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Filing State Returns

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Filing State Returns

Filing state returns 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. Filing state returns A pension is generally a series of payments made to you after you retire from work. Filing state returns Pension payments are made regularly and are for past services with an employer. Filing state returns An annuity is a series of payments under a contract. Filing state returns You can buy the contract alone or you can buy it with the help of your employer. Filing state returns Annuity payments are made regularly for more than one full year. Filing state returns Note. Filing state returns Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. Filing state returns Types of pensions and annuities. Filing state returns   Particular types of pensions and annuities include: Fixed period annuities. Filing state returns You receive definite amounts at regular intervals for a definite length of time. Filing state returns Annuities for a single life. Filing state returns You receive definite amounts at regular intervals for life. Filing state returns The payments end at death. Filing state returns Joint and survivor annuities. Filing state returns The first annuitant receives a definite amount at regular intervals for life. Filing state returns After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Filing state returns The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Filing state returns Variable annuities. Filing state returns You receive payments that may vary in amount for a definite length of time or for life. Filing state returns The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. Filing state returns Disability pensions. Filing state returns You are under minimum retirement age and receive payments because you retired on disability. Filing state returns 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. Filing state returns If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. Filing state returns 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. Filing state returns This plan must meet Internal Revenue Code requirements. Filing state returns It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. Filing state returns However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. Filing state returns A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Filing state returns A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. Filing state returns   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. Filing state returns A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. Filing state returns It does not qualify for most of the tax benefits of a qualified plan. Filing state returns Annuity worksheets. Filing state returns   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. Filing state returns Request for a ruling. Filing state returns   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. Filing state returns This is treated as a request for a ruling. Filing state returns See Requesting a Ruling on Taxation of Annuity near the end of this publication. Filing state returns Withholding tax and estimated tax. Filing state returns   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. Filing state returns 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. Filing state returns 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. Filing state returns 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). Filing state returns These payments are also known as amounts received as an annuity. Filing state returns 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. Filing state returns In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. Filing state returns The amount of each payment that is more than the part that represents your net cost is taxable. Filing state returns 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. Filing state returns These terms are explained in the following discussions. Filing state returns 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. Filing state returns First, find your net cost of the contract as of the annuity starting date (defined later). Filing state returns To find this amount, you must first figure the total premiums, contributions, or other amounts paid. Filing state returns This includes the amounts your employer contributed if you were required to include these amounts in income. Filing state returns It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). Filing state returns 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. Filing state returns Any additional premiums paid for double indemnity or disability benefits. Filing state returns Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). Filing state returns 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. Filing state returns Example. Filing state returns 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. Filing state returns The annuity starting date is July 1. Filing state returns This is the date you use in figuring your investment in the contract and your expected return (discussed later). Filing state returns Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. Filing state returns Foreign employment. Filing state returns   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. Filing state returns 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. Filing state returns Foreign employment contributions while a nonresident alien. Filing state returns   In determining your cost, special rules apply if you are a U. Filing state returns S. Filing state returns citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Filing state returns 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. Filing state returns Death benefit exclusion. Filing state returns   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. Filing state returns The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. Filing state returns How to adjust your total cost. Filing state returns   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Filing state returns Add it to the cost or unrecovered cost of the annuity at the annuity starting date. Filing state returns See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. Filing state returns Net cost. Filing state returns   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. Filing state returns This is the unrecovered investment in the contract as of the annuity starting date. Filing state returns If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. Filing state returns Refund feature. Filing state returns   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Filing state returns 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. Filing state returns   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. Filing state returns Zero value of refund feature. Filing state returns   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. Filing state returns   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). Filing state returns   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. Filing state returns Examples. Filing state returns The first example shows how to figure the value of the refund feature when there is only one beneficiary. Filing state returns 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. Filing state returns In both examples, the taxpayer elects to use Tables V through VIII. Filing state returns 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. Filing state returns Example 1. Filing state returns At age 65, Barbara bought for $21,053 an annuity with