under the plan ($115). File your taxes for free During the year, there were total distributions of $50 from the plan to the employee. File your taxes for free Regular pay = $200; Deferral, not vested = $20; Distribution = $50; Vesting of prior-year deferrals and employer match = $100 plus earnings on that $100 of $15. File your taxes for free Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay plus $115 vested prior-year deferral and prior year employer match and earning on the prior year amounts minus $20 deferral that is not vested) 295 Leave Box 11 blank. File your taxes for free File Form SSA-131 -0-     Form SSA-131 Completion Item 6 ($230 Amount from Box 1 of Form W-2 minus $50 Distribution) $180 Table 2. File your taxes for free Specifications for Electronic Reporting of Special Wage Payments Record Position  Field Size   Description Start End 1 3 3 Record Type—must include only the capital letters “SWP” 4 12 9 SSN—must be numeric and may not be all zeros 13 27 15 Last Name—all capitals and no punctuation; may have blanks on right only 28 38 11 First Name—all capitals and no punctuation; may have blanks on right only 39 39 1 Middle Initial—must be either a capital letter or blank 40 48 9 EIN—must be numeric and may not be all zeros 49 59 11 Payment—must be numeric; may not be all zeros; last two digits on right are assumed to be cents; no period or dollar sign 60 63 4 Payment Year—must be only a four-digit year 64 66 3 SSA Office Code—must be numeric and may be all zeros 67 67 1 Payment Type Code—must be the capital letter “T” 68 117 50 Filler  The record format is a fixed length of 117. File your taxes for free  The file format is ASCII. File your taxes for free  Submit only one file at a time. File your taxes for free   Table 3. File your taxes for free Sample—Paper Listing for Reporting Special Wage Payments to Several Employees Report of Special Wage PaymentsTax Year: Page of A. File your taxes for free Employer Name: EIN:   Address: Contact Name:     Phone: ( )   . File your taxes for free 1) B. File your taxes for free Employee Name: (Last) (First) (MI)   C. File your taxes for free SSN: D. File your taxes for free SWP:$ E. File your taxes for free Type: Other: 2) B. File your taxes for free Employee Name: (Last) (First) (MI)   C. File your taxes for free SSN: D. File your taxes for free SWP:$ E. File your taxes for free Type: Other: 3) B. File your taxes for free Employee Name: (Last) (First) (MI)   C. File your taxes for free SSN: D. File your taxes for free SWP:$ E. File your taxes for free Type: Other: 4) B. File your taxes for free Employee Name: (Last) (First) (MI)   C. File your taxes for free SSN: D. File your taxes for free SWP:$ E. File your taxes for free Type: Other: 5) B. File your taxes for free Employee Name: (Last) (First) (MI)   C. File your taxes for free SSN: D. File your taxes for free SWP:$ E. File your taxes for free Type: Other:     INSTRUCTIONS:   Enter tax year and page number. File your taxes for free   A. File your taxes for free Employer name, employer identification number (EIN), address, the name of a contact person, and a phone number where the contact person can be reached during normal business hours. File your taxes for free   B. File your taxes for free Employee's name. File your taxes for free   C. File your taxes for free Employee's social security number (SSN). File your taxes for free   D. File your taxes for free Total amount of special wage payments made to the employee. File your taxes for free   E. File your taxes for free Type of special wage payment from the following list: (1) Vacation Pay, (2) Sick Pay, (3) Severance Pay,  (4) Bonus, (5) Deferred Compensation, (6) Stock Options, and (7) Other—Please explain. File your taxes for free   Do not use a paper listing for nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in block 11 of Form W-2. File your taxes for free (Get Form SSA-131. File your taxes for free )                 Prev  Up  Next   Home   More Online Publications
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IRS Civil Penalties Virtual Mailbox

IRS Civil Penalties Virtual Mailbox

"Shaping the Future of Civil Penalties"

The Internal Revenue Service is committed to ensuring civil penalties are imposed in a fair, consistent and efficient manner. This includes application of penalties that are comprehensible and effective in promoting voluntary compliance.

