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Irs 1040

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Irs 1040

Irs 1040 3. Irs 1040   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Irs 1040 Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Irs 1040 Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Irs 1040 When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Irs 1040 Any remaining gain is a section 1231 gain. Irs 1040 Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Irs 1040 Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Irs 1040 Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Irs 1040 If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Irs 1040 Do not take that gain into account as section 1231 gain. Irs 1040 Section 1231 transactions. Irs 1040   The following transactions result in gain or loss subject to section 1231 treatment. Irs 1040 Sales or exchanges of real property or depreciable personal property. Irs 1040 This property must be used in a trade or business and held longer than 1 year. Irs 1040 Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Irs 1040 Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Irs 1040 Sales or exchanges of leaseholds. Irs 1040 The leasehold must be used in a trade or business and held longer than 1 year. Irs 1040 Sales or exchanges of cattle and horses. Irs 1040 The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Irs 1040 Sales or exchanges of other livestock. Irs 1040 This livestock does not include poultry. Irs 1040 It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Irs 1040 Sales or exchanges of unharvested crops. Irs 1040 The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Irs 1040 You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Irs 1040 Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Irs 1040 Cutting of timber or disposal of timber, coal, or iron ore. Irs 1040 The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Irs 1040 Condemnations. Irs 1040 The condemned property must have been held longer than 1 year. Irs 1040 It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Irs 1040 It cannot be property held for personal use. Irs 1040 Casualties and thefts. Irs 1040 The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Irs 1040 You must have held the property longer than 1 year. Irs 1040 However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Irs 1040 For more information on casualties and thefts, see Publication 547. Irs 1040 Property for sale to customers. Irs 1040   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Irs 1040 If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Irs 1040 Example. Irs 1040 You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Irs 1040 Customers make deposits on the reels, which you refund if the reels are returned within a year. Irs 1040 If they are not returned, you keep each deposit as the agreed-upon sales price. Irs 1040 Most reels are returned within the 1-year period. Irs 1040 You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Irs 1040 Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Irs 1040 Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Irs 1040 Copyrights. Irs 1040    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Irs 1040 The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Irs 1040 Treatment as ordinary or capital. Irs 1040   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Irs 1040 If you have a net section 1231 loss, it is ordinary loss. Irs 1040 If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Irs 1040 The rest, if any, is long-term capital gain. Irs 1040 Nonrecaptured section 1231 losses. Irs 1040   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Irs 1040 Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Irs 1040 These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Irs 1040 Example. Irs 1040 In 2013, Ben has a $2,000 net section 1231 gain. Irs 1040 To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Irs 1040 From 2008 through 2012 he had the following section 1231 gains and losses. Irs 1040 Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Irs 1040 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Irs 1040 To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Irs 1040 This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Irs 1040 On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Irs 1040 Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Irs 1040 Whether the adjusted basis was figured using depreciation or amortization another person claimed. Irs 1040 Corporate distributions. Irs 1040   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Irs 1040 General asset accounts. Irs 1040   Different rules apply to dispositions of property you depreciated using a general asset account. Irs 1040 For information on these rules, see Publication 946. Irs 1040 Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Irs 1040 See Gain Treated as Ordinary Income, later. Irs 1040 Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Irs 1040 See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Irs 1040 Section 1245 property defined. Irs 1040   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Irs 1040 Personal property (either tangible or intangible). Irs 1040 Other tangible property (except buildings and their structural components) used as any of the following. Irs 1040 See Buildings and structural components below. Irs 1040 An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Irs 1040 A research facility in any of the activities in (a). Irs 1040 A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Irs 1040 That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Irs 1040 Amortization of certified pollution control facilities. Irs 1040 The section 179 expense deduction. Irs 1040 Deduction for clean-fuel vehicles and certain refueling property. Irs 1040 Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Irs 1040 Deduction for certain qualified refinery property. Irs 1040 Deduction for qualified energy efficient commercial building property. Irs 1040 Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Irs 1040 (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Irs 1040 ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Irs 1040 Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Irs 1040 Deduction for qualified tertiary injectant expenses. Irs 1040 Certain reforestation expenditures. Irs 1040 Deduction for election to expense qualified advanced mine safety equipment property. Irs 1040 Single purpose agricultural (livestock) or horticultural structures. Irs 1040 Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Irs 1040 Any railroad grading or tunnel bore. Irs 1040 Buildings and structural components. Irs 1040   Section 1245 property does not include buildings and structural components. Irs 1040 The term building includes a house, barn, warehouse, or garage. Irs 1040 The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Irs 1040   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Irs 1040 Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Irs 1040   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Irs 1040 Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Irs 1040 Facility for bulk storage of fungible commodities. Irs 1040   This term includes oil or gas storage tanks and grain storage bins. Irs 1040 Bulk storage means the storage of a commodity in a large mass before it is used. Irs 1040 For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Irs 1040 To be fungible, a commodity must be such that one part may be used in place of another. Irs 1040   Stored materials that vary in composition, size, and weight are not fungible. Irs 1040 Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Irs 1040 For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Irs 1040 Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Irs 1040 The depreciation and amortization allowed or allowable on the property. Irs 1040 The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Irs 1040 A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Irs 1040 For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Irs 1040 See Gifts and Transfers at Death, later. Irs 1040 Use Part III of Form 4797 to figure the ordinary income part of the gain. Irs 1040 Depreciation