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How to do your taxes 3. How to do your taxes   Section 501(c)(3) Organizations Table of Contents IntroductionChild care organizations. How to do your taxes Topics - This chapter discusses: Useful Items - You may want to see: Contributions to 501(c)(3) OrganizationsCertain annuity contracts. How to do your taxes Certain contracts held by a charitable remainder trust. How to do your taxes Excise Taxes. How to do your taxes Indoor tanning services. How to do your taxes Application for Recognition of ExemptionPolitical activity. How to do your taxes Private delivery service. How to do your taxes Amendments to organizing documents required. How to do your taxes How to show reasonable action and good faith. How to do your taxes Not acting reasonably and in good faith. How to do your taxes Prejudicing the interest of the Government. How to do your taxes Procedure for requesting extension. How to do your taxes More information. How to do your taxes Organizations Not Required To File Form 1023 Articles of OrganizationOrganizational Test Dedication and Distribution of Assets Educational Organizations and Private SchoolsEducational Organizations Private Schools Organizations Providing InsuranceCharitable Risk Pools Other Section 501(c)(3) OrganizationsCharitable Organizations Religious Organizations Scientific Organizations Literary Organizations Amateur Athletic Organizations Prevention of Cruelty to Children or Animals Private Foundations and Public CharitiesPrivate Foundations Public Charities Private Operating Foundations Lobbying ExpendituresLobbying expenditures. How to do your taxes Grass roots expenditures. How to do your taxes Lobbying nontaxable amount. How to do your taxes Grass roots nontaxable amount. How to do your taxes Organization that no longer qualifies. How to do your taxes Tax on organization. How to do your taxes Tax on managers. How to do your taxes Taxes on organizations. How to do your taxes Taxes on managers. How to do your taxes Political expenditures. How to do your taxes Correction of expenditure. How to do your taxes Introduction An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes. How to do your taxes Religious. How to do your taxes Charitable. How to do your taxes Scientific. How to do your taxes Testing for public safety. How to do your taxes Literary. How to do your taxes Educational. How to do your taxes Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment; however, see Amateur Athletic Organizations , later in this chapter). How to do your taxes The prevention of cruelty to children or animals. How to do your taxes To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. How to do your taxes A trust is a fund or foundation and will qualify. How to do your taxes However, an individual or a partnership will not qualify. How to do your taxes Examples. How to do your taxes   Qualifying organizations include: Nonprofit old-age homes, Parent-teacher associations, Charitable hospitals or other charitable organizations, Alumni associations, Schools, Chapters of the Red Cross, Boys' or Girls' Clubs, and Churches. How to do your taxes Child care organizations. How to do your taxes   The term educational purposes includes providing for care of children away from their homes if substantially all the care provided is to enable individuals (the parents) to be gainfully employed and the services are available to the general public. How to do your taxes Instrumentalities. How to do your taxes   A state or municipal instrumentality may qualify under section 501(c)(3) if it is organized as a separate entity from the governmental unit that created it and if it otherwise meets the organizational and operational tests of section 501(c)(3). How to do your taxes Examples of a qualifying instrumentality might include state schools, universities, or hospitals. How to do your taxes However, if an organization is an integral part of the local government or possesses governmental powers, it does not qualify for exemption. How to do your taxes A state or municipality itself does not qualify for exemption. How to do your taxes Topics - This chapter discusses: Contributions to 501(c)(3) organizations, Applications for recognition of exemption, Articles of Organization, Educational organizations and private schools, Organizations providing insurance, Other section 501(c)(3) organizations, Private foundations and public charities, and Lobbying expenditures. How to do your taxes Useful Items - You may want to see: Forms (and Instructions) 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code See chapter 6 for information about getting publications and forms. How to do your taxes Contributions to 501(c)(3) Organizations Contributions to domestic organizations described in this chapter, except organizations testing for public safety, are deductible as charitable contributions on the donor's federal income tax return. How to do your taxes Fundraising events. How to do your taxes   If the donor receives something of value in return for the contribution, a common occurrence with fundraising efforts, part or all of the contribution may not be deductible. How to do your taxes This may apply to fundraising activities such as charity balls, bazaars, banquets, auctions, concerts, athletic events, and solicitations for membership or contributions when merchandise or benefits are given in return for payment of a specified minimum contribution. How to do your taxes   If the donor receives or expects to receive goods or services in return for a contribution to your organization, the donor cannot deduct any part of the contribution unless the donor intends to, and does, make a payment greater than the fair market value of the goods or services. How to do your taxes If a deduction is allowed, the donor can deduct only the part of the contribution, if any, that is more than the fair market value of the goods or services received. How to do your taxes You should determine in advance the fair market value of any goods or services to be given to contributors and tell them, when you publicize the fundraising event or solicit their contributions, how much is deductible and how much is for the goods or services. How to do your taxes See Disclosure of Quid Pro Quo Contributions in chapter 2. How to do your taxes Exemption application not filed. How to do your taxes   Donors cannot deduct any charitable contribution to an organization that is required to apply for recognition of exemption but has not done so. How to do your taxes Separate fund—contributions that are deductible. How to do your taxes   An organization that is exempt from federal income tax other than as an organization described in section 501(c)(3) can, if it desires, establish a fund, separate and apart from its other funds, exclusively for religious, charitable, scientific, literary, or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. How to do your taxes   If the fund is organized and operated exclusively for these purposes, it may qualify for exemption as an organization described in section 501(c)(3), and contributions made to it will be deductible as provided by section 170. How to do your taxes A fund with these characteristics must be organized in such a manner as to prohibit the use of its funds upon dissolution, or otherwise, for the general purposes of the organization creating it. How to do your taxes Personal benefit contracts. How to do your taxes   Generally, charitable deductions will not be allowed for a transfer to, or for the use of, a section 501(c)(3) or (c)(4) organization if in connection with the transfer: The organization directly or indirectly pays, or previously paid, a premium on a personal benefit contract for the transferor, or There is an understanding or expectation that anyone will directly or indirectly pay a premium on a personal benefit contract for the transferor. How to do your taxes   A personal benefit contract with respect to the transferor is any life insurance, annuity, or endowment contract, if any direct or indirect beneficiary under the contract is the transferor, any member of the transferor's family, or any other person designated by the transferor. How to do your taxes Certain annuity contracts. How to do your taxes   If an organization incurs an obligation to pay a charitable gift annuity, and the organization purchases an annuity contract to fund the obligation, individuals receiving payments under the charitable gift annuity will not be treated as indirect beneficiaries if the organization owns all of the incidents of ownership under the contract, is entitled to all payments under the contract, and the timing and amount of the payments are substantially the same as the timing and amount of payments to each person under the obligation (as such obligation is in effect at the time of the transfer). How to do your taxes Certain contracts held by a charitable remainder trust. How to do your taxes   An individual will not be considered an indirect beneficiary under a life insurance, annuity, or endowment contract held by a charitable remainder annuity trust or a charitable remainder unitrust solely by reason of being entitled to the payment if the trust owns all of the incidents of ownership under the contract, and the trust is entitled to all payments under the contract. How to do your taxes Excise tax. How to do your taxes   If the premiums are paid in connection with a transfer for which a deduction is not allowable under the deduction denial rule, without regard to when the transfer to the charitable organization was made, an excise tax will be applied that is equal to the amount of the premiums paid by the organization on any life insurance, annuity, or endowment contract. How to do your taxes The excise tax does not apply if all of the direct and indirect beneficiaries under the contract are organizations. How to do your taxes Excise Taxes. How to do your taxes   A charitable organization liable for excise taxes must file Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. How to do your taxes Generally, the due date for filing Form 4720 occurs on the fifteenth day of the fifth month following the close of the organization's tax year. How to do your taxes Indoor tanning services. How to do your taxes   If your organization provides an indoor tanning bed service, the ACA imposed a 10% excise tax on services provided after June 30, 2010. How to do your taxes For more information, go to IRS. How to do your taxes gov and select Affordable Care Act Tax Provisions. How to do your taxes Application for Recognition of Exemption This discussion describes certain information to be provided upon application for recognition of exemption by all organizations created for any of the purposes described earlier in this chapter. How to do your taxes For example, the application must include a conformed copy of the organization's articles of incorporation, as discussed under Articles of Organization , later in this chapter. How to do your taxes See the organization headings that follow for specific information your organization may need to provide. How to do your taxes Form 1023. How to do your taxes   Your organization must file its application for recognition of exemption on Form 1023. How to do your taxes See chapter 1 and the instructions accompanying Form 1023 for the procedures to follow in applying. How to do your taxes Some organizations are not required to file Form 1023. How to do your taxes See Organizations Not Required To File Form 1023, later. How to do your taxes    Additional information to help you complete your application can be found online. How to do your taxes Go to Exemption Requirement – Section 501(c)(3) Organizations and select the link at the bottom of the Web page for step by step help with the application process. How to do your taxes See Exemption Requirements - Section 501(c)(3) Organizations. How to do your taxes   Form 1023 and accompanying statements must show that all of the following are true. How to do your taxes The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (religious, charitable, etc. How to do your taxes ) specified in the introduction to this chapter. How to do your taxes No part of the organization's net earnings will inure to the benefit of private shareholders or individuals. How to do your taxes You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. How to do your taxes The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. How to do your taxes See Political activity, next, and Lobbying Expenditures , near the end of this chapter. How to do your taxes Political activity. How to do your taxes   If any of the activities (whether or not substantial) of your organization consist of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, your organization will not qualify for tax-exempt status under section 501(c)(3). How to do your taxes Such participation or intervention includes the publishing or distributing of statements. How to do your taxes   Whether your organization is participating or intervening, directly or indirectly, in any political campaign on behalf of (or in opposition to) any candidate for public office depends upon all of the facts and circumstances of each case. How to do your taxes Certain voter education activities or public forums conducted in a nonpartisan manner may not be prohibited political activity under section 501(c)(3), while other so-called voter education activities may be prohibited. How to do your taxes Effective date of exemption. How to do your taxes   Most organizations described in this chapter that were organized after October 9, 1969, will not be treated as tax exempt unless they apply for recognition of exemption by filing Form 1023. How to do your taxes These organizations will not be treated as tax exempt for any period before they file Form 1023, unless they file the form within 27 months from the end of the month in which they were organized. How to do your taxes If the organization files the application within this 27-month period, the organization's exemption will be recognized retroactively to the date it was organized. How to do your taxes Otherwise, exemption will be recognized only from the date of receipt. How to do your taxes The date of receipt is the date of the U. How to do your taxes S. How to do your taxes postmark on the cover in which an exemption application is mailed or, if no postmark appears on the cover, the date the application is stamped as received by the IRS. How to do your taxes Private delivery service. How to do your taxes   If a private delivery service designated by the IRS, rather than the U. How to do your taxes S. How to do your taxes Postal Service, is used to deliver the application, the date of receipt is the date recorded or marked by the private delivery service. How to do your taxes The following private delivery services have been designated