a refund feature. Filing state returns She will get $100 a month for life. Filing state returns 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. Filing state returns In this case, the contract cost and the total guaranteed return are the same ($21,053). Filing state returns 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. Filing state returns 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. Filing state returns 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). Filing state returns 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. Filing state returns Example 2. Filing state returns John died while still employed. Filing state returns His widow, Eleanor, age 48, receives $171 a month for the rest of her life. Filing state returns John's son, Elmer, age 9, receives $50 a month until he reaches age 18. Filing state returns John's contributions to the retirement fund totaled $7,559. Filing state returns 45, with interest on those contributions of $1,602. Filing state returns 53. Filing state returns The guarantee or total refund feature of the contract is $9,161. Filing state returns 98 ($7,559. Filing state returns 45 plus $1,602. Filing state returns 53). Filing state returns 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. Filing state returns 9 $71,614. Filing state returns 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. Filing state returns 0 5,400. Filing state returns 00   3) Total expected return   $77,014. Filing state returns 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. Filing state returns 45   2) Guaranteed amount (contributions of $7,559. Filing state returns 45 plus interest of $1,602. Filing state returns 53) $9,161. Filing state returns 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. Filing state returns 00   4) Net guaranteed amount $3,761. Filing state returns 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. Filing state returns 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. Filing state returns 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. Filing state returns See the discussion of expected return, later in this publication. Filing state returns Free IRS help. Filing state returns   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. Filing state returns Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Filing state returns The following discussions explain how to figure the expected return with each type of annuity. Filing state returns A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. Filing state returns Fixed period annuity. Filing state returns   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. Filing state returns It is the total amount you will get beginning at the annuity starting date. Filing state returns You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). Filing state returns 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. Filing state returns Single life annuity. Filing state returns   If you are to get annuity payments for the rest of your life, find your expected return as follows. Filing state returns You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. Filing state returns These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). Filing state returns   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. Filing state returns See Adjustments to Tables I, II, V, VI, and VIA following Table I. Filing state returns Example. Filing state returns Henry bought an annuity contract that will give him an annuity of $500 a month for his life. Filing state returns 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. Filing state returns 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. Filing state returns 2 multiple by +. Filing state returns 1. Filing state returns His expected return would then be $115,800 ($6,000 × 19. Filing state returns 3). Filing state returns Annuity for shorter of life or specified period. Filing state returns   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. Filing state returns To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Filing state returns 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. Filing state returns Example. Filing state returns Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. Filing state returns She was age 65 at her birthday nearest the annuity starting date. Filing state returns 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. Filing state returns 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. Filing state returns See Special Elections, later. Filing state returns Joint and survivor annuities. Filing state returns   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. Filing state returns To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. Filing state returns If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. Filing state returns See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. Filing state returns Example. Filing state returns 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. Filing state returns At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. Filing state returns The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. Filing state returns 0 Expected return $132,000 Different payments to survivor. Filing state returns   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. Filing state returns Example 1. Filing state returns 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. Filing state returns 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. Filing state returns 0 Multiple for Gerald, age 70 (from Table V)   16. Filing state returns 0 Difference: Multiple applicable to Mary   6. Filing state returns 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. Filing state returns 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. Filing state returns 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. Filing state returns Your husband died while still employed. Filing state returns 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. Filing state returns Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. Filing state returns You were 50 years old at the annuity starting date. Filing state returns Marie was 16 and Jean was 14. Filing state returns 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. Filing state returns 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. Filing state returns 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. Filing state returns 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. Filing state returns Computation Under the General Rule Note. Filing state returns Variable annuities use a different computation for determining the exclusion amounts. Filing state returns See Variable annuities later. Filing state returns Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. Filing state returns   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. Filing state returns See Death benefit exclusion , earlier. Filing state returns Step 2. Filing state returns   Figure your expected return. Filing state returns Step 3. Filing state returns   Divide Step 1 by Step 2 and round to three decimal places. Filing state returns This will give you the exclusion percentage. Filing state returns Step 4. Filing state returns   Multiply the exclusion percentage by the first regular periodic payment. Filing state returns The result is the tax-free part of each pension or annuity payment. Filing state returns   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. Filing state returns 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. Filing state returns   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. Filing