taken on other property or taken by other taxpayers. Irs 1040   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Irs 1040 Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Irs 1040 Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Irs 1040 Depreciation and amortization. Irs 1040   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Irs 1040 Ordinary depreciation deductions. Irs 1040 Any special depreciation allowance you claimed. Irs 1040 Amortization deductions for all the following costs. Irs 1040 Acquiring a lease. Irs 1040 Lessee improvements. Irs 1040 Certified pollution control facilities. Irs 1040 Certain reforestation expenses. Irs 1040 Section 197 intangibles. Irs 1040 Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Irs 1040 Franchises, trademarks, and trade names acquired before August 11, 1993. Irs 1040 The section 179 deduction. Irs 1040 Deductions for all the following costs. Irs 1040 Removing barriers to the disabled and the elderly. Irs 1040 Tertiary injectant expenses. Irs 1040 Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Irs 1040 Environmental cleanup costs. Irs 1040 Certain reforestation expenses. Irs 1040 Qualified disaster expenses. Irs 1040 Any basis reduction for the investment credit (minus any basis increase for credit recapture). Irs 1040 Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Irs 1040 Example. Irs 1040 You file your returns on a calendar year basis. Irs 1040 In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Irs 1040 You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Irs 1040 You did not take the section 179 deduction. Irs 1040 You sold the truck in May 2013 for $7,000. Irs 1040 The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Irs 1040 Figure the gain treated as ordinary income as follows. Irs 1040 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Irs 1040   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Irs 1040   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Irs 1040 Depreciation allowed or allowable. Irs 1040   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Irs 1040 However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Irs 1040 If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Irs 1040   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Irs 1040 Multiple asset accounts. Irs 1040   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Irs 1040 Example. Irs 1040 In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Irs 1040 All of the depreciation was recorded in a single depreciation account. Irs 1040 After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Irs 1040 You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Irs 1040 However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Irs 1040 Normal retirement. Irs 1040   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Irs 1040 Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Irs 1040 To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Irs 1040 Section 1250 property defined. Irs 1040   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Irs 1040 It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Irs 1040 A fee simple interest in land is not included because it is not depreciable. Irs 1040   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Irs 1040 Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Irs 1040 For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Irs 1040 For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Irs 1040 If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Irs 1040 You will not have additional depreciation if any of the following conditions apply to the property disposed of. Irs 1040 You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Irs 1040 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Irs 1040 The property was residential low-income rental property you held for 162/3 years or longer. Irs 1040 For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Irs 1040 You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Irs 1040 The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Irs 1040 These properties are depreciated using the straight line method. Irs 1040 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Irs 1040 Depreciation taken by other taxpayers or on other property. Irs 1040   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Irs 1040 Example. Irs 1040 Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Irs 1040 Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Irs 1040 On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Irs 1040 At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Irs 1040 Depreciation allowed or allowable. Irs 1040   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Irs 1040 If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Irs 1040 Retired or demolished property. Irs 1040   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Irs 1040 Example. Irs 1040 A wing of your building is totally destroyed by fire. Irs 1040 The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Irs 1040 Figuring straight line depreciation. Irs 1040   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Irs 1040 If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Irs 1040   Salvage value and useful life are not used for the ACRS method of depreciation. Irs 1040 Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Irs 1040   The straight line method is applied without any basis reduction for the investment credit. Irs 1040 Property held by lessee. Irs 1040   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Irs 1040 This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Irs 1040 The same rule applies to the cost of acquiring a lease. Irs 1040   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Irs 1040 However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Irs 1040 Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Irs 1040 The percentages for these types of real property are as follows. Irs 1040 Nonresidential real property. Irs 1040   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Irs 1040 For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Irs 1040 Residential rental property. Irs 1040   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Irs 1040 The percentage for periods before 1976 is zero. Irs 1040 Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Irs 1040 Low-income housing. Irs 1040    Low-income housing includes all the following types of residential rental property. Irs 1040 Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Irs 1040 Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Irs 1040 Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Irs 1040 Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Irs 1040   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Irs 1040 If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Irs 1040 Foreclosure. Irs 1040   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Irs 1040 Example. Irs 1040 On June 1, 2001, you acquired low-income housing property. Irs 1040 On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Irs 1040 The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Irs 1040 The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Irs 1040 Therefore, 70% of the additional depreciation is treated as ordinary income. Irs 1040 Holding period. Irs 1040   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Irs 1040 For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Irs 1040 If you sold it on January 2, 2013, the holding period is exactly 192 full months. Irs 1040 The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Irs 1040 Holding period for constructed, reconstructed, or erected property. Irs 1040   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Irs 1040 Property acquired by gift or received in a tax-free transfer. Irs 1040   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Irs 1040   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Irs 1040 See Low-Income Housing With Two or More Elements, next. Irs 1040 Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Irs 1040 The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Irs 1040 The following are the types of separate elements. Irs 1040 A separate improvement (defined below). Irs 1040 The basic section 1250 property plus improvements not qualifying as