by the IRS. How to do your taxes DHL Express (DHL): DHL “Same Day” Service. How to do your taxes Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First. How to do your taxes United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A. How to do your taxes M. How to do your taxes , UPS Worldwide Express Plus, and UPS Worldwide Express. How to do your taxes Amendments to organizing documents required. How to do your taxes   If an organization is required to alter its activities or to make substantive amendments to its organizing document, the ruling or determination letter recognizing its exempt status will be effective as of the date the changes are made. How to do your taxes If only a nonsubstantive amendment is made, exempt status will be effective as of the date it was organized, if the application was filed within the 15-month period, or the date the application was filed. How to do your taxes Extensions of time for filing. How to do your taxes   There are two ways organizations seeking exemption can receive an extension of time for filing Form 1023. How to do your taxes Automatic 12-month extension. How to do your taxes Organizations will receive an automatic 12-month extension if they file an application for recognition of exemption with the IRS within 12 months of the original deadline. How to do your taxes To get this extension, an organization must add the following statement at the top of its application: “Filed Pursuant to Section 301. How to do your taxes 9100-2. How to do your taxes ” Discretionary extensions. How to do your taxes An organization that fails to file a Form 1023 within the extended 12-month period will be granted an extension to file if it submits evidence (including affidavits) to establish that: It acted reasonably and in good faith, and Granting a discretionary extension will not prejudice the interests of the government. How to do your taxes How to show reasonable action and good faith. How to do your taxes   An organization acted reasonably and showed good faith if at least one of the following is true. How to do your taxes The organization requests relief before its failure to file is discovered by the IRS. How to do your taxes The organization failed to file because of intervening events beyond its control. How to do your taxes The organization exercised reasonable diligence (taking into account the complexity of the return or issue and the organization's experience in these matters) but was not aware of the filing requirement. How to do your taxes The organization reasonably relied upon the written advice of the IRS. How to do your taxes The organization reasonably relied upon the advice of a qualified tax professional who failed to file or advise the organization to file Form 1023. How to do your taxes An organization cannot rely on the advice of a tax professional if it knows or should know that he or she is not competent to render advice on filing exemption applications or is not aware of all the relevant facts. How to do your taxes Not acting reasonably and in good faith. How to do your taxes   An organization has not acted reasonably and in good faith under the following circumstances. How to do your taxes It seeks to change a return position for which an accuracy-related penalty has been or could be imposed at the time the relief is requested. How to do your taxes It was informed of the requirement to file and related tax consequences, but chose not to file. How to do your taxes It uses hindsight in requesting relief. How to do your taxes The IRS will not ordinarily grant an extension if specific facts have changed since the due date that makes filing an application advantageous to an organization. How to do your taxes Prejudicing the interest of the Government. How to do your taxes   Prejudice to the interest of the Government results if granting an extension of time to file to an organization results in a lower total tax liability for the years to which the filing applies than would have been the case if the organization had filed on time. How to do your taxes Before granting an extension, the IRS can require the organization requesting it to submit a statement from an independent auditor certifying that no prejudice will result if the extension is granted. How to do your taxes The interests of the Government are ordinarily prejudiced if the tax year in which the application should have been filed (or any tax year that would have been affected had the filing been timely) are closed by the statute of limitations before relief is granted. How to do your taxes The IRS can condition a grant of relief on the organization providing the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced. How to do your taxes Procedure for requesting extension. How to do your taxes   To request a discretionary extension, an organization must submit (to the IRS address shown on Form 1023 and Notice 1382) the following. How to do your taxes A statement showing the date Form 1023 was required to have been filed and the date it was actually filed. How to do your taxes Any documents relevant to the application. How to do your taxes An affidavit describing in detail the events that led to the failure to apply and to the discovery of that failure. How to do your taxes If the organization relied on a tax professional's advice, the affidavit must describe the engagement and responsibilities of the professional and the extent to which the organization relied on him or her. How to do your taxes This affidavit must be accompanied by a dated declaration, signed by an individual who has personal knowledge of the facts and circumstances, who is authorized to act for the organization, which states, “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. How to do your taxes ” Detailed affidavits from individuals having knowledge or information about the events that led to the failure to make the application and to the discovery of that failure. How to do your taxes This includes the organization's return preparer, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer on the application. How to do your taxes The affidavits must describe the engagement and responsibilities of the individual and the advice that he or she provided. How to do your taxes These affidavits must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. How to do your taxes ” The organization must state whether the returns for the tax year in which the application should have been filed or any tax years that would have been affected by the application had it been timely made are being examined by the IRS, an appeals office, or a federal court. How to do your taxes The organization must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the organization's request for relief is pending. How to do your taxes The organization, if requested, has to submit copies of its tax returns, and copies of the returns of other affected taxpayers. How to do your taxes   A request for this relief in connection with an application for exemption does not require payment of an additional user fee. How to do your taxes Also, a request for relief under the automatic 12-month extension does not require payment of a user fee. How to do your taxes More information. How to do your taxes   For more information about these procedures, see Regulations sections 301. How to do your taxes 9100-1, 301. How to do your taxes 9100-2, 301. How to do your taxes 9100-3, Revenue Procedure 2013-4, section 6. How to do your taxes 04, 2013-1 I. How to do your taxes R. How to do your taxes B. How to do your taxes 126, and Revenue Procedure 2013-8, 2013-1 I. How to do your taxes R. How to do your taxes B. How to do your taxes 237. How to do your taxes See Revenue Procedure 2013-4 and Revenue Procedure 2013-8. How to do your taxes Notification from the IRS. How to do your taxes   Organizations filing Form 1023 and satisfying all requirements of section 501(c)(3) will be notified of their exempt status in writing. How to do your taxes Organizations Not Required To File Form 1023 Some organizations are not required to file Form 1023. How to do your taxes These include: Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men's or women's organization, religious school, mission society, or youth group. How to do your taxes Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later). How to do your taxes These organizations are exempt automatically if they meet the requirements of section 501(c)(3). How to do your taxes Filing Form 1023 to establish exemption. How to do your taxes   If the organization wants to establish its exemption with the IRS and receive a ruling or determination letter recognizing its exempt status, it should file Form 1023. How to do your taxes By establishing its exemption, potential contributors are assured by the IRS that contributions will be deductible. How to do your taxes A subordinate organization (other than a private foundation) covered by a group exemption letter does not have to submit a Form 1023 for itself. How to do your taxes Private foundations. How to do your taxes   See Private Foundations and Public Charities, later in this chapter, for more information about the additional notice required from an organization in order for it not to be presumed to be a private foundation and for the additional information required from a private foundation claiming to be an operating foundation. How to do your taxes Gross receipts test. How to do your taxes   For purposes of the gross receipts test, an organization normally does not have more than $5,000 annually in gross receipts if: During its first tax year the organization received gross receipts of $7,500 or less, During its first 2 years the organization had a total of $12,000 or less in gross receipts, and In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less. How to do your taxes   An organization with gross receipts more than the amounts in the gross receipts test, unless otherwise exempt from filing Form 1023, must file a Form 1023 within 90 days after the end of the period in which the amounts are exceeded. How to do your taxes For example, an organization's gross receipts for its first tax year were less than $7,500, but at the end of its second tax year its gross receipts for the 2-year period were more than $12,000. How to do your taxes The organization must file Form 1023 within 90 days after the end of its second tax year. How to do your taxes   If the organization had existed for at least 3 tax years and had met the gross receipts test for all prior tax years but fails to meet the requirement for the current tax year, its tax-exempt status for the prior years will not be lost even if Form 1023 is not filed within 90 days after the close of the current tax year. How to do your taxes However, the organization will not be treated as a section 501(c)(3) organization for the period beginning with the current tax year and ending with the filing of Form 1023. How to do your taxes Example. How to do your taxes   An organization is organized and operated exclusively for charitable purposes and is not a private foundation. How to do your taxes It was incorporated on January 1, 2009, and files returns on a calendar-year basis. How to do your taxes It did not file a Form 1023. How to do your taxes The organization's gross receipts during the years 2009 through 2012 were as follows: 2009 $3,600 2010 2,900 2011 400 2012 12,600   The organization's total gross receipts for 2009, 2010, and 2011 were $6,900. How to do your taxes Therefore, it did not have to file Form 1023 and is exempt for those years. How to do your taxes However, for 2010, 2011, and 2012 the total gross receipts were $15,900. How to do your taxes Therefore, the organization must file Form 1023 within 90 days after the end of its 2012 tax year. How to do your taxes If it does not file within this time period, it will not be exempt under section 501(c)(3) for the period beginning with tax year 2012 ending when the Form 1023 is received by the IRS. How to do your taxes The organization, however, will not lose its exempt status for the tax years ending before January 1, 2012. How to do your taxes   The IRS will consider applying the Commissioner's discretionary authority to extend the time for filing Form 1023. How to do your taxes See the procedures for this extension discussed earlier. How to do your taxes Articles of Organization Your organization must include a conformed copy of its articles of organization with the application for recognition of exemption. How to do your taxes This may be its trust instrument, corporate charter, articles of association, or any other written instrument by which it is created. How to do your taxes Organizational Test The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. How to do your taxes These conditions for exemption are referred to as the organizational test. How to do your taxes Section 501(c)(3) is the provision of law that grants exemption to the organizations described in this chapter. How to do your taxes Therefore, the organizational test may be met if the purposes stated in the articles of organization are limited in some way by reference to section 501(c)(3). How to do your taxes The requirement that your organization's purposes and powers must be limited by the articles of organization is not satisfied if the limit is contained only in the bylaws or other rules or regulations. How to do your taxes Moreover, the organizational test is not satisfied by statements of your organization's officers that you intend to operate only for exempt purposes. How to do your taxes Also, the test is not satisfied by the fact that your actual operations are for exempt purposes. How to do your taxes In interpreting an organization's articles, the law of the state where the organization was created is controlling. How to do your taxes If an organization contends that the terms of its articles have a different meaning under state law than their generally accepted meaning, such meaning must be established by a clear and convincing reference to relevant court decisions, opinions of the state attorney general, or other appropriate state authorities. How to do your taxes The following are examples illustrating the organizational test. How to do your taxes Example 1. How to do your taxes Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). How to do your taxes These articles appropriately limit the organization's purposes. How to do your taxes The organization meets the organizational test. How to do your taxes Example 2. How to do your taxes An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. How to do your taxes The organization will not be properly limited as to its purposes since all research is not scientific. How to do your taxes The organization does not meet the organizational test. How to do your taxes Example 3. How to do your taxes An organization's articles state that its purpose is