state returns Step 5. Filing state returns   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. Filing state returns This will give you the tax-free part of the total payment for the year. Filing state returns    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. Filing state returns This fractional amount is multiplied by your exclusion percentage to get the tax-free part. Filing state returns Step 6. Filing state returns   Subtract the tax-free part from the total payment you received. Filing state returns The rest is the taxable part of your pension or annuity. Filing state returns Example 1. Filing state returns You purchased an annuity with an investment in the contract of $10,800. Filing state returns Under its terms, the annuity will pay you $100 a month for life. Filing state returns The multiple for your age (age 65) is 20. Filing state returns 0 as shown in Table V. Filing state returns Your expected return is $24,000 (20 × 12 × $100). Filing state returns Your cost of $10,800, divided by your expected return of $24,000, equals 45. Filing state returns 0%. Filing state returns This is the percentage you will not have to include in income. Filing state returns 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. Filing state returns If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). Filing state returns Example 2. Filing state returns Gerald bought a joint and survivor annuity. Filing state returns Gerald's investment in the contract is $62,712 and the expected return is $121,200. Filing state returns The exclusion percentage is 51. Filing state returns 7% ($62,712 ÷ $121,200). Filing state returns Gerald will receive $500 a month ($6,000 a year). Filing state returns Each year, until his net cost is recovered, $3,102 (51. Filing state returns 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. Filing state returns If Gerald dies, his wife will receive $350 a month ($4,200 a year). Filing state returns If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. Filing state returns 7%). Filing state returns Each year, until the entire net cost is recovered, his wife will receive $2,171. Filing state returns 40 (51. Filing state returns 7% of her payments received of $4,200) tax free. Filing state returns She will include $2,028. Filing state returns 60 ($4,200 − $2,171. Filing state returns 40) in her income tax return. Filing state returns Example 3. Filing state returns 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. Filing state returns Your two daughters each receive annual annuities of $1,800 until they reach age 18. Filing state returns Your husband contributed $25,576 to the plan. Filing state returns You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. Filing state returns 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. Filing state returns The exclusion percentage of 18. Filing state returns 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. Filing state returns Each full year $864 (18. Filing state returns 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. Filing state returns Each year, until age 18, $324 (18. Filing state returns 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. Filing state returns Part-year payments. Filing state returns   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. Filing state returns   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. Filing state returns 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. Filing state returns   If you received a fractional payment, follow Step 5, discussed earlier. Filing state returns This gives you the tax-free part of your total payment. Filing state returns Example. Filing state returns On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. Filing state returns The applicable multiple from Table V is 23. Filing state returns 3 (age 61). Filing state returns Her expected return is $34,950 ($125 × 12 × 23. Filing state returns 3). Filing state returns Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. Filing state returns 1%. Filing state returns Each payment received will consist of 63. Filing state returns 1% return of cost and 36. Filing state returns 9% taxable income, until her net cost of the contract is fully recovered. Filing state returns During the first year, Mary received three payments of $125, or $375, of which $236. Filing state returns 63 (63. Filing state returns 1% × $375) is a return of cost. Filing state returns The remaining $138. Filing state returns 37 is included in income. Filing state returns Increase in annuity payments. Filing state returns   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. Filing state returns All increases in the installment payments are fully taxable. Filing state returns   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. Filing state returns 72-5(a)(5) of the regulations. Filing state returns Example. Filing state returns Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. Filing state returns In figuring the taxable part, Joe elects to use Tables V through VIII. Filing state returns The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. Filing state returns His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. Filing state returns 0 × $1,764 annual payment). Filing state returns The exclusion percentage is $7,938 ÷ $35,280, or 22. Filing state returns 5%. Filing state returns During the year he received 11 monthly payments of $147, or $1,617. Filing state returns Of this amount, 22. Filing state returns 5% × $147 × 11 ($363. Filing state returns 83) is tax free as a return of cost and the balance of $1,253. Filing state returns 17 is taxable. Filing state returns Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). Filing state returns The tax-free part is still only 22. Filing state returns 5% of the annuity payments as of the annuity starting date (22. Filing state returns 5% × $147 × 12 = $396. Filing state returns 90 for a full year). Filing state returns The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. Filing state returns Variable annuities. Filing state returns   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. Filing state returns   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. Filing state returns If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. Filing state returns Example. Filing state returns Frank purchased a variable annuity at age 65. Filing state returns The total cost of the contract was $12,000. Filing state returns The annuity starting date is January 1 of the year of purchase. Filing state returns His annuity will be paid, starting July 1, in variable annual installments for his life. Filing state returns 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. Filing state returns   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. Filing state returns 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. Filing state returns The result is added to the previously figured periodic tax-free part. Filing state returns The sum is the amount of each future payment that will be tax free. Filing state returns Example. Filing state returns 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. Filing state returns Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Filing state returns 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. Filing state returns 00 Amount received in second year 500. Filing state returns 00 Difference $100. Filing state returns 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. Filing state returns 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. Filing state returns 4) $5. Filing state returns 43 Revised annual tax-free part