separate improvements. Irs 1040 The units placed in service at different times before all the section 1250 property is finished. Irs 1040 For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Irs 1040 As a result, the apartment house consists of three separate elements. Irs 1040 The 36-month test for separate improvements. Irs 1040   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Irs 1040 Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Irs 1040 Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Irs 1040 $5,000. Irs 1040 The 1-year test. Irs 1040   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Irs 1040 The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Irs 1040 In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Irs 1040 Example. Irs 1040 The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Irs 1040 During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Irs 1040 The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Irs 1040 However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Irs 1040 Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Irs 1040 Addition to the capital account. Irs 1040   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Irs 1040   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Irs 1040 For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Irs 1040 The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Irs 1040 The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Irs 1040   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Irs 1040 If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Irs 1040 Unadjusted basis. Irs 1040   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Irs 1040 However, the cost of components retired before that date is not included in the unadjusted basis. Irs 1040 Holding period. Irs 1040   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Irs 1040 The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Irs 1040 The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Irs 1040 The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Irs 1040   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Irs 1040 Use the first day of a calendar month that is closest to the middle of the tax year. Irs 1040 If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Irs 1040 Figuring ordinary income attributable to each separate element. Irs 1040   Figure ordinary income attributable to each separate element as follows. Irs 1040   Step 1. Irs 1040 Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Irs 1040   Step 2. Irs 1040 Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Irs 1040   Step 3. Irs 1040 Multiply the result in Step 2 by the applicable percentage for the element. Irs 1040 Example. Irs 1040 You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Irs 1040 The property consisted of four elements (W, X, Y, and Z). Irs 1040 Step 1. Irs 1040 The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Irs 1040 The sum of the additional depreciation for all the elements is $24,000. Irs 1040 Step 2. Irs 1040 The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Irs 1040 Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Irs 1040 $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Irs 1040 Step 3. Irs 1040 The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Irs 1040 From these facts, the sum of the ordinary income for each element is figured as follows. Irs 1040   Step 1 Step 2 Step 3 Ordinary Income W . Irs 1040 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Irs 1040 25 5,000 92% 4,600 Z . Irs 1040 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Irs 1040 In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Irs 1040 In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Irs 1040 Figure the additional depreciation for the periods after 1975. Irs 1040 Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Irs 1040 Stop here if this is residential rental property or if (2) is equal to or more than (1). Irs 1040 This is the gain treated as ordinary income because of additional depreciation. Irs 1040 Subtract (2) from (1). Irs 1040 Figure the additional depreciation for periods after 1969 but before 1976. Irs 1040 Add the lesser of (4) or (5) to the result in (3). Irs 1040 This is the gain treated as ordinary income because of additional depreciation. Irs 1040 A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Irs 1040 Use Form 4797, Part III, to figure the ordinary income part of the gain. Irs 1040 Corporations. Irs 1040   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Irs 1040 The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Irs 1040 Report this additional ordinary income on Form 4797, Part III, line 26 (f). Irs 1040 Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Irs 1040 This applies even if no payments are received in that year. Irs 1040 If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Irs 1040 For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Irs 1040 If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Irs 1040 To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Irs 1040 Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Irs 1040 For a detailed discussion of installment sales, see Publication 537. Irs 1040 Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Irs 1040 However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Irs 1040 For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Irs 1040 See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Irs 1040 Part gift and part sale or exchange. Irs 1040   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Irs 1040 If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Irs 1040 However, see Bargain sale to charity, later. Irs 1040 Example. Irs 1040 You transferred depreciable personal property to your son for $20,000. Irs 1040 When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Irs 1040 You took depreciation of $30,000. Irs 1040 You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Irs 1040 You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Irs 1040 You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Irs 1040 Gift to charitable organization. Irs 1040   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Irs 1040 Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Irs 1040   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Irs 1040 For more information, see Giving Property That Has Increased in Value in Publication 526. Irs 1040 Bargain sale to charity. Irs 1040   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Irs 1040 First, figure the ordinary income as if you had sold the property at its fair market value. Irs 1040 Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Irs 1040 See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Irs 1040 Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Irs 1040 Example. Irs 1040 You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Irs 1040 Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Irs 1040 If you had sold the property at its fair market value, your ordinary income would have been $5,000. Irs 1040 Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Irs 1040 Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Irs 1040 For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Irs 1040 However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Irs 1040 Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Irs 1040 Example 1. Irs 1040 Janet Smith owned depreciable property that, upon her death, was inherited by her son. Irs 1040 No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Irs 1040 However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Irs 1040 Example 2. Irs 1040 The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Irs 1040 If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Irs 1040 Ordinary income from depreciation must be reported by the trust on the transfer. Irs 1040 Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Irs 1040 For information on like-kind exchanges and involuntary conversions, see chapter 1. Irs 1040 Depreciable personal property. Irs 1040   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Irs 1040 The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Irs 1040 The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Irs 1040 Example 1. Irs 1040 