We invite you to share your comments regarding ways to improve the Civil Penalties Program. Specifically, we are requesting your assistance in determining barriers and soliciting recommendations for an enhanced penalty strategy that achieves the following desired states:

  • Penalty Consistency –IRS applies appropriate penalties to taxpayer actions and circumstances in a fair and uniform manner
  • Penalty Comprehensibility –IRS and taxpayers demonstrate an understanding of taxpayer reporting, filing, and payment obligations as it relates to civil penalties
  • Penalty Effectiveness - IRS applies and abates penalties in a manner that positively affects future reporting, filing, and payment compliance
  • Penalty Efficiency –IRS administers penalties promptly and accurately, so not to impede timely processing of case resolution

Your recommendations will be used to address weaknesses in the current program and design a uniform approach to penalty administration.

Please provide your comments to the following questions.  Do not include any information regarding specific taxpayer cases. 

Question #1:    What are the factors that influence an effective Penalty Program?  (i.e., "What are we already doing well?")

Question #2:    What are the barriers to an effective Penalty Program?

Please submit your comments to:  sbse.civil.penalties@irs.gov .

 

Page Last Reviewed or Updated: 14-Feb-2014

The File Your Taxes For Free

File your taxes for free Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. File your taxes for free A pension is generally a series of payments made to you after you retire from work. File your taxes for free Pension payments are made regularly and are for past services with an employer. File your taxes for free An annuity is a series of payments under a contract. File your taxes for free You can buy the contract alone or you can buy it with the help of your employer. File your taxes for free Annuity payments are made regularly for more than one full year. File your taxes for free Note. File your taxes for free Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. File your taxes for free Types of pensions and annuities. File your taxes for free   Particular types of pensions and annuities include: Fixed period annuities. File your taxes for free You receive definite amounts at regular intervals for a definite length of time. File your taxes for free Annuities for a single life. File your taxes for free You receive definite amounts at regular intervals for life. File your taxes for free The payments end at death. File your taxes for free Joint and survivor annuities. File your taxes for free The first annuitant receives a definite amount at regular intervals for life. File your taxes for free After he or she dies, a second annuitant receives a definite amount at regular intervals for life. File your taxes for free The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. File your taxes for free Variable annuities. File your taxes for free You receive payments that may vary in amount for a definite length of time or for life. File your taxes for free The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. File your taxes for free Disability pensions. File your taxes for free You are under minimum retirement age and receive payments because you retired on disability. File your taxes for free If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. File your taxes for free If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. File your taxes for free A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. File your taxes for free This plan must meet Internal Revenue Code requirements. File your taxes for free It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. File your taxes for free However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. File your taxes for free A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. File your taxes for free A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. File your taxes for free   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. File your taxes for free A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. File your taxes for free It does not qualify for most of the tax benefits of a qualified plan. File your taxes for free Annuity worksheets. File your taxes for free   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. File your taxes for free Request for a ruling. File your taxes for free   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. File your taxes for free This is treated as a request for a ruling. File your taxes for free See Requesting a Ruling on Taxation of Annuity near the end of this publication. File your taxes for free Withholding tax and estimated tax. File your taxes for free   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. File your taxes for free If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. File your taxes for free Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. File your taxes for free Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). File your taxes for free These payments are also known as amounts received as an annuity. File your taxes for free If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. File your taxes for free In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. File your taxes for free The amount of each payment that is more than the part that represents your net cost is taxable. File your taxes for free Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. File your taxes for free These terms are explained in the following discussions. File your taxes for free Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. File your taxes for free First, find your net cost of the contract as of the annuity starting date (defined later). File your taxes for free To find this amount, you must first figure the total premiums, contributions, or other amounts paid. File your taxes for free This includes the amounts your employer contributed if you were required to include these amounts in income. File your taxes for free It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). File your taxes for free From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. File your taxes for free Any additional premiums paid for double indemnity or disability benefits. File your taxes for free Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). File your taxes for free The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. File your taxes for free Example. File your taxes for free On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. File your taxes for free The annuity starting date is July 1. File your taxes for free This is the date you use in figuring your investment in the contract and your expected return (discussed later). File your taxes for free Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. File your taxes for free Foreign employment. File your taxes for free   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. File