for third and later years ($600 + $5. Filing state returns 43) $605. Filing state returns 43 Amount taxable in third year ($1,200 − $605. Filing state returns 43) $594. Filing state returns 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. Filing state returns 72–4(d)(3) of the Income Tax Regulations. Filing state returns The statement must also show the following information: The annuity starting date and your age on that date. Filing state returns The first day of the first period for which you received an annuity payment in the current year. Filing state returns Your investment in the contract as originally figured. Filing state returns 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. Filing state returns Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. Filing state returns Exclusion limited to net cost. Filing state returns   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). Filing state returns This is the unrecovered investment in the contract as of the annuity starting date. Filing state returns   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. Filing state returns This deduction is not subject to the 2%-of-adjusted-gross-income limit. Filing state returns Example 1. Filing state returns Your annuity starting date is after 1986. Filing state returns Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. Filing state returns There is no refund feature. Filing state returns Your monthly annuity payment is $833. Filing state returns 33. Filing state returns Your exclusion ratio is 12% and you exclude $100 a month. Filing state returns Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Filing state returns Thereafter, your annuity payments are fully taxable. Filing state returns Example 2. Filing state returns 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. Filing state returns The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. Filing state returns The exclusion ratio is 10. Filing state returns 8%, and your monthly exclusion is $90. Filing state returns After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). Filing state returns 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. Filing state returns Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. Filing state returns Exclusion not limited to net cost. Filing state returns   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. Filing state returns If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. Filing state returns The total exclusion may be more than your investment in the contract. Filing state returns 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. Filing state returns 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. Filing state returns These tables correspond to the old Tables I through IV. Filing state returns In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. Filing state returns If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. Filing state returns 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). Filing state returns 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. Filing state returns Contributions made both before July 1986 and after June 1986. Filing state returns   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. Filing state returns (See the examples below. Filing state returns )    Making the election. Filing state returns 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. Filing state returns 72–6 of the Income Tax Regulations. Filing state returns ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. Filing state returns   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. Filing state returns 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. Filing state returns    Advantages of election. Filing state returns 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. Filing state returns    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. Filing state returns 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. Filing state returns   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. Filing state returns Example 1. Filing state returns Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. Filing state returns Payment of the $42,000 contribution is guaranteed under a refund feature. Filing state returns Bill is 55 years old as of the annuity starting date. Filing state returns 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. Filing state returns       Pre- July 1986   Post- June 1986 A. Filing state returns 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. Filing state returns 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. Filing state returns 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. Filing state returns Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. Filing state returns 7   28. Filing state returns 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. Filing state returns Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . Filing state returns 079   . Filing state returns 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). Filing state returns The taxable part of his annuity is $22,080 ($24,000 minus $1,920). Filing state returns 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). Filing state returns Example 2. Filing state returns Al is age 62 at his nearest birthday to the annuity starting date. Filing state returns Al's wife is age 60 at her nearest birthday to the annuity starting date. Filing state returns 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. Filing state returns The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. Filing state returns Al makes the election described in Example 1 . Filing state returns For purposes of this example, assume the refund feature adjustment is zero. Filing state returns If an adjustment is required, IRS will figure the amount. Filing state returns See Requesting a Ruling on Taxation of Annuity near the end of this publication. Filing state returns       Pre-  July 1986   Post-  June 1986 A. Filing state returns 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. Filing state returns 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. Filing state returns Expected return         1) Multiple for both annuitants from Tables II and VI 25. Filing state returns 4   28. Filing state returns 8   2) Multiple for first annuitant from Tables I and V 16. Filing state returns 9   22. Filing state returns 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. Filing state returns 5   6. Filing state returns 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. Filing state returns Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . Filing state returns 209   . Filing state returns 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). Filing state returns The taxable part of his annuity is $9,216 ($12,000 − $2,784). Filing state returns 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. Filing state returns After Al's death, his widow will apply the same exclusion percentages (20. Filing state returns 9% and 2. Filing state returns 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. Filing state returns Annuity received after June 30, 1986. Filing state returns   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. Filing state returns Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. Filing state returns    Make the election by attaching the following statement to your income tax return. Filing state returns    “I elect, under section 1. Filing state returns 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. Filing state returns ”   The statement must also include your name, address, and social security number. Filing