You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Irs 1040 The old machine cost you $5,000 two years ago. Irs 1040 You took depreciation deductions of $3,950. Irs 1040 Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Irs 1040 Example 2. Irs 1040 You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Irs 1040 This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Irs 1040 You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Irs 1040 Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Irs 1040 All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Irs 1040 Example 3. Irs 1040 A fire destroyed office machinery you bought for $116,000. Irs 1040 The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Irs 1040 You received a $117,000 insurance payment, realizing a gain of $92,640. Irs 1040 You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Irs 1040 $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Irs 1040 The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Irs 1040 The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Irs 1040 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Irs 1040 Depreciable real property. Irs 1040   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Irs 1040 The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Irs 1040 The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Irs 1040   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Irs 1040 Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Irs 1040 Example. Irs 1040 The state paid you $116,000 when it condemned your depreciable real property for public use. Irs 1040 You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Irs 1040 You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Irs 1040 You choose to postpone reporting the gain. Irs 1040 If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Irs 1040 The ordinary income to be reported is $6,000, which is the greater of the following amounts. Irs 1040 The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Irs 1040 The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Irs 1040   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Irs 1040 Basis of property acquired. Irs 1040   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Irs 1040   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Irs 1040 However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Irs 1040 Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Irs 1040 Add the fair market value (or cost) of the other property acquired to the result in (1). Irs 1040 Divide the result in (1) by the result in (2). Irs 1040 Multiply the total basis by the result in (3). Irs 1040 This is the basis of the depreciable real property acquired. Irs 1040 If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Irs 1040 Subtract the result in (4) from the total basis. Irs 1040 This is the basis of the other property acquired. Irs 1040 If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Irs 1040 Example 1. Irs 1040 In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Irs 1040 The property's adjusted basis was $38,400, with additional depreciation of $14,932. Irs 1040 On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Irs 1040 Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Irs 1040 You chose to postpone reporting the gain under the involuntary conversion rules. Irs 1040 Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Irs 1040 The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Irs 1040 The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Irs 1040 If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Irs 1040 Example 2. Irs 1040 John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Irs 1040 He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Irs 1040 He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Irs 1040 Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Irs 1040 The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Irs 1040 The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Irs 1040 The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Irs 1040 The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Irs 1040 4. Irs 1040 The basis of the depreciable real property is $12,000. Irs 1040 This is the $30,000 total basis multiplied by the 0. Irs 1040 4 figured in (3). Irs 1040 The basis of the other property (land) is $18,000. Irs 1040 This is the $30,000 total basis minus the $12,000 figured in (4). Irs 1040 The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Irs 1040 Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Irs 1040 Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Irs 1040 See chapter 2. Irs 1040 In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Irs 1040 In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Irs 1040 These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Irs 1040 The comparison should take into account all the following facts and circumstances. Irs 1040 The original cost and reproduction cost of construction, erection, or production. Irs 1040 The remaining economic useful life. Irs 1040 The state of obsolescence. Irs 1040 The anticipated expenditures required to maintain, renovate, or modernize the properties. Irs 1040 Like-kind exchanges and involuntary conversions. Irs 1040   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Irs 1040 The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Irs 1040 The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Irs 1040   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Irs 1040 The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Irs 1040 If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Irs 1040 Example. Irs 1040 A fire destroyed your property with a total fair market value of $50,000. Irs 1040 It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Irs 1040 You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Irs 1040 The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Irs 1040 You choose to postpone reporting your gain from the involuntary conversion. Irs 1040 You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Irs 1040 The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Irs 1040 The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Irs 1040 The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Irs 1040 Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Irs 1040 The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Irs 1040 All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Irs 1040 Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Irs 1040 However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. Irs 1040 Prev  Up  Next   Home   More Online Publications
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Fact Sheets 2014

IRS Offers Advice on How to Choose a Tax Preparer
FS-2014-5, February 2014 — Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.

Earned Income Tax Credit; Do I Qualify?
FS-2014-4, January 2014 — The Earned Income Tax Credit (EITC) is a financial boost for people working hard to make ends meet. Millions of workers may qualify for the first time this year due to changes in their marital, parental or financial status.

IRS Criminal Investigation Combats Identity Theft Refund Fraud
FS-2014-3, January 2014 — The IRS has seen a significant increase in refund fraud that involves identity thieves who file false claims for refunds by stealing and using someone's Social Security number. The investigative work done by Criminal Investigation is a major component of the IRS’s efforts to combat tax-related identity theft. 

Tips for Taxpayers, Victims about Identity Theft and Tax Returns
FS-2014-2, January 2014 — Identity theft is one of the fastest growing crimes nationwide, and refund fraud caused by identity theft is one of the biggest challenges facing the IRS. In 2014, the IRS continues to take new steps and strong actions to protect taxpayers and help victims of identity theft and refund fraud.

IRS Combats Identity Theft and Refund Fraud on Many Fronts
FS-2014-1, January 2014 — Stopping identity theft and refund fraud is a top priority for the IRS. The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.

News Release and Fact Sheet Archive
News releases and fact sheets from November 2002 forward and an archive of news releases and fact sheets in PDF format back to 1997.