to receive contributions and pay them over to organizations that are described in section 501(c)(3) and exempt from taxation under section 501(a). How to do your taxes The organization meets the organizational test. How to do your taxes Example 4. How to do your taxes If a stated purpose in the articles is the conduct of a school of adult education and its manner of operation is described in detail, such a purpose will be satisfactorily limited. How to do your taxes Example 5. How to do your taxes If the articles state the organization is formed for charitable purposes, without any further description, such language ordinarily will be sufficient since the term charitable has a generally accepted legal meaning. How to do your taxes On the other hand, if the purposes are stated to be charitable, philanthropic, and benevolent, the organizational requirement will not be met since the terms philanthropic and benevolent have no generally accepted legal meaning and, therefore, the stated purposes may, under the laws of the state, permit activities that are broader than those intended by the exemption law. How to do your taxes Example 6. How to do your taxes If the articles state an organization is formed to promote American ideals, or to foster the best interests of the people, or to further the common welfare and well-being of the community, without any limitation or provision restricting such purposes to accomplishment only in a charitable manner, the purposes will not be sufficiently limited. How to do your taxes Such purposes are vague and may be accomplished other than in an exempt manner. How to do your taxes Example 7. How to do your taxes A stated purpose to operate a hospital does not meet the organizational test since it is not necessarily charitable. How to do your taxes A hospital may or may not be exempt depending on the manner in which it is operated. How to do your taxes Example 8. How to do your taxes An organization that is expressly empowered by its articles to carry on social activities will not be sufficiently limited as to its power, even if its articles state that it is organized and will be operated exclusively for charitable purposes. How to do your taxes Dedication and Distribution of Assets Assets of an organization must be permanently dedicated to an exempt purpose. How to do your taxes This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the Federal Government or to a state or local government for a public purpose. How to do your taxes If the assets could be distributed to members or private individuals or for any other purpose, the organizational test is not met. How to do your taxes Dedication. How to do your taxes   To establish that your organization's assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. How to do your taxes Although reliance can be placed upon state law to establish permanent dedication of assets for exempt purposes, your organization's application probably can be processed much more rapidly if its articles of organization include a provision ensuring permanent dedication of assets for exempt purposes. How to do your taxes Distribution. How to do your taxes   Revenue Procedure 82-2, 1982-1 C. How to do your taxes B. How to do your taxes 367, identifies the states and circumstances in which the IRS will not require an express provision for the distribution of assets upon dissolution in the articles of organization. How to do your taxes The procedure also provides a sample of an acceptable dissolution provision for organizations required to have one. How to do your taxes   If a named beneficiary is to be the distributee, it must be one that would qualify and would be exempt within the meaning of section 501(c)(3) at the time the dissolution takes place. How to do your taxes Since the named beneficiary at the time of dissolution may not be qualified, may not be in existence, or may be unwilling or unable to accept the assets of the dissolving organization, a provision should be made for distribution of the assets for one or more of the purposes specified in this chapter in the event of any such contingency. How to do your taxes Sample articles of organization. How to do your taxes   See sample articles of organization in the Appendix in the back of this publication. How to do your taxes Educational Organizations and Private Schools If your organization wants to obtain recognition of exemption as an educational organization, you must submit complete information as to how your organization carries on or plans to carry on its educational activities, such as by conducting a school, by panels, discussions, lectures, forums, radio and television programs, or through various cultural media such as museums, symphony orchestras, or art exhibits. How to do your taxes In each instance, you must explain by whom and where these activities are or will be conducted and the amount of admission fees, if any. How to do your taxes You must submit a copy of the pertinent contracts, agreements, publications, programs, etc. How to do your taxes If you are organized to conduct a school, you must submit full information regarding your tuition charges, number of faculty members, number of full-time and part-time students enrolled, courses of study and degrees conferred, together with a copy of your school catalog. How to do your taxes See also Private Schools , discussed later. How to do your taxes Educational Organizations The term educational relates to: The instruction or training of individuals for the purpose of improving or developing their capabilities, or The instruction of the public on subjects useful to individuals and beneficial to the community. How to do your taxes Advocacy of a position. How to do your taxes   Advocacy of a particular position or viewpoint may be educational if there is a sufficiently full and fair exposition of pertinent facts to permit an individual or the public to form an independent opinion or conclusion. How to do your taxes The mere presentation of unsupported opinion is not educational. How to do your taxes Method not educational. How to do your taxes   The method used by an organization to develop and present its views is a factor in determining if an organization qualifies as educational within the meaning of section 501(c)(3). How to do your taxes The following factors may indicate that the method is not educational. How to do your taxes The presentation of viewpoints unsupported by facts is a significant part of the organization's communications. How to do your taxes The facts that purport to support the viewpoint are distorted. How to do your taxes The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of emotion than of objective evaluations. How to do your taxes The approach used is not aimed at developing an understanding on the part of the audience because it does not consider their background or training. How to do your taxes   Exceptional circumstances, however, may exist where an organization's advocacy may be educational even if one or more of the factors listed above are present. How to do your taxes Qualifying organizations. How to do your taxes   The following types of organizations may qualify as educational: An organization, such as a primary or secondary school, a college, or a professional or trade school, that has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled student body in attendance at a place where the educational activities are regularly carried on, An organization whose activities consist of conducting public discussion groups, forums, panels, lectures, or other similar programs, An organization that presents a course of instruction by correspondence or through the use of television or radio, A museum, zoo, planetarium, symphony orchestra, or other similar organization, A nonprofit children's day-care center, and A credit counseling organization. How to do your taxes College book stores, cafeterias, restaurants, etc. How to do your taxes   These and other on-campus organizations should submit information to show that they are controlled by and operated for the convenience of the faculty and student body or by whom they are controlled and whom they serve. How to do your taxes Alumni association. How to do your taxes   An alumni association should establish that it is organized to promote the welfare of the university with which it is affiliated, is subject to the control of the university as to its policies and destination of funds, and is operated as an integral part of the university or is otherwise organized to promote the welfare of the college or university. How to do your taxes If your association does not have these characteristics, it may still be exempt as a social club if it meets the requirements described in chapter 4, under 501(c)(7) - Social and Recreation Clubs . How to do your taxes Athletic organization. How to do your taxes   This type of organization must submit evidence that it is engaged in activities such as directing and controlling interscholastic athletic competitions, conducting tournaments, and prescribing eligibility rules for contestants. How to do your taxes If it is not so engaged, your organization may be exempt as a social club described in chapter 4. How to do your taxes Raising funds to be used for travel and other activities to interview and persuade prospective students with outstanding athletic ability to attend a particular university does not show an exempt purpose. How to do your taxes If your organization is not exempt as an educational organization, see Amateur Athletic Organizations , later in this chapter. How to do your taxes Private Schools Every private school filing an application for recognition of tax-exempt status must supply the IRS (on Schedule B, Form 1023) with the following information. How to do your taxes The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. How to do your taxes (This information also must be projected, so far as may be feasible, for the next academic year. How to do your taxes ) The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards. How to do your taxes A list of the school's incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations. How to do your taxes A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed. How to do your taxes The public school district and county in which the school is located. How to do your taxes How to determine racial composition. How to do your taxes   The racial composition of the student body, faculty, and administrative staff can be an estimate based on the best information readily available to the school, without requiring student applicants, students, faculty, or administrative staff to submit to the school information that the school otherwise does not require. How to do your taxes Nevertheless, a statement of the method by which the racial composition was determined must be supplied. How to do your taxes The identity of individual students or members of the faculty and administrative staff should not be included with this information. How to do your taxes   A school that is a state or municipal instrumentality (see Instrumentalities , near the beginning of this chapter), whether or not it qualifies for exemption under section 501(c)(3), is not considered to be a private school for purposes of the following discussion. How to do your taxes Racially Nondiscriminatory Policy To qualify as an organization exempt from federal income tax, a private school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and that it does not discriminate against applicants and students on the basis of race, color, or national or ethnic origin. How to do your taxes Also, the school must circulate information that clearly states the school's admission policies. How to do your taxes A racially nondiscriminatory policy toward students means that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administering its educational policies, admission policies, scholarship and loan programs, and athletic and other school-administered programs. How to do your taxes The IRS considers discrimination on the basis of race to include discrimination on the basis of color or national or ethnic origin. How to do your taxes The existence of a racially discriminatory policy with respect to the employment of faculty and administrative staff is indicative of a racially discriminatory policy as to students. How to do your taxes Conversely, the absence of racial discrimination in the employment of faculty and administrative staff is indicative of a racially nondiscriminatory policy as to students. How to do your taxes A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance is not discrimination on the basis of race when the purpose and effect of this policy is to promote establishing and maintaining the school's nondiscriminatory policy. How to do your taxes A school that selects students on the basis of membership in a religious denomination or unit is not discriminating if membership in the denomination or unit is open to all on a racially nondiscriminatory basis. How to do your taxes Policy statement. How to do your taxes   The school must include a statement of its racially nondiscriminatory policy in all its brochures and catalogs dealing with student admissions, programs, and scholarships. How to do your taxes Also, the school must include a reference to its racially nondiscriminatory policy in other written advertising that it uses to inform prospective students of its programs. How to do your taxes Publicity requirement. How to do your taxes   The school must make its racially nondiscriminatory policy known to all segments of the general community served by the school. How to do your taxes Selective communication of a racially nondiscriminatory policy that a school provides solely to leaders of racial groups will not be considered an effective means of communication to make the policy known to all segments of the community. How to do your taxes To satisfy this requirement, the school must use one of the following two methods. How to do your taxes Method one. How to do your taxes   The school can publish a notice of its racially nondiscriminatory policy in a newspaper of general circulation that serves all racial segments of the community. How to do your taxes Such publication must be repeated at least once annually during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. How to do your taxes When more than one community is served by a school, the school can publish the notice in those newspapers that are reasonably likely to be read by all racial segments in the communities that the school serves. How to do your taxes If this method is used, the notice must meet the following printing requirements. How to do your taxes It must appear in a section of the newspaper likely to be read by prospective students and their families. How to do your taxes It must occupy at least 3 column inches. How to do your taxes It must have