your taxes for free The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. File your taxes for free Foreign employment contributions while a nonresident alien. File your taxes for free   In determining your cost, special rules apply if you are a U. File your taxes for free S. File your taxes for free citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. File your taxes for free Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. File your taxes for free Death benefit exclusion. File your taxes for free   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. File your taxes for free The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. File your taxes for free How to adjust your total cost. File your taxes for free   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. File your taxes for free Add it to the cost or unrecovered cost of the annuity at the annuity starting date. File your taxes for free See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. File your taxes for free Net cost. File your taxes for free   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. File your taxes for free This is the unrecovered investment in the contract as of the annuity starting date. File your taxes for free If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. File your taxes for free Refund feature. File your taxes for free   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. File your taxes for free Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. File your taxes for free   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. File your taxes for free Zero value of refund feature. File your taxes for free   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. File your taxes for free   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). File your taxes for free   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. File your taxes for free Examples. File your taxes for free The first example shows how to figure the value of the refund feature when there is only one beneficiary. File your taxes for free Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. File your taxes for free In both examples, the taxpayer elects to use Tables V through VIII. File your taxes for free If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. File your taxes for free Example 1. File your taxes for free At age 65, Barbara bought for $21,053 an annuity with a refund feature. File your taxes for free She will get $100 a month for life. File your taxes for free Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. File your taxes for free In this case, the contract cost and the total guaranteed return are the same ($21,053). File your taxes for free Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. File your taxes for free 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. File your taxes for free For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). File your taxes for free In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. File your taxes for free Example 2. File your taxes for free John died while still employed. File your taxes for free His widow, Eleanor, age 48, receives $171 a month for the rest of her life. File your taxes for free John's son, Elmer, age 9, receives $50 a month until he reaches age 18. File your taxes for free John's contributions to the retirement fund totaled $7,559. File your taxes for free 45, with interest on those contributions of $1,602. File your taxes for free 53. File your taxes for free The guarantee or total refund feature of the contract is $9,161. File your taxes for free 98 ($7,559. File your taxes for free 45 plus $1,602. File your taxes for free 53). File your taxes for free The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. File your taxes for free 9 $71,614. File your taxes for free 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. File your taxes for free 0 5,400. File your taxes for free 00   3) Total expected return   $77,014. File your taxes for free 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. File your taxes for free 45   2) Guaranteed amount (contributions of $7,559. File your taxes for free 45 plus interest of $1,602. File your taxes for free 53) $9,161. File your taxes for free 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. File your taxes for free 00   4) Net guaranteed amount $3,761. File your taxes for free 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. File your taxes for free 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. File your taxes for free 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. File your taxes for free See the discussion of expected return, later in this publication. File your taxes for free Free IRS help. File your taxes for free   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. File your taxes for free Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. File your taxes for free The following discussions explain how to figure the expected return with each type of annuity. File your taxes for free A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. File your taxes for free Fixed period annuity. File your taxes for free   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. File your taxes for free It is the total amount you will get beginning at the annuity starting date. File your taxes for free You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). File your taxes for free To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. File your taxes for free Single life annuity. File your taxes for free   If you are to get annuity payments for the rest of your life, find your expected return as follows. File your taxes for free You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. File your taxes for free These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). File your taxes for free   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. File your taxes for free See Adjustments to Tables I, II, V, VI, and VIA following Table I. File your taxes for free Example. File your taxes for free Henry bought an annuity contract that will give him an annuity of $500 a month for his life. File your taxes for free If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. File your taxes for free 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. File your taxes for free 2 multiple by +. File your taxes for free 1. File your taxes for free His expected return would then be $115,800 ($6,000 × 19. File your taxes for free 3). File your taxes for free Annuity for shorter of life or specified period. File your taxes for free   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. File your taxes for free To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. File your taxes for free Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. File your taxes for free Example. File your taxes for free Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. File your taxes for free She was age 65 at her birthday