Page Last Reviewed or Updated: 05-Mar-2014

The Irs 1040

Irs 1040 Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. Irs 1040 Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. Irs 1040 Method 2. Irs 1040 How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. Irs 1040 In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Irs 1040 You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. Irs 1040 Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. Irs 1040 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. Irs 1040 These wages must be included on line 7 of Form 1040. Irs 1040 See Form 8919 for more information. Irs 1040 Childcare providers. Irs 1040   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. Irs 1040 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. Irs 1040 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. Irs 1040 Babysitting. Irs 1040   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Irs 1040 Bankruptcy. Irs 1040   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. Irs 1040 Your W-2 will show your total wages and withheld income tax for the year. Irs 1040 On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. Irs 1040 Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. Irs 1040 If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. Irs 1040   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. Irs 1040 For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. Irs 1040   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. Irs 1040 The statement must show the allocation and describe the method used to make the allocation. Irs 1040 For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. Irs 1040 R. Irs 1040 B. Irs 1040 596, available at www. Irs 1040 irs. Irs 1040 gov/irb/2006-40_IRB/ar12. Irs 1040 html. Irs 1040 Miscellaneous Compensation This section discusses many types of employee compensation. Irs 1040 The subjects are arranged in alphabetical order. Irs 1040 Advance commissions and other earnings. Irs 1040   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. Irs 1040    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. Irs 1040 If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. Irs 1040 See Repayments , later. Irs 1040 Allowances and reimbursements. Irs 1040    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Irs 1040 If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. Irs 1040 Back pay awards. Irs 1040   Include in income amounts you are awarded in a settlement or judgment for back pay. Irs 1040 These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. Irs 1040 They should be reported to you by your employer on Form W-2. Irs 1040 Bonuses and awards. Irs 1040    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. Irs 1040 These include prizes such as vacation trips for meeting sales goals. Irs 1040 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. Irs 1040 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. Irs 1040 Employee achievement award. Irs 1040   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. Irs 1040 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. Irs 1040 Your employer can tell you whether your award is a qualified plan award. Irs 1040 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. Irs 1040   However, the exclusion does not apply to the following awards. Irs 1040 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. Irs 1040 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. Irs 1040 Example. Irs 1040 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. Irs 1040 Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. Irs 1040 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. Irs 1040 Differential wage payments. Irs 1040   This is any payment made by an employer to an individual for any period during which the individual is, 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 the individual would have received from the employer for that period. Irs 1040 These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. Irs 1040 The payments are reported as wages on Form W-2. Irs 1040 Government cost-of-living allowances. Irs 1040   Most payments received by U. Irs 1040 S. Irs 1040 Government civilian employees for working abroad are taxable. Irs 1040 However, certain cost-of-living allowances are tax free. Irs 1040 Publication 516, U. Irs 1040 S. Irs 1040 Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. Irs 1040 Nonqualified deferred compensation plans. Irs 1040   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. Irs 1040 This amount is shown on Form W-2, box 12, using code Y. Irs 1040 This amount is not included in your income. Irs 1040   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. Irs 1040 This amount is included in your wages shown on Form W-2, box 1. Irs 1040 It is also shown on Form W-2, box 12, using code Z. Irs 1040 Nonqualified deferred compensation plans of nonqualified entities. Irs 1040   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. Irs 1040 For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. Irs 1040 A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. Irs 1040 Note received for services. Irs 1040   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. Irs 1040 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. Irs 1040 Do not include that part again in your income. Irs 1040 Include the rest of the payment in your income in the year of payment. Irs 1040   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. Irs 1040 Severance pay. Irs 1040   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Irs 1040 Accrued leave payment. Irs 1040   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. Irs 1040   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. Irs 1040 You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Irs 1040 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 your return and the wages on your Forms W-2. Irs 1040 Outplacement services. Irs 1040   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. Irs 1040    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). Irs 1040 Sick pay. Irs 1040   Pay you receive from your employer while you are sick or injured is part of your salary or wages. Irs 1040 In addition, you must include in your income sick pay benefits received from any of the following payers. Irs 1040 A welfare fund. Irs 1040 A state sickness or disability fund. Irs 1040 An association of employers or employees. Irs 1040 An insurance company, if your employer paid for the plan. Irs 1040 However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. Irs 1040 For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. Irs 1040 Social security and Medicare taxes paid by employer. Irs 1040   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. Irs 1040 The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Irs 1040 However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Irs 1040 Stock appreciation rights. Irs 1040   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. Irs 1040 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. Irs 1040 You include the cash payment in income in the year you use the right. Irs 1040 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. Irs 1040 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. Irs 1040 See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. Irs 1040 Recipient of fringe benefit. Irs 1040   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. Irs 1040 You are considered to be the recipient even if it is given to another person, such as a member of your family. Irs 1040 An example is a car your employer gives to your spouse for services you perform. Irs 1040 The car is considered to have been provided to you and not to your spouse. Irs 1040   You do not have to be an employee of the provider to be a recipient of a fringe benefit. Irs 1040 If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. Irs 1040 Provider of benefit. Irs 1040   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. Irs 1040 The provider can be a client or customer of an independent contractor. Irs 1040 Accounting period. Irs 1040   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Irs 1040 Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Irs 1040 The general rule: benefits are reported for a full calendar year (January 1–December 31). Irs 1040 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. Irs 