its title printed in at least 12 point bold face type. How to do your taxes It must have the remaining text printed in at least 8 point type. How to do your taxes The following is an acceptable example of the notice:   NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS     The M School admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. How to do your taxes It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. How to do your taxes   Method two. How to do your taxes   The school can use the broadcast media to publicize its racially nondiscriminatory policy if this use makes the policy known to all segments of the general community the school serves. How to do your taxes If the school uses this method, it must provide documentation showing that the means by which this policy was communicated to all segments of the general community was reasonably expected to be effective. How to do your taxes In this case, appropriate documentation would include copies of the tapes or scripts used and records showing that there was an adequate number of announcements. How to do your taxes The documentation also would include proof that these announcements were made during hours when they were likely to be communicated to all segments of the general community, that they were long enough to convey the message clearly, and that they were broadcast on radio or television stations likely to be listened to by substantial numbers of members of all racial segments of the general community. How to do your taxes Announcements must be made during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. How to do your taxes Exceptions. How to do your taxes   The publicity requirements will not apply in the following situations. How to do your taxes First, if for the preceding 3 years the enrollment of a parochial or other church-related school consists of students at least 75% of whom are members of the sponsoring religious denomination or unit, the school can make known its racially nondiscriminatory policy in whatever newspapers or circulars the religious denomination or unit uses in the communities from which the students are drawn. How to do your taxes These newspapers and circulars can be distributed by a particular religious denomination or unit or by an association that represents a number of religious organizations of the same denomination. How to do your taxes If, however, the school advertises in newspapers of general circulation in the community or communities from which its students are drawn and the second exception (discussed next) does not apply to the school, then it must comply with either of the publicity requirements explained earlier. How to do your taxes Second, if a school customarily draws a substantial percentage of its students nationwide, worldwide, from a large geographic section or sections of the United States, or from local communities, and if the school follows a racially nondiscriminatory policy as to its students, the school may satisfy the publicity requirement by complying with the instructions explained earlier under Policy statement . How to do your taxes   The school can demonstrate that it follows a racially nondiscriminatory policy either by showing that it currently enrolls students of racial minority groups in meaningful numbers or, except for local community schools, when minority students are not enrolled in meaningful numbers, that its promotional activities and recruiting efforts in each geographic area were reasonably designed to inform students of all racial segments in the general communities within the area of the availability of the school. How to do your taxes The question as to whether a school demonstrates such a policy satisfactorily will be determined on the basis of the facts and circumstances of each case. How to do your taxes   The IRS recognizes that the failure by a school drawing its students from local communities to enroll racial minority group students may not necessarily indicate the absence of a racially nondiscriminatory policy when there are relatively few or no such students in these communities. How to do your taxes Actual enrollment is, however, a meaningful indication of a racially nondiscriminatory policy in a community in which a public school or schools became subject to a desegregation order of a federal court or are otherwise expressly obligated to implement a desegregation plan under the terms of any written contract or other commitment to which any federal agency was a party. How to do your taxes   The IRS encourages schools to satisfy the publicity requirement by using either of the methods described earlier, even though a school considers itself to be within one of the Exceptions. How to do your taxes The IRS believes that these publicity requirements are the most effective methods to make known a school's racially nondiscriminatory policy. How to do your taxes In this regard, it is each school's responsibility to determine whether either of the exceptions applies. How to do your taxes Such responsibility will prepare the school, if it is audited by the IRS, to demonstrate that the failure to publish its racially nondiscriminatory policy in accordance with either one of the publicity requirements was justified by one of the exceptions. How to do your taxes Also, a school must be prepared to demonstrate that it has publicly disavowed or repudiated any statements purported to have been made on its behalf (after November 6, 1975) that are contrary to its publicity of a racially nondiscriminatory policy as to students, to the extent that the school or its principal official was aware of these statements. How to do your taxes Facilities and programs. How to do your taxes   A school must be able to show that all of its programs and facilities are operated in a racially nondiscriminatory manner. How to do your taxes Scholarship and loan programs. How to do your taxes   As a general rule, all scholarship or other comparable benefits obtainable at the school must be offered on a racially nondiscriminatory basis. How to do your taxes This must be known throughout the general community being served by the school and should be referred to in its publicity. How to do your taxes Financial assistance programs, as well as scholarships and loans made under financial assistance programs, that favor members of one or more racial minority groups and that do not significantly detract from or are designed to promote a school's racially nondiscriminatory policy will not adversely affect the school's exempt status. How to do your taxes Certification. How to do your taxes   An individual authorized to take official action on behalf of a school that claims to be racially nondiscriminatory as to students must certify annually, under penalties of perjury, on Schedule E (Form 990 or 990-EZ) or Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax, whichever applies, that to the best of his or her knowledge and belief the school has satisfied all requirements that apply, as previously explained. How to do your taxes   Failure to comply with the guidelines ordinarily will result in the proposed revocation of the exempt status of a school. How to do your taxes Recordkeeping requirements. How to do your taxes With certain exceptions, given later, each exempt private school must maintain the following records for a minimum period of 3 years, beginning with the year after the year of compilation or acquisition. How to do your taxes Records indicating the racial composition of the student body, faculty, and administrative staff for each academic year. How to do your taxes Records sufficient to document that scholarship and other financial assistance is awarded on a racially nondiscriminatory basis. How to do your taxes Copies of all materials used by or on behalf of the school to solicit contributions. How to do your taxes Copies of all brochures, catalogs, and advertising dealing with student admissions, programs, and scholarships. How to do your taxes (Schools advertising nationally or in a large geographic segment or segments of the United States need only maintain a record sufficient to indicate when and in what publications their advertisements were placed. How to do your taxes ) The racial composition of the student body, faculty, and administrative staff can be determined in the same manner as that described at the beginning of this section. How to do your taxes However, a school cannot discontinue maintaining a system of records that reflect the racial composition of its students, faculty, and administrative staff used on November 6, 1975, unless it substitutes a different system that compiles substantially the same information, without advance approval of the IRS. How to do your taxes The IRS does not require that a school release any personally identifiable records or personal information except in accordance with the requirements of the Family Educational Rights and Privacy Act of 1974. How to do your taxes Similarly, the IRS does not require a school to keep records prohibited under state or federal law. How to do your taxes Exceptions. How to do your taxes   The school does not have to independently maintain these records for IRS use if both of the following are true. How to do your taxes Substantially the same information has been included in a report or reports filed with an agency or agencies of federal, state, or local governments, and this information is current within 1 year. How to do your taxes The school maintains copies of these reports from which this information is readily obtainable. How to do your taxes If these reports do not include all of the information required, as discussed earlier, records providing such remaining information must be maintained by the school for IRS use. How to do your taxes Failure to maintain records. How to do your taxes   Failure to maintain or to produce the required records and information, upon proper request, will create a presumption that the organization has failed to comply with these guidelines. How to do your taxes Organizations Providing Insurance An organization described in sections 501(c)(3) or 501(c)(4) may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. How to do your taxes However, this rule does not apply to state-sponsored organizations described in sections 501(c)(26) or 501(c)(27), which are discussed in chapter 4, or to charitable risk pools, discussed next. How to do your taxes Charitable Risk Pools A charitable risk pool is treated as organized and operated exclusively for charitable purposes if it: Is organized and operated only to pool insurable risks of its members (not including risks related to medical malpractice) and to provide information to its members about loss control and risk management, Consists only of members that are section 501(c)(3) organizations exempt from tax under section 501(a), Is organized under state law authorizing this type of risk pooling, Is exempt from state income tax (or will be after qualifying as a section 501(c)(3) organization), Has obtained at least $1,000,000 in startup capital from nonmember charitable organizations, Is controlled by a board of directors elected by its members, and Is organized under documents requiring that: Each member be a section 501(c)(3) organization exempt from tax under section 501(a), Each member that receives a final determination that it no longer qualifies under section 501(c)(3) notify the pool immediately, and Each insurance policy issued by the pool provide that it will not cover events occurring after a final determination described in (b). How to do your taxes Other Section 501(c)(3) Organizations In addition to the information required for all organizations, as described earlier, you should include any other information described in this section. How to do your taxes Charitable Organizations If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. How to do your taxes Some examples of this type of organization are those organized for: Relief of the poor, the distressed, or the underprivileged, Advancement of religion, Advancement of education or science, Erection or maintenance of public buildings, monuments, or works, Lessening the burdens of government, Lessening of neighborhood tensions, Elimination of prejudice and discrimination, Defense of human and civil rights secured by law, and Combating community deterioration and juvenile delinquency. How to do your taxes The rest of this section contains a description of the information to be provided by certain specific organizations. How to do your taxes This information is in addition to the required inclusions described in chapter 1, and other statements requested on Form 1023. How to do your taxes Each of the following organizations must submit the information described. How to do your taxes Charitable organization supporting education. How to do your taxes   Submit information showing how your organization supports education — for example, contributes to an existing educational institution, endows a professorial chair, contributes toward paying teachers' salaries, or contributes to an educational institution to enable it to carry on research. How to do your taxes Scholarships. How to do your taxes   If the organization awards or plans to award scholarships, complete Schedule H of Form 1023. How to do your taxes Also, submit the following: Criteria used for selecting recipients, including the rules of eligibility. How to do your taxes How and by whom the recipients are or will be selected. How to do your taxes If awards are or will be made directly to individuals, whether information is required assuring that the student remains in school. How to do your taxes If awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer— Whether any preference is or will be accorded an applicant by reason of the parent's position, length of employment, or salary, Whether as a condition of the award the recipient must upon graduation accept employment with the company, and Whether the award will be continued even if the parent's employment ends. How to do your taxes A copy of the scholarship application form and any brochures or literature describing the scholarship program. How to do your taxes Hospital. How to do your taxes   If you are organized to operate a charitable hospital, complete and attach Section I of Schedule C, Form 1023. How to do your taxes   If your hospital was transferred to you from proprietary ownership, complete and attach Schedule G of Form 1023. How to do your taxes You must attach a list showing: The names of the active and courtesy staff members of the proprietary hospital, as well as the names of your medical staff members after the transfer to nonprofit ownership, and The names of any doctors who continued to lease office space in the hospital after its transfer to nonprofit ownership and the amount of rent paid. How to do your taxes Submit also an appraisal showing