state returns   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. Filing state returns Disqualifying form of payment or settlement. Filing state returns   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. Filing state returns See regulations section 1. Filing state returns 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. Filing state returns You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. Filing state returns Worksheets for Determining Taxable Annuity Worksheets I and II. Filing state returns   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. Filing state returns 72–6(d)(6) Election. Filing state returns Worksheet I For Determining Taxable Annuity Under Regulations Section 1. Filing state returns 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. Filing state returns   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Filing state returns )             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. Filing state returns If not, the IRS will calculate the refund feature percentage. Filing state returns             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Filing state returns   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. Filing state returns   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. Filing state returns   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. Filing state returns     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. Filing state returns 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. Filing state returns   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Filing state returns )             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. Filing state returns If not, the IRS will calculate the refund feature percentage. Filing state returns             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Filing state returns   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. Filing state returns   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. Filing state returns 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. Filing state returns   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. Filing state returns   Actuarial Tables Please click here for the text description of the image. Filing state returns Actuarial Tables Please click here for the text description of the image. Filing state returns Actuarial Tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns Actuarial tables Please click here for the text description of the image. Filing state returns 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. Filing state returns If you make this request, you are asking for a ruling. Filing state returns User fee. Filing state returns   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. Filing state returns You should call the IRS for the proper fee. Filing state returns A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. Filing state returns Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. Filing state returns O. Filing state returns 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. Filing state returns When to make the request. Filing state returns   Please note that requests sent between February 1 and April 15 may experience some delay. Filing state returns We process requests in the order received, and we will reply to your request as soon as we can process it. Filing state returns 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. Filing state returns S. Filing state returns Individual Income Tax Return, to get an extension of time to file. Filing state returns Information you must furnish. Filing state returns   You must furnish the information listed below so the IRS can comply with your request. Filing state returns Failure to furnish the information will result in a delay in processing your request. Filing state returns 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. Filing state returns Copies of any documents showing distributions, annuity rates, and annuity options available to you. Filing state returns A copy of any Form 1099–R you received since your annuity began. Filing state returns A statement indicating whether you have filed your return for the year for which you are making the request. Filing state returns If you have requested an extension of time to file that return, please indicate the extension date. Filing state returns Your daytime phone number. Filing state returns Your current mailing address. Filing state returns A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. Filing state returns Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. Filing state returns A completed Tax Information Sheet (or facsimile) shown on the next page. Filing state returns Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. Filing state returns This statement must be signed by the retiree or the survivor annuitant. Filing state returns It cannot be signed by a representative. Filing state returns Tax Information Sheet Please click here for the text description of the image. Filing state returns Tax Information Sheet Please click here for the text description of the image. Filing state returns 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. Filing state returns Free help with your tax return. Filing state returns   You can get free help preparing your return nationwide from IRS-certified volunteers. Filing state returns The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Filing state returns The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Filing state returns 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. Filing state returns In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Filing state returns To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Filing state returns gov, download the IRS2Go app, or call 1-800-906-9887. Filing state returns   As part of the TCE program, AARP offers the Tax-Aide counseling program. Filing state returns To find the nearest AARP Tax-Aide site, visit AARP's website at www. Filing state returns aarp. Filing state returns org/money/taxaide or call 1-888-227-7669. Filing state returns For more information on these programs, go to IRS. Filing state returns gov and enter “VITA” in the search box. Filing state returns Internet. Filing state returns    IRS. Filing state returns gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Filing state returns Download the free IRS2Go app from the iTunes app store or from Google Play. Filing state returns 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. Filing state returns Check the status of your 2013 refund with the Where's My Refund? application on IRS. Filing state returns gov or download the IRS2Go app and select the Refund Status option. Filing state returns The IRS issues more than 9 out of 10 refunds in less than 21 days. Filing state returns 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. Filing state returns You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Filing state returns The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Filing state returns Use the Interactive Tax Assistant (ITA) to research your tax questions. Filing state returns No need to wait on the phone or stand in line. Filing state returns 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. Filing state returns When you reach the response screen, you can print the entire interview and the final response for your records. Filing state returns New subject areas are added on a regular basis. Filing state returns  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Filing state returns gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Filing state