1040 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. Irs 1040 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. Irs 1040   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). Irs 1040 Form W-2. Irs 1040   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. Irs 1040 Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). Irs 1040 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). Irs 1040 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. Irs 1040 Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . Irs 1040 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. Irs 1040 Long-term care coverage. Irs 1040   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. Irs 1040 However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. Irs 1040 This amount will be reported as wages in box 1 of your Form W-2. Irs 1040 Archer MSA contributions. Irs 1040    Contributions by your employer to your Archer MSA generally are not included in your income. Irs 1040 Their total will be reported in box 12 of Form W-2, with code R. Irs 1040 You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Irs 1040 File the form with your return. Irs 1040 Health flexible spending arrangement (health FSA). Irs 1040   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. Irs 1040   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. Irs 1040 The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. Irs 1040 For more information, see Notice 2012-40, 2012-26 I. Irs 1040 R. Irs 1040 B. Irs 1040 1046, available at www. Irs 1040 irs. Irs 1040 gov/irb/2012-26 IRB/ar09. Irs 1040 html. Irs 1040 Health reimbursement arrangement (HRA). Irs 1040   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. Irs 1040 Health savings accounts (HSA). Irs 1040   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Irs 1040 Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Irs 1040 Contributions made by your employer are not included in your income. Irs 1040 Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Irs 1040 Distributions not used for qualified medical expenses are included in your income. Irs 1040 See Publication 969 for the requirements of an HSA. Irs 1040   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Irs 1040 The contributions are treated as a distribution of money and are not included in the partner's gross income. Irs 1040 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. Irs 1040 In both situations, the partner can deduct the contribution made to the partner's HSA. Irs 1040   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. Irs 1040 The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Irs 1040 Qualified HSA funding distribution. Irs 1040   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. Irs 1040 See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. Irs 1040 Failure to maintain eligibility. Irs 1040   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. Irs 1040 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. Irs 1040 This income is also subject to an additional 10% tax. Irs 1040 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. Irs 1040 See Instructions for Form 8839, Qualified Adoption Expenses, for more information. Irs 1040 Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. Irs 1040 They also are included as social security and Medicare wages in boxes 3 and 5. Irs 1040 However, they are not included as wages in box 1. Irs 1040 To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. Irs 1040 File the form with your return. Irs 1040 Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. Irs 1040 The gym must be used primarily by employees, their spouses, and their dependent children. Irs 1040 If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. Irs 1040 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. Irs 1040 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. Irs 1040 Also see Employee Discounts , later. Irs 1040 Holiday gifts. Irs 1040   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. Irs 1040 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. Irs 1040 Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Irs 1040 Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. Irs 1040 The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Irs 1040 Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. Irs 1040 Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. Irs 1040 To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. Irs 1040 See the Instructions for Form 2441 for more information. Irs 1040 Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. Irs 1040 For more information, see Publication 970. Irs 1040 Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. Irs 1040 The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. Irs 1040 However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). Irs 1040 The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. Irs 1040 For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. Irs 1040 (Ask your employer for this percentage. Irs 1040 ) For a discount on services, 20%. Irs 1040 Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. Irs 1040 If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). Irs 1040 Qualified retirement planning services paid for you by your employer may be excluded from your income. Irs 1040 For more information, see Retirement Planning Services , later. Irs 1040 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. Irs 1040 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. Irs 1040 For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. Irs 1040 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. Irs 1040 Also, it is shown separately in box 12 with code C. Irs 1040 Group-term life insurance. Irs 1040   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. Irs 1040 Permanent benefits. Irs 1040   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. Irs 1040 Your employer should be able to tell you the amount to include in your income. Irs 1040 Accidental death benefits. Irs 1040   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. Irs 1040 Former employer. Irs 1040   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. Irs 1040 Also, it is shown separately in box 12 with code C. Irs 1040 Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. Irs 1040 You must pay these taxes with your income tax return. Irs 1040 Include them on line 60, Form 1040, and follow the instructions forline 60. Irs 1040 For more information, see the Instructions for Form 1040. Irs 1040 Two or more employers. Irs 1040   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. Irs 1040 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. Irs 1040 You must figure how much to include in your income. Irs 1040 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. Irs 1040 Figuring the taxable cost. Irs 1040    Use the following worksheet to figure the amount to include in your income. Irs 1040   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. Irs 1040 However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . Irs 1040 Worksheet 1. Irs 1040 Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Irs 1040 Enter the total amount of your insurance coverage from your employer(s) 1. Irs 1040   2. Irs 1040 Limit on exclusion for employer-provided group-term life insurance coverage 2. Irs 1040 50,000 3. Irs 1040 Subtract line 2 from line 1 3. Irs 1040   4. Irs 1040 Divide line 3 by $1,000. Irs 1040 Figure to the nearest tenth 4. Irs 1040   5. Irs 1040 Go to Table 1. Irs 1040 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. Irs 1040   6. Irs 1040 Multiply line 4 by line 5 6. Irs 1040     7. Irs 1040 Enter the number of full months of coverage at this cost 7. Irs 1040   8. Irs 1040 Multiply line 6 by line 7 8. Irs 1040   9. Irs 1040 Enter the premiums you paid per month 9. Irs 1040       10. Irs 1040 Enter the number of months you paid the  premiums 10. Irs 1040       11. Irs 1040 Multiply line 9 by line 10. Irs 1040 11. Irs 1040   12. Irs 1040 Subtract line 11 from line 8. Irs 1040 Include this amount in your income as wages 12. Irs 1040   Table 1. Irs 1040 Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . Irs 1040 05     25 through 29 . Irs 1040 06     30 through 34 . Irs 1040 08     35 through 39 . Irs 1040 09     40 through 44 . Irs 1040 10     45 through 49 . Irs 1040 15     50 through 