the fair rental value of the rented space. How to do your taxes Clinic. How to do your taxes   If you are organized to operate a clinic, attach a statement including: A description of the facilities and services, To whom the services are offered, such as the public at large or a specific group, How charges are determined, such as on a profit basis, to recover costs, or at less than cost, By whom administered and controlled, Whether any of the professional staff (that is, those who perform or will perform the clinical services) also serve or will serve in an administrative capacity, and How compensation paid the professional staff is or will be determined. How to do your taxes Home for the aged. How to do your taxes   If you are organized to operate a home for the aged, complete and attach Schedule F of Form 1023 and required attachments. How to do your taxes Community nursing bureau. How to do your taxes   If you provide a nursing register or community nursing bureau, provide information showing that your organization will be operated as a community project and will receive its primary support from public contributions to maintain a nonprofit register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses for the benefit of hospitals, health agencies, doctors, and individuals. How to do your taxes Organization providing loans. How to do your taxes   If you make, or will make, loans for charitable and educational purposes, submit the following information. How to do your taxes An explanation of the circumstances under which such loans are, or will be, made. How to do your taxes Criteria for selection, including the rules of eligibility. How to do your taxes How and by whom the recipients are or will be selected. How to do your taxes Manner of repayment of the loan. How to do your taxes Security required, if any. How to do your taxes Interest charged, if any, and when payable. How to do your taxes Copies in duplicate of the loan application and any brochures or literature describing the loan program. How to do your taxes Public-interest law firms. How to do your taxes   If your organization was formed to litigate in the public interest (as opposed to providing legal services to the poor), such as in the area of protection of the environment, you should submit the following information. How to do your taxes How the litigation can reasonably be said to be representative of a broad public interest rather than a private one. How to do your taxes Whether the organization will accept fees for its services. How to do your taxes A description of the cases litigated or to be litigated and how they benefit the public generally. How to do your taxes Whether the policies and program of the organization are the responsibility of a board or committee representative of the public interest, which is neither controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in this chapter. How to do your taxes Whether the organization is operated, through sharing of office space or otherwise, in a way to create identification or confusion with a particular private law firm. How to do your taxes Whether there is an arrangement to provide, directly or indirectly, a deduction for the cost of litigation that is for the private benefit of the donor. How to do your taxes Acceptance of attorneys' fees. How to do your taxes   A nonprofit public-interest law firm can accept attorneys' fees in public-interest cases if the fees are paid directly by its clients and the fees are not more than the actual costs incurred in the case. How to do your taxes Upon undertaking a representation, the organization cannot withdraw from the case because the litigant is unable to pay the fee. How to do your taxes   Firms can accept fees awarded or approved by a court or an administrative agency and paid by an opposing party if the firms do not use the likelihood or probability of fee awards as a consideration in the selection of cases. How to do your taxes All fee awards must be paid to the organization and not to its individual staff attorneys. How to do your taxes Instead, a public-interest law firm can reasonably compensate its staff attorneys, but only on a straight salary basis. How to do your taxes Private attorneys, whose services are retained by the firm to assist it in particular cases, can be compensated by the firm, but only on a fixed fee or salary basis. How to do your taxes   The total amount of all attorneys' fees (court awarded and those received from clients) must not be more than 50% of the total cost of operations of the organization's legal functions, calculated over a 5-year period. How to do your taxes   If, in order to carry out its program, an organization violates applicable canons of ethics, disrupts the judicial system, or engages in any illegal action, the organization will jeopardize its exemption. How to do your taxes Religious Organizations To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines. How to do your taxes That the particular religious beliefs of the organization are truly and sincerely held. How to do your taxes That the practices and rituals associated with the organization's religious belief or creed are not illegal or contrary to clearly defined public policy. How to do your taxes Therefore, your group (or organization) may not qualify for treatment as an exempt religious organization for tax purposes if its actions, as contrasted with its beliefs, are contrary to well established and clearly defined public policy. How to do your taxes If there is a clear showing that the beliefs (or doctrines) are sincerely held by those professing them, the IRS will not question the religious nature of those beliefs. How to do your taxes Churches. How to do your taxes   Although a church, its integrated auxiliaries, or a convention or association of churches is not required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions, the organization may find it advantageous to obtain recognition of exemption. How to do your taxes In this event, you should submit information showing that your organization is a church, synagogue, association or convention of churches, religious order, or religious organization that is an integral part of a church, and that it is engaged in carrying out the function of a church. How to do your taxes   In determining whether an admittedly religious organization is also a church, the IRS does not accept every assertion that the organization is a church. How to do your taxes Because beliefs and practices vary so widely, there is no single definition of the word church for tax purposes. How to do your taxes The IRS considers the facts and circumstances of each organization applying for church status. How to do your taxes Convention or association of churches. How to do your taxes   Any organization that is otherwise a convention or association of churches will not fail to qualify as a church merely because the membership of the organization includes individuals as well as churches or because the individuals have voting rights in the organization. How to do your taxes Integrated auxiliaries. How to do your taxes   An organization is an integrated auxiliary of a church if all the following are true. How to do your taxes The organization is described both in sections 501(c)(3) and 509(a)(1), 509(a)(2), or 509(a)(3). How to do your taxes It is affiliated with a church or a convention or association of churches. How to do your taxes It is internally supported. How to do your taxes An organization is internally supported unless both of the following are true. How to do your taxes It offers admissions, goods, services, or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for a small part of the cost). How to do your taxes It normally gets more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses. How to do your taxes Special rule. How to do your taxes   Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy (1) and (2) shown earlier are integrated auxiliaries of a church even if they are not internally supported. How to do your taxes   In order for an organization (including a church and religious organization) to qualify for tax exemption, no part of its net earnings can inure to any individual. How to do your taxes   Although an individual is entitled to a charitable deduction for contributions to a church, the assignment or similar transfer of compensation for personal services to a church generally does not relieve a taxpayer of federal income tax liability on the compensation, regardless of the motivation behind the transfer. How to do your taxes Scientific Organizations You must show that your organization's research will be carried on in the public interest. How to do your taxes Scientific research will be considered to be in the public interest if the results of the research (including any patents, copyrights, processes, or formulas) are made available to the public on a nondiscriminatory basis; if the research is performed for the United States or a state, county, or municipal government; or if the research is carried on for one of the following purposes. How to do your taxes Aiding in the scientific education of college or university students. How to do your taxes Obtaining scientific information that is published in a treatise, thesis, trade publication, or in any other form th
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The How To Do Your Taxes

How to do your taxes 5. How to do your taxes   Wages, Salaries, and Other Earnings Table of Contents Reminder Introduction Useful Items - You may want to see: Employee CompensationBabysitting. How to do your taxes Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Reminder Foreign income. How to do your taxes   If you are a U. How to do your taxes S. How to do your taxes citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U. How to do your taxes S. How to do your taxes law. How to do your taxes This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. How to do your taxes This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). How to do your taxes If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. How to do your taxes For details, see Publication 54, Tax Guide for U. How to do your taxes S. How to do your taxes Citizens and Resident Aliens Abroad. How to do your taxes Introduction This chapter discusses compensation received for services as an employee, such as wages, salaries, and fringe benefits. How to do your taxes The following topics are included. How to do your taxes Bonuses and awards. How to do your taxes Special rules for certain employees. How to do your taxes Sickness and injury benefits. How to do your taxes The chapter explains what income is included in the employee's gross income and what is not included. How to do your taxes Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income Employee Compensation This section discusses various types of employee compensation including fringe benefits, retirement plan contributions, stock options, and restricted property. How to do your taxes Form W-2. How to do your taxes    If you are an employee, you should receive Form W-2 from your employer showing the pay you received for your services. How to do your taxes Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you do not receive a Form W-2. How to do your taxes   If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. How to do your taxes These wages must be included on line 7 of Form 1040. How to do your taxes See Form 8919 for more information. How to do your taxes Childcare providers. How to do your taxes    If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. How to do your taxes If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. How to do your taxes You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. How to do your taxes Babysitting. How to do your taxes   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. How to do your taxes Miscellaneous Compensation This section discusses different types of employee compensation. How to do your taxes Advance commissions and other earnings. How to do your taxes   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. How to do your taxes    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. How to do your taxes If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. How to do your taxes See Repayments in chapter 12. How to do your taxes Allowances and reimbursements. How to do your taxes    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463. How to do your taxes If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. How to do your taxes Back pay awards. How to do your taxes    Include in income amounts you are awarded in a settlement or judgment for back pay. How to do your taxes These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. How to do your taxes They should be reported to you by your employer on Form W-2. How to do your taxes Bonuses and awards. How to do your taxes   Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. How to do your taxes These include prizes such as vacation trips for meeting sales goals. How to do your taxes If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. How to do your taxes However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. How to do your taxes Employee achievement award. How to do your taxes   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. How to do your taxes However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. How to do your taxes Your employer can tell you whether your award is a qualified plan award. How to do your taxes Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. How to do your taxes   However, the exclusion does not apply to the following awards: A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. How to do your taxes A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. How to do your taxes Example. How to do your taxes Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. How to do your taxes Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. How to do your taxes However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 – $1,600) in his income. How to do your taxes Differential wage payments. How to do your taxes   This is any payment made to you by an employer for any period during which you are, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages you would have received from the employer during that period. How to do your taxes These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. How to do your taxes The payments are reported as wages on Form W-2. How to do your taxes Government cost-of-living allowances. How to do your taxes   Most payments received by U. How to do your taxes S. How to do your taxes Government civilian employees for working abroad are taxable. How to do your taxes However, certain cost-of-living allowances are tax free. How to do your taxes Publication 516, U. How to do your taxes S. How to do your