returns You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Filing state returns The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Filing state returns When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Filing state returns Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Filing state returns You can also ask the IRS to mail a return or an account transcript to you. Filing state returns Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Filing state returns gov or by calling 1-800-908-9946. Filing state returns Tax return and tax account transcripts are generally available for the current year and the past three years. Filing state returns Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Filing state returns Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Filing state returns If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Filing state returns Check the status of your amended return using Where's My Amended Return? Go to IRS. Filing state returns gov and enter Where's My Amended Return? in the search box. Filing state returns You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Filing state returns It can take up to 3 weeks from the date you mailed it to show up in our system. Filing state returns Make a payment using one of several safe and convenient electronic payment options available on IRS. Filing state returns gov. Filing state returns Select the Payment tab on the front page of IRS. Filing state returns gov for more information. Filing state returns Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Filing state returns Figure your income tax withholding with the IRS Withholding Calculator on IRS. Filing state returns gov. Filing state returns Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Filing state returns Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Filing state returns gov. Filing state returns Request an Electronic Filing PIN by going to IRS. Filing state returns gov and entering Electronic Filing PIN in the search box. Filing state returns Download forms, instructions and publications, including accessible versions for people with disabilities. Filing state returns Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Filing state returns gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Filing state returns An employee can answer questions about your tax account or help you set up a payment plan. Filing state returns Before you visit, check the Office Locator on IRS. Filing state returns gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Filing state returns If you have a special need, such as a disability, you can request an appointment. Filing state returns Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Filing state returns Apply for an Employer Identification Number (EIN). Filing state returns Go to IRS. Filing state returns gov and enter Apply for an EIN in the search box. Filing state returns Read the Internal Revenue Code, regulations, or other official guidance. Filing state returns Read Internal Revenue Bulletins. Filing state returns Sign up to receive local and national tax news and more by email. Filing state returns Just click on “subscriptions” above the search box on IRS. 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Filing state returns Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. Filing state returns Proc. Filing state returns 2013-16 Table of Contents SECTION 1. Filing state returns PURPOSE SECTION 2. Filing state returns BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. Filing state returns BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. Filing state returns FEDERAL INCOME TAX TREATMENT SECTION 5. Filing state returns INFORMATION-REPORTING OBLIGATIONS SECTION 6. Filing state returns HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. Filing state returns PENALTY RELIEF FOR 2012 SECTION 8. Filing state returns SCOPE AND EFFECTIVE DATE SECTION 9. Filing state returns DRAFTING INFORMATION SECTION 1. Filing state returns PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). Filing state returns Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). Filing state returns In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. Filing state returns Current plans call for HAMP to continue accepting new borrowers through the end of 2013. Filing state returns The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. Filing state returns SECTION 2. Filing state returns BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . Filing state returns 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Filing state returns A description of the program can be found at www. Filing state returns makinghomeaffordable. Filing state returns gov. Filing state returns . Filing state returns 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. Filing state returns These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. Filing state returns . Filing state returns 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. Filing state returns The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. Filing state returns However, as noted in section 2. Filing state returns 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. Filing state returns (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. Filing state returns ”) . Filing state returns 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. Filing state returns . Filing state returns 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. Filing state returns The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. Filing state returns (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. Filing state returns ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). Filing state returns Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. Filing state returns Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. Filing state returns . Filing state returns 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. Filing state returns (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. Filing state returns ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. Filing state returns . Filing state returns 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). Filing state returns If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. Filing state returns These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. Filing state returns The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. Filing state returns The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. Filing state returns For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. Filing state returns ” . Filing state returns 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). Filing state returns . Filing state returns 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. Filing state returns 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. Filing state returns . Filing state returns 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. Filing state returns SECTION 3. Filing state returns BACKGROUND—APPLICABLE PROVISIONS OF LAW . Filing state returns 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. Filing state returns See § 61(a)(12). Filing state returns . Filing state returns 02 Under § 1. Filing state returns 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. Filing state returns In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. Filing state returns However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. Filing state returns See § 1. Filing state returns 1001-3(c)(6). Filing state returns . Filing state returns 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. Filing