54 . Irs 1040 23     55 through 59 . Irs 1040 43     60 through 64 . Irs 1040 66     65 through 69 1. Irs 1040 27     70 and older 2. Irs 1040 06   Example. Irs 1040 You are 51 years old and work for employers A and B. Irs 1040 Both employers provide group-term life insurance coverage for you for the entire year. Irs 1040 Your coverage is $35,000 with employer A and $45,000 with employer B. Irs 1040 You pay premiums of $4. Irs 1040 15 a month under the employer B group plan. Irs 1040 You figure the amount to include in your income as follows. Irs 1040   Worksheet 1. Irs 1040 Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. Irs 1040 Enter the total amount of your insurance coverage from your employer(s) 1. Irs 1040 80,000 2. Irs 1040 Limit on exclusion for employer-provided group-term life insurance coverage 2. Irs 1040 50,000 3. Irs 1040 Subtract line 2 from line 1 3. Irs 1040 30,000 4. Irs 1040 Divide line 3 by $1,000. Irs 1040 Figure to the nearest tenth 4. Irs 1040 30. Irs 1040 0 5. Irs 1040 Go to Table 1. Irs 1040 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. Irs 1040 . Irs 1040 23 6. Irs 1040 Multiply line 4 by line 5 6. Irs 1040 6. Irs 1040 90 7. Irs 1040 Enter the number of full months of coverage at this cost. Irs 1040 7. Irs 1040 12 8. Irs 1040 Multiply line 6 by line 7 8. Irs 1040 82. Irs 1040 80 9. Irs 1040 Enter the premiums you paid per month 9. Irs 1040 4. Irs 1040 15     10. Irs 1040 Enter the number of months you paid the premiums 10. Irs 1040 12     11. Irs 1040 Multiply line 9 by line 10. Irs 1040 11. Irs 1040 49. Irs 1040 80 12. Irs 1040 Subtract line 11 from line 8. Irs 1040 Include this amount in your income as wages 12. Irs 1040 33. Irs 1040 00 The total amount to include in income for the cost of excess group-term life insurance is $33. Irs 1040 Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. Irs 1040 You must add it to the wages shown on your Forms W-2 and include the total on your return. Irs 1040 Entire cost excluded. Irs 1040   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. Irs 1040 You are permanently and totally disabled and have ended your employment. Irs 1040 Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. Irs 1040 A charitable organization 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. Irs 1040 (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. Irs 1040 ) 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. Irs 1040 Entire cost taxed. Irs 1040   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. Irs 1040 The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. Irs 1040 You are a key employee and your employer's plan discriminates in favor of key employees. Irs 1040 Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Irs 1040 The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. Irs 1040 The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. Irs 1040 (You must accept it in order to be able to properly perform your duties. Irs 1040 ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. Irs 1040 See De Minimis (Minimal) Benefits , earlier. Irs 1040 Faculty lodging. Irs 1040   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. Irs 1040 However, the lodging must be qualified campus lodging, and you must pay an adequate rent. Irs 1040 Academic health center. Irs 1040   This is an organization that meets the following conditions. Irs 1040 Its principal purpose or function is to provide medical or hospital care or medical education or research. Irs 1040 It receives payments for graduate medical education under the Social Security Act. Irs 1040 One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. Irs 1040 Qualified campus lodging. Irs 1040   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. Irs 1040 The lodging must be located on or near a campus of the educational institution or academic health center. Irs 1040 Adequate rent. Irs 1040   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. Irs 1040 If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. Irs 1040   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. Irs 1040 Example. Irs 1040 Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. Irs 1040 The house is appraised at $200,000. Irs 1040 The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. Irs 1040 Carl pays an annual rent of $11,000. Irs 1040 Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). Irs 1040 If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). Irs 1040 Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. Irs 1040 See Publication 521 for more information. Irs 1040 No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). Irs 1040 In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. Irs 1040 Example. Irs 1040 You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Irs 1040 Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. Irs 1040 The value of the personal flight is not included in your income. Irs 1040 However, the value of the hotel room is included in your income because you do not work in the hotel business. Irs 1040 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. Irs 1040 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. Irs 1040 You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Irs 1040 Also, see Financial Counseling Fees , earlier. Irs 1040 Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. Irs 1040 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. Irs 1040 Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. Irs 1040 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. Irs 1040 Exclusion limit. Irs 1040   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. Irs 1040   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. Irs 1040   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. Irs 1040   If the benefits have a value that is more than these limits, the excess must be included in your income. Irs 1040 You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. Irs 1040 Commuter highway vehicle. Irs 1040   This is a highway vehicle that seats at least six adults (not including the driver). Irs 1040 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). Irs 1040 Transit pass. Irs 1040   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. Irs 1040 Qualified parking. Irs 1040   This is parking provided to an employee at or near the employer's place of business. Irs 1040 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. Irs 1040 It does not include parking at or near the employee's home. Irs 1040 Qualified bicycle commuting. Irs 1040   This is reimbursement based on the number of qualified bicycle commuting months for the year. Irs 1040 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. Irs 1040 The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Irs 1040 Tuition Reduction You can exclude a qualified tuition reduction from your income. Irs 1040 This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. Irs 1040 For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. Irs 1040 Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. Irs 1040 For more information, see Publication 970. Irs 1040 Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. Irs 1040 Example. Irs 1040 You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. Irs 1040 The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. Irs 1040 Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. Irs 1040 For an exception, see Group-Term Life Insurance , earlier. Irs 1040 General valuation rule. Irs 1040   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. Irs 1040 If you pay fair market value for a fringe benefit, no amount is included in your income. Irs 1040 Fair market value. Irs 1040   The fair market value of a fringe benefit is determined by all the facts and circumstances. Irs 1040 It is the amount you would have to pay a third party to buy or lease the benefit. Irs 1040 This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. Irs 1040 Employer-provided vehicles. Irs 1040   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. Irs 1040   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. Irs 1040 An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. Irs 1040 The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. Irs 1040 Flights on employer-provided aircraft. Irs 1040   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. Irs 1040   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. Irs 