nearest the annuity starting date. File your taxes for free She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. File your taxes for free 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. File your taxes for free See Special Elections, later. File your taxes for free Joint and survivor annuities. File your taxes for free   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. File your taxes for free To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. File your taxes for free If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. File your taxes for free See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. File your taxes for free Example. File your taxes for free John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. File your taxes for free At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. File your taxes for free The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. File your taxes for free 0 Expected return $132,000 Different payments to survivor. File your taxes for free   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. File your taxes for free Example 1. File your taxes for free Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. File your taxes for free If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. File your taxes for free 0 Multiple for Gerald, age 70 (from Table V)   16. File your taxes for free 0 Difference: Multiple applicable to Mary   6. File your taxes for free 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. File your taxes for free 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. File your taxes for free 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. File your taxes for free Your husband died while still employed. File your taxes for free Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. File your taxes for free Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. File your taxes for free You were 50 years old at the annuity starting date. File your taxes for free Marie was 16 and Jean was 14. File your taxes for free Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. File your taxes for free 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. File your taxes for free 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. File your taxes for free 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. File your taxes for free Computation Under the General Rule Note. File your taxes for free Variable annuities use a different computation for determining the exclusion amounts. File your taxes for free See Variable annuities later. File your taxes for free Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. File your taxes for free   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. File your taxes for free See Death benefit exclusion , earlier. File your taxes for free Step 2. File your taxes for free   Figure your expected return. File your taxes for free Step 3. File your taxes for free   Divide Step 1 by Step 2 and round to three decimal places. File your taxes for free This will give you the exclusion percentage. File your taxes for free Step 4. File your taxes for free   Multiply the exclusion percentage by the first regular periodic payment. File your taxes for free The result is the tax-free part of each pension or annuity payment. File your taxes for free   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. File your taxes for free However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. File your taxes for free   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. File your taxes for free Step 5. File your taxes for free   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. File your taxes for free This will give you the tax-free part of the total payment for the year. File your taxes for free    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. File your taxes for free This fractional amount is multiplied by your exclusion percentage to get the tax-free part. File your taxes for free Step 6. File your taxes for free   Subtract the tax-free part from the total payment you received. File your taxes for free The rest is the taxable part of your pension or annuity. File your taxes for free Example 1. File your taxes for free You purchased an annuity with an investment in the contract of $10,800. File your taxes for free Under its terms, the annuity will pay you $100 a month for life. File your taxes for free The multiple for your age (age 65) is 20. File your taxes for free 0 as shown in Table V. File your taxes for free Your expected return is $24,000 (20 × 12 × $100). File your taxes for free Your cost of $10,800, divided by your expected return of $24,000, equals 45. File your taxes for free 0%. File your taxes for free This is the percentage you will not have to include in income. File your taxes for free Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. File your taxes for free If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). File your taxes for free Example 2. File your taxes for free Gerald bought a joint and survivor annuity. File your taxes for free Gerald's investment in the contract is $62,712 and the expected return is $121,200. File your taxes for free The exclusion percentage is 51. File your taxes for free 7% ($62,712 ÷ $121,200). File your taxes for free Gerald will receive $500 a month ($6,000 a year). File your taxes for free Each year, until his net cost is recovered, $3,102 (51. File your taxes for free 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. File your taxes for free If Gerald dies, his wife will receive $350 a month ($4,200 a year). File your taxes for free If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. File your taxes for free 7%). File your taxes for free Each year, until the entire net cost is recovered, his wife will receive $2,171. File your taxes for free 40 (51. File your taxes for free 7% of her payments received of $4,200) tax free. File your taxes for free She will include $2,028. File your taxes for free 60 ($4,200 − $2,171. File your taxes for free 40) in her income tax return. File your taxes for free Example 3. File your taxes for free Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. File your taxes for free Your two daughters each receive annual annuities of $1,800 until they reach age 18. File your taxes for free Your husband contributed $25,576 to the plan. File your taxes for free You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. File your taxes for free Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. File your taxes for free The exclusion percentage of 18. File your taxes for free 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. File your taxes for free Each full year $864 (18. File your taxes for free 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. File your taxes for free Each year, until age 18, $324 (18. File your taxes for free 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. File your taxes for free Part-year payments. File your