taxes Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. How to do your taxes Nonqualified deferred compensation plans. How to do your taxes   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. How to do your taxes This amount is shown on Form W-2, box 12, using code Y. How to do your taxes This amount is not included in your income. How to do your taxes   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. How to do your taxes This amount is included in your wages shown on Form W-2, box 1. How to do your taxes It is also shown on Form W-2, box 12, using code Z. How to do your taxes Note received for services. How to do your taxes    If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. How to do your taxes When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. How to do your taxes Do not include that part again in your income. How to do your taxes Include the rest of the payment in your income in the year of payment. How to do your taxes   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. How to do your taxes Severance pay. How to do your taxes   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. How to do your taxes Accrued leave payment. How to do your taxes    If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. How to do your taxes   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. How to do your taxes You can reduce gross wages by the amount you repaid in the same tax year in which you received it. How to do your taxes Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on the return and the wages on your Forms W-2. How to do your taxes Outplacement services. How to do your taxes   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. How to do your taxes    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). How to do your taxes Sick pay. How to do your taxes   Pay you receive from your employer while you are sick or injured is part of your salary or wages. How to do your taxes In addition, you must include in your income sick pay benefits received from any of the following payers: A welfare fund. How to do your taxes A state sickness or disability fund. How to do your taxes An association of employers or employees. How to do your taxes An insurance company, if your employer paid for the plan. How to do your taxes However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. How to do your taxes For more information, see Publication 525. How to do your taxes Social security and Medicare taxes paid by employer. How to do your taxes   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. How to do your taxes The payment also is treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. How to do your taxes However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. How to do your taxes Stock appreciation rights. How to do your taxes   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. How to do your taxes When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. How to do your taxes You include the cash payment in your income in the year you use the right. How to do your taxes Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. How to do your taxes Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. How to do your taxes Accounting period. How to do your taxes   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. How to do your taxes Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. How to do your taxes The general rule: benefits are reported for a full calendar year (January 1–December 31). How to do your taxes The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. How to do your taxes For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. How to do your taxes  Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. How to do your taxes   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). How to do your taxes Form W-2. How to do your taxes   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips, and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. How to do your taxes Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). How to do your taxes However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). How to do your taxes Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. How to do your taxes Benefits you receive from the plan may be taxable, as explained later under Sickness and Injury Benefits . How to do your taxes For information on the items covered in this section, other than Long-term care coverage, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. How to do your taxes Long-term care coverage. How to do your taxes    Contributions by your employer to provide coverage for long-term care services generally are not included in your income. How to do your taxes However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. How to do your taxes This amount will be reported as wages in box 1 of your Form W-2. How to do your taxes   Contributions you make to the plan are discussed in Publication 502, Medical and Dental Expenses. How to do your taxes Archer MSA contributions. How to do your taxes    Contributions by your employer to your Archer MSA generally are not included in your income. How to do your taxes Their total will be reported in box 12 of Form W-2 with code R. How to do your taxes You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. How to do your taxes File the form with your return. How to do your taxes Health flexible spending arrangement (health FSA). How to do your taxes   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. How to do your taxes Note. How to do your taxes Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. How to do your taxes The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. How to do your taxes For more information, see Notice 2012-40, 2012-26 I. How to do your taxes R. How to do your taxes B. How to do your taxes 1046, available at www. How to do your taxes irs. How to do your taxes gov/irb/2012-26 IRB/ar09. How to do your taxes html. How to do your taxes Health reimbursement arrangement (HRA). How to do your taxes   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. How to do your taxes Health savings accounts (HSA). How to do your taxes   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. How to do your taxes Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. How to do your taxes Contributions made by your employer are not included in your income. How to do your taxes Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. How to do your taxes Distributions not used for qualified medical expenses are included in your income. How to do your taxes See Publication 969 for the requirements of an HSA. How to do your taxes   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. How to do your taxes The contributions are treated as a distribution of money and are not included in the partner's gross income. How to do your taxes Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. How to do your taxes In both situations, the partner can deduct the contribution made to the partner's HSA. How to do your taxes   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. How to do your taxes The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. How to do your taxes Qualified HSA funding distribution. How to do your taxes   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. How to do your taxes See Publication 590 for the requirements for these qualified HSA funding distributions. How to do your taxes Failure to maintain eligibility. How to do your taxes   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. How to do your taxes If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. How to do your taxes This income is also subject to an additional 10% tax. How to do your taxes Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. How to do your taxes See the Instructions for Form 8839, Qualified Adoption Expenses, for more information. How to do your taxes Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. How to do your taxes They also are included as social security and Medicare wages in boxes 3 and 5. How to do your taxes However, they are not included as wages in box 1. How to do your taxes To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. How to do your taxes File the form with your return. How to do your taxes De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. How to do your taxes In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. How to do your taxes Holiday gifts. How to do your taxes   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. How to do your taxes However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. How to do your taxes Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. How to do your taxes For more information, see Publication 970, Tax Benefits for Education. How to do your taxes Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. How to do your taxes However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. How to do your taxes For exceptions, see Entire cost excluded , and Entire cost taxed , later. How to do your taxes If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. How to do your taxes Also, it is shown separately in box 12 with code C. How to do your taxes Group-term life insurance. How to do your taxes   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. How to do your taxes Permanent benefits. How to do your taxes   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. How to do your taxes Your employer should be able to tell you the amount to include in your income. How to do your taxes Accidental death benefits. How to do your taxes   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. How to do your taxes Former employer. How to do your taxes   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. How to do your taxes Also, it is shown separately in box 12 with code C. How to do your taxes Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. How to do your taxes You must pay these taxes with your income tax return. How to do your taxes Include them on line 60, Form 1040, and follow the instructions for line 60. How to do your taxes For more information, see the Instructions for Form 1040. How to do your taxes Two or more employers. How to do your taxes   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. How to do your taxes If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. How to do your taxes You must figure how much to include in your income. How to do your taxes Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. How to do your taxes Figuring the taxable cost. How to do your taxes   Use the following worksheet to figure the amount to include in your income. How to do your taxes     Worksheet 5-1. How to do your taxes Figuring the Cost of Group-Term Life Insurance To Include in Income 1. How to do your taxes Enter the total amount of your insurance coverage from your employer(s) 1. How to do your taxes   2. How to do your taxes Limit on exclusion for employer-provided group-term life insurance coverage 2. How to do your taxes 50,000 3. How to do your taxes Subtract line 2 from line 1 3. How to do your taxes   4. How to do your taxes Divide line 3 by $1,000. How to do your taxes Figure to the nearest tenth 4. How to do your taxes   5. How to do your taxes Go to Table 5-1. How to do your taxes Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. How to do your taxes   6. How to do your taxes Multiply line 4 by line 5 6. How to do your taxes   7. How to do your taxes Enter the number of full months of coverage at this cost. How to do your taxes 7. How to do your taxes   8. How to do your taxes Multiply line 6 by line 7 8. How to do your taxes   9. How to do your taxes Enter the premiums you paid per month 9. How to do your taxes       10. How to do your taxes Enter the number of months you paid the premiums 10. How to do your taxes       11. How to do your taxes Multiply line 9 by line 10. How to do your taxes 11. How to do your taxes   12. How to do your taxes Subtract line 11 from line 8. How to do your taxes Include this amount in your income as wages 12. How to do your taxes      Table 5-1. How to do your taxes Cost of $1,000 of Group-Term Life Insurance for One Month Age Cost Under 25 $. How to do your taxes 05 25 through 29 . How to do your taxes 06 30 through 34 . How to do your taxes 08 35 through 39 . How to do your taxes 09 40 through 44 . How to do your taxes 10 45 through 49 . How to do your taxes 15 50 through 54 . How to do your taxes 23 55 through 59 . How to do your taxes 43 60 through 64 . How to do your taxes 66 65 through 69 1. How to do your taxes 27 70 and older 2. How to do your taxes 06 Example. How to do your taxes You are 51 years old and work for employers A and B. How to do your taxes Both employers provide group-term life insurance coverage for you for the entire year. How to do your taxes Your coverage is $35,000 with employer A and $45,000 with employer B. How to do your taxes You pay premiums of $4. How to do your taxes 15 a month under the employer B group plan. How to do your taxes You figure the amount to include in your income as shown in Worksheet 5-1. How to do your taxes Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated, later. How to do your taxes Worksheet 5-1. How to do your taxes Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated 1. How to do your taxes Enter the total amount of your insurance coverage from your employer(s) 1. How to do your taxes 80,000 2. How to do your taxes Limit on exclusion for employer-provided group-term life insurance coverage 2. How to do your taxes 50,000 3. How to do your taxes Subtract line 2 from line 1 3. How to do your taxes 30,000 4. How to do your taxes Divide line 3 by $1,000. How to do your taxes Figure to the nearest tenth 4. How to do your taxes 30. How to do your taxes 0 5. How to do your taxes Go to Table 5-1. How to do your taxes Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. How to do your taxes . How to do your taxes 23 6. How to do your taxes Multiply line 4 by line 5 6. How to do your taxes 6. How to do your taxes 90 7. How to do your taxes Enter the number of full months of coverage at this cost. How to do your taxes 7. How to do your taxes 12 8. How to do your taxes Multiply line 6 by line 7 8. How to do your taxes 82. How to do your taxes 80 9. How to do your taxes Enter the premiums you paid per month 9. How to do your taxes 4. How to do your taxes 15     10. How to do your taxes Enter the number of months you paid the premiums 10. How to do your taxes 12     11. How to do your taxes Multiply line 9 by line 10. How to do your taxes 11. How to do your taxes 49. How to do your taxes 80 12. How to do your taxes Subtract line 11 from line 8. How to do your taxes Include this amount in your income as wages 12. How to do your taxes 33. How to do your taxes 00 Entire cost excluded. How to do your taxes   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. How to