state returns 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. Filing state returns If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. Filing state returns See also § 1. Filing state returns 61-12(c). Filing state returns . Filing state returns 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. Filing state returns If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. Filing state returns See, e. Filing state returns g. Filing state returns , §§ 1. Filing state returns 1272-1(c)(5) and 1. Filing state returns 1274-2(d). Filing state returns . Filing state returns 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. Filing state returns Section 108(a)(1)(E) and 108(a)(1)(B). Filing state returns (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. Filing state returns ) . Filing state returns 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. Filing state returns . Filing state returns 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. Filing state returns See §§ 108(h) and 163(h)(3)(B)(i). Filing state returns . Filing state returns 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). Filing state returns Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. Filing state returns . Filing state returns 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. Filing state returns . Filing state returns 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. Filing state returns Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. Filing state returns . Filing state returns 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. Filing state returns See § 108(h)(1). Filing state returns If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). Filing state returns See § 108(b). Filing state returns For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Filing state returns . Filing state returns 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Filing state returns See Form 982 instructions and Publication 4681. Filing state returns This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. Filing state returns . Filing state returns 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. Filing state returns See Notice 2003-18, 2003-1 C. Filing state returns B. Filing state returns 699, and Rev. Filing state returns Rul. Filing state returns 79-356, 1979-2 C. Filing state returns B. Filing state returns 28. Filing state returns However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). Filing state returns See Rev. Filing state returns Rul. Filing state returns 2005-46, 2005-2 C. Filing state returns B. Filing state returns 120, and Rev. Filing state returns Rul. Filing state returns 75-246, 1975-1 C. Filing state returns B. Filing state returns 24. Filing state returns . Filing state returns 14 Under § 451 and § 1. Filing state returns 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. Filing state returns . Filing state returns 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. Filing state returns See § 6041(a) and (d) and § 1. Filing state returns 6041-1(a)(1) and (b). Filing state returns . Filing state returns 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. Filing state returns See § 6050P(a)-(c) and §§ 1. Filing state returns 6050P-1(a) and 1. Filing state returns 6050P-2(a) and (d). Filing state returns . Filing state returns 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. Filing state returns These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. Filing state returns Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. Filing state returns ” . Filing state returns 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. Filing state returns These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. Filing state returns Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. Filing state returns SECTION 4. Filing state returns FEDERAL INCOME TAX TREATMENT . Filing state returns 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. Filing state returns See § 1. Filing state returns 1001-3. Filing state returns At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. Filing state returns See also § 61(a)(12) and § 1. Filing state returns 61-12(c). Filing state returns . Filing state returns 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. Filing state returns Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. Filing state returns Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. Filing state returns . Filing state returns 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. Filing state returns Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. Filing state returns . Filing state returns 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Filing state returns Therefore, for purposes of § 1. Filing state returns 1001-3, the date of the modification is the date of the permanent modification. Filing state returns . Filing state returns 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. Filing state returns 01 of this revenue procedure for the taxable year in which the permanent modification occurs. Filing state returns Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. Filing state returns The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. Filing state returns . Filing state returns 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. Filing state returns . Filing state returns 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. Filing state returns This is consistent with Rev. Filing state returns Rul. Filing state returns 2009-19, 2009-28 I. Filing state returns R. Filing state returns B. Filing state returns 111, which addressed the treatment of Pay-for-Performance Success Payments. Filing state returns . Filing state returns 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. Filing state returns If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. Filing state returns . Filing state returns 09 As described in section 2. Filing state returns 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. Filing state returns To the extent that the HAMP-PRA borrower is described in section 4. Filing state returns 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. Filing state returns To the extent that the HAMP-PRA borrower is described in section 4. Filing state returns 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. Filing state returns SECTION 5. Filing state returns INFORMATION-REPORTING OBLIGATIONS . Filing state returns 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. Filing state returns A copy of this form is required to be furnished to the borrower. Filing state returns . Filing state returns 02 As stated in sections 4. Filing state returns 01 and 4. Filing state returns 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. Filing state returns . Filing state returns 03 An investor is an applicable entity that is required under § 1. Filing state returns 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Filing state returns Under § 1. Filing state returns 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Filing state returns Identifiable events determine when Forms 1099-C have to be issued. Filing state returns Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. Filing state returns This rule under § 1. Filing state returns 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. Filing state returns . Filing state returns 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. Filing state returns That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). Filing state returns . Filing state returns 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Filing state returns 