taxes for free   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. File your taxes for free   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. File your taxes for free For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. File your taxes for free   If you received a fractional payment, follow Step 5, discussed earlier. File your taxes for free This gives you the tax-free part of your total payment. File your taxes for free Example. File your taxes for free On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. File your taxes for free The applicable multiple from Table V is 23. File your taxes for free 3 (age 61). File your taxes for free Her expected return is $34,950 ($125 × 12 × 23. File your taxes for free 3). File your taxes for free Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. File your taxes for free 1%. File your taxes for free Each payment received will consist of 63. File your taxes for free 1% return of cost and 36. File your taxes for free 9% taxable income, until her net cost of the contract is fully recovered. File your taxes for free During the first year, Mary received three payments of $125, or $375, of which $236. File your taxes for free 63 (63. File your taxes for free 1% × $375) is a return of cost. File your taxes for free The remaining $138. File your taxes for free 37 is included in income. File your taxes for free Increase in annuity payments. File your taxes for free   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. File your taxes for free All increases in the installment payments are fully taxable. File your taxes for free   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. File your taxes for free 72-5(a)(5) of the regulations. File your taxes for free Example. File your taxes for free Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. File your taxes for free In figuring the taxable part, Joe elects to use Tables V through VIII. File your taxes for free The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. File your taxes for free His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. File your taxes for free 0 × $1,764 annual payment). File your taxes for free The exclusion percentage is $7,938 ÷ $35,280, or 22. File your taxes for free 5%. File your taxes for free During the year he received 11 monthly payments of $147, or $1,617. File your taxes for free Of this amount, 22. File your taxes for free 5% × $147 × 11 ($363. File your taxes for free 83) is tax free as a return of cost and the balance of $1,253. File your taxes for free 17 is taxable. File your taxes for free Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). File your taxes for free The tax-free part is still only 22. File your taxes for free 5% of the annuity payments as of the annuity starting date (22. File your taxes for free 5% × $147 × 12 = $396. File your taxes for free 90 for a full year). File your taxes for free The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. File your taxes for free Variable annuities. File your taxes for free   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. File your taxes for free   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. File your taxes for free If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. File your taxes for free Example. File your taxes for free Frank purchased a variable annuity at age 65. File your taxes for free The total cost of the contract was $12,000. File your taxes for free The annuity starting date is January 1 of the year of purchase. File your taxes for free His annuity will be paid, starting July 1, in variable annual installments for his life. File your taxes for free The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. File your taxes for free   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. File your taxes for free Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. File your taxes for free The result is added to the previously figured periodic tax-free part. File your taxes for free The sum is the amount of each future payment that will be tax free. File your taxes for free Example. File your taxes for free Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. File your taxes for free Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. File your taxes for free Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. File your taxes for free 00 Amount received in second year 500. File your taxes for free 00 Difference $100. File your taxes for free 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. File your taxes for free 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. File your taxes for free 4) $5. File your taxes for free 43 Revised annual tax-free part for third and later years ($600 + $5. File your taxes for free 43) $605. File your taxes for free 43 Amount taxable in third year ($1,200 − $605. File your taxes for free 43) $594. File your taxes for free 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. File your taxes for free 72–4(d)(3) of the Income Tax Regulations. File your taxes for free The statement must also show the following information: The annuity starting date and your age on that date. File your taxes for free The first day of the first period for which you received an annuity payment in the current year. File your taxes for free Your investment in the contract as originally figured. File your taxes for free The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. File your taxes for free Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. File your taxes for free Exclusion limited to net cost. File your taxes for free   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). File your taxes for free This is the unrecovered investment in the contract as of the annuity starting date. File your taxes for free   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. File your taxes for free This deduction is not subject to the 2%-of-adjusted-gross-income limit. File your taxes for free Example 1. File your taxes for free Your annuity starting date is after 1986. File your taxes for free Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. File your taxes for free There is no refund feature. File your taxes for free Your monthly annuity payment is $833. File your taxes for free 33. File your taxes for free Your exclusion ratio is 12% and you exclude $100 a month. File your taxes for free Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. File your taxes for free Thereafter, your annuity payments are fully taxable. File your taxes for free Example 2. File your taxes for free The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. File your taxes for free The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. File your taxes for free The exclusion ratio is 10. File your taxes for free 8%, and your monthly exclusion is $90. File your taxes for free After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). File your taxes for free An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. File