do your taxes You are permanently and totally disabled and have ended your employment. How to do your taxes Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. How to do your taxes A charitable organization (defined in chapter 24) to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. How to do your taxes (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. How to do your taxes ) The plan existed on January 1, 1984, and You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. How to do your taxes Entire cost taxed. How to do your taxes   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply: The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. How to do your taxes You are a key employee and your employer's plan discriminates in favor of key employees. How to do your taxes Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. How to do your taxes Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. How to do your taxes You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. How to do your taxes Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. How to do your taxes A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. How to do your taxes Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. How to do your taxes However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. How to do your taxes Exclusion limit. How to do your taxes   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. How to do your taxes   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. How to do your taxes   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. How to do your taxes   If the benefits have a value that is more than these limits, the excess must be included in your income. How to do your taxes You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. How to do your taxes Commuter highway vehicle. How to do your taxes   This is a highway vehicle that seats at least six adults (not including the driver). How to do your taxes At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). How to do your taxes Transit pass. How to do your taxes   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. How to do your taxes Qualified parking. How to do your taxes   This is parking provided to an employee at or near the employer's place of business. How to do your taxes It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. How to do your taxes It does not include parking at or near the employee's home. How to do your taxes Qualified bicycle commuting. How to do your taxes   This is reimbursement based on the number of qualified bicycle commuting months for the year. How to do your taxes A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. How to do your taxes The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. How to do your taxes Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. How to do your taxes (Your employer can tell you whether your retirement plan is qualified. How to do your taxes ) However, the cost of life insurance coverage included in the plan may have to be included. How to do your taxes See Group-Term Life Insurance , earlier, under Fringe Benefits. How to do your taxes If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. How to do your taxes However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. How to do your taxes For information on distributions from retirement plans, see Publication 575, Pension and Annuity Income (or Publication 721, Tax Guide to U. How to do your taxes S. How to do your taxes Civil Service Retirement Benefits, if you are a federal employee or retiree). How to do your taxes Elective deferrals. How to do your taxes   If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. How to do your taxes The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. How to do your taxes An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. How to do your taxes However, it is included in wages subject to social security and Medicare taxes. How to do your taxes   Elective deferrals include elective contributions to the following retirement plans. How to do your taxes Cash or deferred arrangements (section 401(k) plans). How to do your taxes The Thrift Savings Plan for federal employees. How to do your taxes Salary reduction simplified employee pension plans (SARSEP). How to do your taxes Savings incentive match plans for employees (SIMPLE plans). How to do your taxes Tax-sheltered annuity plans (403(b) plans). How to do your taxes Section 501(c)(18)(D) plans. How to do your taxes Section 457 plans. How to do your taxes Qualified automatic contribution arrangements. How to do your taxes   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. How to do your taxes You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. How to do your taxes The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. How to do your taxes   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. How to do your taxes Overall limit on deferrals. How to do your taxes   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3) and (5) above. How to do your taxes The limit for SIMPLE plans is $12,000. How to do your taxes The limit for section 501(c)(18)(D) plans is the lesser of $7,000 or 25% of your compensation. How to do your taxes The limit for section 457 plans is the lesser of your includible compensation or $17,500. How to do your taxes Amounts deferred under specific plan limits are part of the overall limit on deferrals. How to do your taxes Designated Roth contributions. How to do your taxes   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. How to do your taxes Designated Roth contributions are treated as elective deferrals, except that they are included in income. How to do your taxes Excess deferrals. How to do your taxes   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. How to do your taxes However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. How to do your taxes   If you set aside more than the limit, the excess generally must be included in your income for that year, unless you have an excess deferral of a designated Roth contribution. How to do your taxes See Publication 525 for a discussion of the tax treatment of excess deferrals. How to do your taxes Catch-up contributions. How to do your taxes   You may be allowed catch-up contributions (additional elective deferral) if you are age 50 or older by the end of your tax year. How to do your taxes Stock Options If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option. How to do your taxes However, if your option is a statutory stock option, you will not have any income until you sell or exchange your stock. How to do your taxes Your employer can tell you which kind of option you hold. How to do your taxes For more information, see Publication 525. How to do your taxes Restricted Property In most cases, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. How to do your taxes However, if you receive stock or other property that has certain restrictions that affect its value, you do not include the value of the property in your income until it has substantially vested. How to do your taxes (You can choose to include the value of the property in your income in the year it is transferred to you. How to do your taxes ) For more information, see Restricted Property in Publication 525. How to do your taxes Dividends received on restricted stock. How to do your taxes   Dividends you receive on restricted stock are treated as compensation and not as dividend income. How to do your taxes Your employer should include these payments on your Form W-2. How to do your taxes Stock you chose to include in income. How to do your taxes   Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends. How to do your taxes Report them on your return as dividends. How to do your taxes For a discussion of dividends, see chapter 8. How to do your taxes    For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Publication 525. How to do your taxes Special Rules for Certain Employees This section deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers. How to do your taxes Clergy Generally, if you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. How to do your taxes , in addition to your salary. How to do your taxes If the offering is made to the religious institution, it is not taxable to you. How to do your taxes If you are a member of a religious organization and you give your outside earnings to the religious organization, you still must include the earnings in your income. How to do your taxes However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. How to do your taxes See chapter 24. How to do your taxes Pension. How to do your taxes    A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. How to do your taxes It must be reported on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. How to do your taxes Housing. How to do your taxes    Special rules for housing apply to members of the clergy. How to do your taxes Under these rules, you do not include in your income the rental value of a home (including utilities) or a designated housing allowance provided to you as part of your pay. How to do your taxes However, the exclusion cannot be more than the reasonable pay for your service. How to do your taxes If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. How to do your taxes The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. How to do your taxes However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you are subject to the self-employment tax. How to do your taxes For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. How to do your taxes Members of Religious Orders If you are a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order. How to do your taxes Services performed for the order. How to do your taxes   If you are performing the services as an agent of the order in the exercise of duties required by the order, do not include in your income the amounts turned over to the order. How to do your taxes   If your order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to be performing the services as an agent of the order. How to do your taxes Any wages you earn as an agent of an order that you turn over to the order are not included in your income. How to do your taxes Example. How to do your taxes You are a member of a church order and have taken a vow of poverty. How to do your taxes You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. How to do your taxes You are a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. How to do your taxes However, you remain under the general direction and control of the order. How to do your taxes You are considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order are not included in your income. How to do your taxes Services performed outside the order. How to do your taxes   If you are directed to work outside the order, your services are not an exercise of duties required by the order unless they meet both of the following requirements: They are the kind of services that are ordinarily the duties of members of the order. How to do your taxes They are part of the duties that you must exercise for, or on behalf of, the religious order as its agent. How to do your taxes If you are an employee of a third party, the services you perform for the third party will not be considered directed or required of you by the order. How to do your taxes Amounts you receive for these services are included in your income, even if you have taken a vow of poverty. How to do your taxes Example. How to do your taxes Mark Brown is a member of a religious order and has taken a vow of poverty. How to do your taxes He renounces all claims to his earnings and turns over his earnings to the order. How to do your taxes Mark is a schoolteacher. How to do your taxes He was instructed by the superiors of the order to get a job with a private tax-exempt school. How to do your taxes Mark became an employee of the school, and, at his request, the school made the salary payments directly to the order. How to do your taxes Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. How to do your taxes The wages Mark earns working for the school are included in his income. How to do your taxes Foreign Employer Special rules apply if you work for a foreign employer. How to do your taxes U. How to do your taxes S. How to do your taxes citizen. How to do your taxes   If you are a U. How to do your taxes S. How to do your taxes citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign employer, you must include your salary in your income. How to do your taxes Social security and Medicare taxes. How to do your taxes   You are exempt from social security and Medicare employee taxes if you are employed in the United States by an international organization or a foreign government. How to do your taxes However, you must pay self-employment tax on your earnings from services performed in the United States, even though you are not self-employed. How to do your taxes This rule also applies if you are an employee of a qualifying wholly owned instrumentality of a foreign government. How to do your taxes Employees of international organizations or foreign governments. How to do your taxes   Your compensation for official services to an international organization is exempt from federal income tax if you are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). How to do your taxes   Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true. How to do your taxes You are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). How to do your taxes Your work is like the work done by employees of the United States in foreign countries. How to do your taxes The foreign government gives an equal exemption to employees of the United States in its country. How to do your taxes Waiver of alien status. How to do your taxes   If you are an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration and Nationality Act to keep your immigrant status, different rules may apply. How to do your taxes See Foreign Employer in Publication 525. How to do your taxes Employment abroad. How to do your taxes   For information on the tax treatment of income earned abroad, see Publication 54. How to do your taxes Military Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. How to do your taxes Allowances generally are not taxed. How to do your taxes For more information on the tax treatment of military allowances and benefits, see Publication 3, Armed Forces' Tax Guide. How to do your taxes Differential wage payments. How to do your taxes   Any payments made to you by an employer during the time you are performing service in the uniformed services are treated as compensation. How to do your taxes These wages are subject to income tax withholding and are reported on a Form W-2. How to do your taxes See the discussion under Miscellaneous Compensation , earlier. How to do your taxes Military retirement pay. How to