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. Filing state returns Under § 6041, these payments are not subject to information reporting. Filing state returns See Notice 2011-14, 2011-11 I. Filing state returns R. Filing state returns B. Filing state returns 544, 546. Filing state returns . Filing state returns 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Filing state returns 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. Filing state returns The payment is subject to the information reporting requirements of § 6041, as described in section 3. Filing state returns 15 of this revenue procedure. Filing state returns Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. Filing state returns SECTION 6. Filing state returns HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . Filing state returns 01 In general. Filing state returns The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). Filing state returns As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. Filing state returns Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. Filing state returns A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. Filing state returns 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Filing state returns Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. Filing state returns 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. Filing state returns . Filing state returns 02 HAMP-PRA borrower options. Filing state returns A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. Filing state returns 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. Filing state returns If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. Filing state returns 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. Filing state returns . Filing state returns 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. Filing state returns (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. Filing state returns (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. Filing state returns 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. Filing state returns 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. Filing state returns This section 6. Filing state returns 03(2) applies only if the change to reporting the discharge using the method described in section 6. Filing state returns 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. Filing state returns To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. Filing state returns (3) Example. Filing state returns The following example illustrates the application of section 6. Filing state returns 03(2) of this revenue procedure. Filing state returns In 2010, B’s basis in B’s principal residence was $330,000. Filing state returns In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. Filing state returns B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). Filing state returns The trial period plan effective date also fell in 2010. Filing state returns B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. Filing state returns 02(2) of this revenue procedure. Filing state returns That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. Filing state returns The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. Filing state returns For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. Filing state returns 02(1) of this revenue procedure. Filing state returns Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. Filing state returns 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). Filing state returns (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. Filing state returns 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. Filing state returns 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Filing state returns Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. Filing state returns 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Filing state returns Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. Filing state returns (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. Filing state returns 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. Filing state returns The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. Filing state returns (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. Filing state returns The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). Filing state returns The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. Filing state returns . Filing state returns 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. Filing state returns (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. Filing state returns Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. Filing state returns Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. Filing state returns If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. Filing state returns (2) A HAMP-PRA borrower who has been using the method described in section 6. Filing state returns 02(1) of this revenue procedure may change to the method described in section 6. Filing state returns 02(2) but must comply with the consistency and open-year requirements described in section 6. Filing state returns 01 of this revenue procedure. Filing state returns SECTION 7. Filing state returns PENALTY RELIEF FOR 2012 . Filing state returns 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. Filing state returns 03 through 5. Filing state returns 04 and section 8. Filing state returns 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. Filing state returns 01 through 4. Filing state returns 04 of this revenue procedure) that is required to be reported for 2012. Filing state returns (2) Not later than March 28, 2013, a statement is sent to the Service. Filing state returns It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. Filing state returns 01(1) of this revenue procedure. Filing state returns The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . Filing state returns 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. Filing state returns 06 and 8. Filing state returns 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. Filing state returns . Filing state returns 03 Section 8. Filing state returns 03 and 8. Filing state returns 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. Filing state returns SECTION 8. Filing state returns SCOPE AND EFFECTIVE DATE . Filing state returns 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. Filing state returns . Filing state returns 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. Filing state returns . Filing state returns 03 Because of the effective date in section 8. Filing state returns 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. Filing state returns 03 through 5. Filing state returns 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. Filing state returns 03 through 5. Filing state returns 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. Filing state returns . Filing state returns 04 Because of the effective date in section 8. Filing state returns 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. Filing state returns 06 of this revenue procedure. Filing state returns SECTION 9. Filing state returns DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. Filing state returns Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. Filing state returns Pflanz and Sheldon A. Filing state returns Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. Filing state returns Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). Filing state returns For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). Filing state returns Prev  Up  Next   Home   More Internal Revenue Bulletins