your taxes for free Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. File your taxes for free Exclusion not limited to net cost. File your taxes for free   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. File your taxes for free If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. File your taxes for free The total exclusion may be more than your investment in the contract. File your taxes for free How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. File your taxes for free Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. File your taxes for free These tables correspond to the old Tables I through IV. File your taxes for free In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. File your taxes for free If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. File your taxes for free However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). File your taxes for free Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. File your taxes for free Contributions made both before July 1986 and after June 1986. File your taxes for free   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. File your taxes for free (See the examples below. File your taxes for free )    Making the election. File your taxes for free Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. File your taxes for free 72–6 of the Income Tax Regulations. File your taxes for free ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. File your taxes for free   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. File your taxes for free You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. File your taxes for free    Advantages of election. File your taxes for free In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. File your taxes for free    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. File your taxes for free If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. File your taxes for free   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. File your taxes for free Example 1. File your taxes for free Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. File your taxes for free Payment of the $42,000 contribution is guaranteed under a refund feature. File your taxes for free Bill is 55 years old as of the annuity starting date. File your taxes for free For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. File your taxes for free       Pre- July 1986   Post- June 1986 A. File your taxes for free Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. File your taxes for free of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. File your taxes for free Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. File your taxes for free Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. File your taxes for free 7   28. File your taxes for free 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. File your taxes for free Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . File your taxes for free 079   . File your taxes for free 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). File your taxes for free The taxable part of his annuity is $22,080 ($24,000 minus $1,920). File your taxes for free If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). File your taxes for free Example 2. File your taxes for free Al is age 62 at his nearest birthday to the annuity starting date. File your taxes for free Al's wife is age 60 at her nearest birthday to the annuity starting date. File your taxes for free The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. File your taxes for free The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. File your taxes for free Al makes the election described in Example 1 . File your taxes for free For purposes of this example, assume the refund feature adjustment is zero. File your taxes for free If an adjustment is required, IRS will figure the amount. File your taxes for free See Requesting a Ruling on Taxation of Annuity near the end of this publication. File your taxes for free       Pre-  July 1986   Post-  June 1986 A. File your taxes for free Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. File your taxes for free Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. File your taxes for free Expected return         1) Multiple for both annuitants from Tables II and VI 25. File your taxes for free 4   28. File your taxes for free 8   2) Multiple for first annuitant from Tables I and V 16. File your taxes for free 9   22. File your taxes for free 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. File your taxes for free 5   6. File your taxes for free 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. File your taxes for free Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . File your taxes for free 209   . File your taxes for free 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). File your taxes for free The taxable part of his annuity is $9,216 ($12,000 − $2,784). File your taxes for free The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. File your taxes for free After Al's death, his widow will apply the same exclusion percentages (20. File your taxes for free 9% and 2. File your taxes for free 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. File your taxes for free Annuity received after June 30, 1986. File your taxes for free   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. File your taxes for free Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. File your taxes for free    Make the election by attaching the following statement to your income tax return. File your taxes for free    “I elect, under section 1. File your taxes for free 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. File your taxes for free ”   The statement must also include your name, address, and social security number. File your taxes for free   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. File your taxes for free Disqualifying form of payment or settlement. File your taxes for free   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. File your taxes for free See regulations section 1. File your taxes for free 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. File your taxes for free You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. File your taxes for free Worksheets for Determining Taxable Annuity Worksheets I and II. File your taxes for free   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. File your taxes for free 72–6(d)(6) Election. File your taxes for free Worksheet I For Determining Taxable Annuity Under Regulations Section 1. File your taxes for free 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. File your taxes for free   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. File your taxes for free )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. File your taxes for free If not, the IRS will calculate the refund feature percentage. File your taxes for free             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. File