do your taxes   If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. How to do your taxes Do not include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan. How to do your taxes   For more detailed discussion of survivor annuities, see chapter 10. How to do your taxes Disability. How to do your taxes   If you are retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later. How to do your taxes Veterans' benefits. How to do your taxes   Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). How to do your taxes The following amounts paid to veterans or their families are not taxable. How to do your taxes Education, training, and subsistence allowances. How to do your taxes Disability compensation and pension payments for disabilities paid either to veterans or their families. How to do your taxes Grants for homes designed for wheelchair living. How to do your taxes Grants for motor vehicles for veterans who lost their sight or the use of their limbs. How to do your taxes Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death. How to do your taxes Interest on insurance dividends you leave on deposit with the VA. How to do your taxes Benefits under a dependent-care assistance program. How to do your taxes The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001. How to do your taxes Payments made under the compensated work therapy program. How to do your taxes Any bonus payment by a state or political subdivision because of service in a combat zone. How to do your taxes Volunteers The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or similar agency is covered in the following discussions. How to do your taxes Peace Corps. How to do your taxes   Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are exempt from tax. How to do your taxes Taxable allowances. How to do your taxes   The following allowances must be included in your income and reported as wages: Allowances paid to your spouse and minor children while you are a volunteer leader training in the United States. How to do your taxes Living allowances designated by the Director of the Peace Corps as basic compensation. How to do your taxes These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses. How to do your taxes Leave allowances. How to do your taxes Readjustment allowances or termination payments. How to do your taxes These are considered received by you when credited to your account. How to do your taxes Example. How to do your taxes Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump sum at the end of his tour of duty. How to do your taxes Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account. How to do your taxes Volunteers in Service to America (VISTA). How to do your taxes   If you are a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages. How to do your taxes National Senior Services Corps programs. How to do your taxes   Do not include in your income amounts you receive for supportive services or reimbursements for out-of-pocket expenses from the following programs. How to do your taxes Retired Senior Volunteer Program (RSVP). How to do your taxes Foster Grandparent Program. How to do your taxes Senior Companion Program. How to do your taxes Service Corps of Retired Executives (SCORE). How to do your taxes   If you receive amounts for supportive services or reimbursements for out-of-pocket expenses from SCORE, do not include these amounts in income. How to do your taxes Volunteer tax counseling. How to do your taxes   Do not include in your income any reimbursements you receive for transportation, meals, and other expenses you have in training for, or actually providing, volunteer federal income tax counseling for the elderly (TCE). How to do your taxes   You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA) program. How to do your taxes See chapter 24. How to do your taxes Sickness and Injury Benefits This section discusses sickness and injury benefits including disability pensions, long-term care insurance contracts, workers' compensation, and other benefits. How to do your taxes In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. How to do your taxes If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. How to do your taxes However, certain payments may not be taxable to you. How to do your taxes Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. How to do your taxes In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury. How to do your taxes Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established. How to do your taxes Cost paid by you. How to do your taxes   If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. How to do your taxes If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. How to do your taxes See Reimbursement in a later year in chapter 21. How to do your taxes Cafeteria plans. How to do your taxes   In most cases, if you are covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums was not included in your income, you are not considered to have paid the premiums and you must include any benefits you receive in your income. How to do your taxes If the amount of the premiums was included in your income, you are considered to have paid the premiums, and any benefits you receive are not taxable. How to do your taxes Disability Pensions If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. How to do your taxes You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age. How to do your taxes Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. How to do your taxes You may be entitled to a tax credit if you were permanently and totally disabled when you retired. How to do your taxes For information on this credit and the definition of permanent and total disability, see chapter 33. How to do your taxes Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. How to do your taxes Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. How to do your taxes The rules for reporting pensions are explained in How To Report in chapter 10. How to do your taxes For information on disability payments from a governmental program provided as a substitute for unemployment compensation, see chapter 12. How to do your taxes Retirement and profit-sharing plans. How to do your taxes   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. How to do your taxes The payments must be reported as a pension or annuity. How to do your taxes For more information on pensions, see chapter 10. How to do your taxes Accrued leave payment. How to do your taxes   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. How to do your taxes The payment is not a disability payment. How to do your taxes Include it in your income in the tax year you receive it. How to do your taxes Military and Government Disability Pensions Certain military and government disability pensions are not taxable. How to do your taxes Service-connected disability. How to do your taxes   You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services. How to do your taxes The armed forces of any country. How to do your taxes The National Oceanic and Atmospheric Administration. How to do your taxes The Public Health Service. How to do your taxes The Foreign Service. How to do your taxes Conditions for exclusion. How to do your taxes   Do not include the disability payments in your income if any of the following conditions apply. How to do your taxes You were entitled to receive a disability payment before September 25, 1975. How to do your taxes You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975. How to do your taxes You receive the disability payments for a combat-related injury. How to do your taxes This is a personal injury or sickness that Results directly from armed conflict, Takes place while you are engaged in extra-hazardous service, Takes place under conditions simulating war, including training exercises such as maneuvers, or Is caused by an instrumentality of war. How to do your taxes You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. How to do your taxes Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA. How to do your taxes Pension based on years of service. How to do your taxes   If you receive a disability pension based on years of service, in most cases you must include it in your income. How to do your taxes However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), do not include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. How to do your taxes You must include the rest of your pension in your income. How to do your taxes Retroactive VA determination. How to do your taxes   If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. How to do your taxes You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period. How to do your taxes You must include with each Form 1040X a copy of the official VA Determination letter granting the retroactive benefit. How to do your taxes The letter must show the amount withheld and the effective date of the benefit. How to do your taxes   If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. How to do your taxes However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you are later given a retroactive disability rating by the VA. How to do your taxes Special statute of limitations. How to do your taxes   In most cases, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. How to do your taxes However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination. How to do your taxes This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination. How to do your taxes Example. How to do your taxes You retired in 2007 and receive a pension based on your years of service. How to do your taxes On August 1, 2013, you receive a determination of service-connected disability retroactive to 2007. How to do your taxes Generally, you could claim a refund for the taxes paid on your pension for 2010, 2011, and 2012. How to do your taxes However, under the special limitation period, you can also file a claim for 2009 as long as you file the claim by August 1, 2014. How to do your taxes You cannot file a claim for 2007 and 2008 because those tax years began more than 5 years before the determination. How to do your taxes Terrorist attack or military action. How to do your taxes   Do not include in your income disability payments you receive for injuries resulting directly from a terrorist or military action. How to do your taxes Long-Term Care Insurance Contracts Long-term care insurance contracts in most cases are treated as accident and health insurance contracts. How to do your taxes Amounts you receive from them (other than policyholder dividends or premium refunds) in most cases are excludable from income as amounts received for personal injury or sickness. How to do your taxes To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return. How to do your taxes A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. How to do your taxes The contract must: Be guaranteed renewable, Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits, and In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses. How to do your taxes Qualified long-term care services. How to do your taxes   Qualified long-term care services are: Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and Required by a chronically ill individual and provided pursuant to a plan of care as prescribed by a licensed health care practitioner. How to do your taxes Chronically ill individual. How to do your taxes   A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following: An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. How to do your taxes Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. How to do your taxes An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. How to do your taxes Limit on exclusion. How to do your taxes   You generally can exclude from gross income up to $320 a day for 2013. How to do your taxes See Limit on exclusion, under Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in Publication 525 for more information. How to do your taxes Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. How to do your taxes The exemption also applies to your survivors. How to do your taxes The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. How to do your taxes If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. How to do your taxes For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. How to do your taxes Return to work. How to do your taxes    If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. How to do your taxes Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. How to do your taxes Railroad sick pay. How to do your taxes    Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. How to do your taxes However, do not include them in your income if they are for an on-the-job injury. How to do your taxes   If you received income because of a disability, see Disability Pensions , earlier. How to do your taxes Federal Employees' Compensation Act (FECA). How to do your taxes   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. How to do your taxes However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. How to do your taxes Report this income on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040-EZ. How to do your taxes Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. How to do your taxes    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. How to do your taxes For a discussion of the taxability of these benefits, see Social security and equivalent railroad retirement benefits under Other Income, in Publication 525. How to do your taxes    You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. How to do your taxes It is a miscellaneous deduction subject to the 2%-of-AGI limit on Schedule A (Form 1040). How to do your taxes If you buy back sick leave in the same year you used it, the amount reduces your taxable sick leave pay. How to do your taxes Do not deduct it separately. How to do your taxes Other compensation. How to do your taxes   Many other amounts you receive as compensation for sickness or injury are not taxable. How to do your taxes These include the following amounts. How to do your taxes Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments. How to do your taxes Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. How to do your taxes Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. How to do your taxes Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. How to do your taxes This compensation must be based only on the injury and not on the period of your absence from work. How to do your taxes These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. How to do your taxes Reimbursement for medical care. How to do your taxes    A reimbursement for medical care is generally not taxable. How to do your taxes However, it may reduce your medical expense deduction. How to do your taxes For more information, see chapter 21. How to do your taxes Prev  Up  Next   Home   More Online Publications