your taxes for free   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. File your taxes for free   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. File your taxes for free   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. File your taxes for free     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. File your taxes for free 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. File your taxes for free   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. File your taxes for free )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. File your taxes for free If not, the IRS will calculate the refund feature percentage. File your taxes for free             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. File your taxes for free   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. File your taxes for free   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. File your taxes for free Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. File your taxes for free   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. File your taxes for free   Actuarial Tables Please click here for the text description of the image. File your taxes for free Actuarial Tables Please click here for the text description of the image. File your taxes for free Actuarial Tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. File your taxes for free Actuarial tables Please click here for the text description of the image. 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File your taxes for free Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. File your taxes for free If you make this request, you are asking for a ruling. File your taxes for free User fee. File your taxes for free   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. File your taxes for free You should call the IRS for the proper fee. File your taxes for free A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. File your taxes for free Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. File your taxes for free O. File your taxes for free Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. File your taxes for free When to make the request. File your taxes for free   Please note that requests sent between February 1 and April 15 may experience some delay. File your taxes for free We process requests in the order received, and we will reply to your request as soon as we can process it. File your taxes for free If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. File your taxes for free S. File your taxes for free Individual Income Tax Return, to get an extension of time to file. File your taxes for free Information you must furnish. File your taxes for free   You must furnish the information listed below so the IRS can comply with your request. File your taxes for free Failure to furnish the information will result in a delay in processing your request. File your taxes for free Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. File your taxes for free Copies of any documents showing distributions, annuity rates, and annuity options available to you. File your taxes for free A copy of any Form 1099–R you received since your annuity began. File your taxes for free A statement indicating whether you have filed your return for the year for which you are making the request. File your taxes for free If you have requested an extension of time to file that return, please indicate the extension date. File your taxes for free Your daytime phone number. File your taxes for free Your current mailing address. File your taxes for free A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. File your taxes for free Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. File your taxes for free A completed Tax Information Sheet (or facsimile) shown on the next page. File your taxes for free Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. File your taxes for free This statement must be signed by the retiree or the survivor annuitant. File your taxes for free It cannot be signed by a representative. File your taxes for free Tax Information Sheet Please click here for the text description of the image. File your taxes for free Tax Information Sheet Please click here for the text description of the image. File your taxes for free Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. File your taxes for free Free help with your tax return. File your taxes for free   You can get free help preparing your return nationwide from IRS-certified volunteers. File your taxes for free The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. File your taxes for free The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. File your taxes for free Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. File your taxes for free In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. File your taxes for free To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. File your taxes for free gov, download the IRS2Go app, or call 1-800-906-9887. File your taxes for free   As part of the TCE program, AARP offers the Tax-Aide counseling program. File your taxes for free To find the nearest AARP Tax-Aide site, visit AARP's website at www. File your taxes for free aarp. File your taxes for free org/money/taxaide or call 1-888-227-7669. File your taxes for free For more information on these programs, go to IRS. File your taxes for free gov and enter “VITA” in the search box. File your taxes for free Internet. File your taxes for free    IRS. File your taxes for free gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. File your taxes for free Download the free IRS2Go app from the iTunes app store or from Google Play. File your taxes for free Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. File your taxes for free Check the status of your 2013 refund with the Where's My Refund? application on IRS. File your taxes for free gov or download the IRS2Go app and select the Refund Status option. File your taxes for free The IRS issues more than 9 out of 10 refunds in less than 21 days. File your taxes for free Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. File your taxes for free You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. File your taxes for free The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. File your taxes for free Use the Interactive Tax Assistant (ITA) to research your tax questions. File your taxes for free No need to wait on the phone or stand in line. File your taxes for free The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. File your taxes for free When you reach the response screen, you can print the entire interview and the final response for your records. 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File your taxes for free gov, or download the IRS2Go app. File your taxes for free Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. File your taxes for free The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. File your taxes for free Mos