1040 The division must be based on all the facts, including which employee or employees control the use of the aircraft. Irs 1040 Special valuation rules. Irs 1040   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. Irs 1040 If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. Irs 1040 You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. Irs 1040   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. Irs 1040 The special valuation rules are the following. Irs 1040 The automobile lease rule. Irs 1040 The vehicle cents-per-mile rule. Irs 1040 The commuting rule. Irs 1040 The unsafe conditions commuting rule. Irs 1040 The employer-operated eating-facility rule. Irs 1040   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Irs 1040    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. Irs 1040 61-21(g) and 1. Irs 1040 61-21(h) of the regulations. Irs 1040 Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. Irs 1040 (Your employer can tell you whether your retirement plan is qualified. Irs 1040 ) However, the cost of life insurance coverage included in the plan may have to be included. Irs 1040 See Group-Term Life Insurance , earlier, under Fringe Benefits. Irs 1040 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. Irs 1040 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. Irs 1040 For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. Irs 1040 S. Irs 1040 Civil Service Retirement Benefits, if you are a federal employee or retiree). Irs 1040 Elective Deferrals 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. Irs 1040 The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. Irs 1040 An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. Irs 1040 However, it is included in wages subject to social security and Medicare taxes. Irs 1040 Elective deferrals include elective contributions to the following retirement plans. Irs 1040 Cash or deferred arrangements (section 401(k) plans). Irs 1040 The Thrift Savings Plan for federal employees. Irs 1040 Salary reduction simplified employee pension plans (SARSEP). Irs 1040 Savings incentive match plans for employees (SIMPLE plans). Irs 1040 Tax-sheltered annuity plans (403(b) plans). Irs 1040 Section 501(c)(18)(D) plans. Irs 1040 (But see Reporting by employer , later. Irs 1040 ) Section 457 plans. Irs 1040 Qualified automatic contribution arrangements. Irs 1040   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. Irs 1040 You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. Irs 1040 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. Irs 1040   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. Irs 1040 Overall limit on deferrals. Irs 1040   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), earlier. Irs 1040 The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. Irs 1040 Amounts deferred under specific plan limits are part of the overall limit on deferrals. Irs 1040   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. Irs 1040 However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Irs 1040 Catch-up contributions. Irs 1040   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. Irs 1040 For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. Irs 1040   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. Irs 1040 SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. Irs 1040 Section 457 plans, see Limit for deferrals under section 457 plans , later. Irs 1040 Limit for deferrals under SIMPLE plans. Irs 1040   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. Irs 1040 Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. Irs 1040 Limit for tax-sheltered annuities. Irs 1040   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. Irs 1040 However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. Irs 1040 $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. Irs 1040   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. Irs 1040   For more information, see Publication 571. Irs 1040 Limit for deferral under section 501(c)(18) plans. Irs 1040   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. Irs 1040 Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. Irs 1040 Limit for deferrals under section 457 plans. Irs 1040   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. Irs 1040 However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. Irs 1040 See Increased limit , later. Irs 1040 Includible compensation. Irs 1040   This is the pay you received for the year from the employer who maintained the section 457 plan. Irs 1040 In most cases, it includes all the following payments. Irs 1040 Wages and salaries. Irs 1040 Fees for professional services. Irs 1040 The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. Irs 1040 Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. Irs 1040 Commissions and tips. Irs 1040 Fringe benefits. Irs 1040 Bonuses. Irs 1040 Employer contributions (elective deferrals) to: The section 457 plan. Irs 1040 Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. Irs 1040 A salary reduction simplified employee pension (SARSEP). Irs 1040 A tax-sheltered annuity (section 403(b) plan). Irs 1040 A savings incentive match plan for employees (SIMPLE plan). Irs 1040 A section 125 cafeteria plan. Irs 1040   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. Irs 1040 Your wages as defined for income tax withholding purposes. Irs 1040 Your wages as reported in box 1 of Form W-2. Irs 1040 Your wages that are subject to social security withholding (including elective deferrals). Irs 1040 Increased limit. Irs 1040   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). Irs 1040 Catch-up contributions. Irs 1040   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. Irs 1040 If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. Irs 1040 However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. Irs 1040 Designated Roth contributions. Irs 1040   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. Irs 1040 Designated Roth contributions are treated as elective deferrals, except that they are included in income. Irs 1040 Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. Irs 1040   Qualified distributions from a Roth plan are not included in income. Irs 1040 In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. Irs 1040 Reporting by employer. Irs 1040   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. Irs 1040 Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. Irs 1040 Section 501(c)(18)(D) contributions. Irs 1040   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. Irs 1040 The amount you contributed should be identified with code “H” in box 12. Irs 1040 You may deduct the amount deferred subject to the limits that apply. Irs 1040 Include your deduction in the total on Form 1040, line 36. Irs 1040 Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. Irs 1040 Designated Roth contributions. Irs 1040    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. Irs 1040 Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. Irs 1040 Excess deferrals. Irs 1040   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. Irs 1040 If the plan permits, the excess amount will be distributed to you. Irs 1040 If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. Irs 1040 You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. Irs 1040 The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. Irs 1040   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. Irs 1040 File Form 1040 to add the excess deferral amount to your wages on line 7. Irs 1040 Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. Irs 1040 Excess not distributed. Irs 1040   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. Irs 1040 Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. Irs 1040 Excess distributed to you. Irs 1040   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. Irs 1040 If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Irs 1040 Any income on the excess deferral taken out is taxable in the tax year in which you take it out. Irs 1040 If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. Irs 1040    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Irs 1040 Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. Irs 1040 If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. Irs 1040 Add the excess deferral amount to your wages on your 2013 tax return. Irs 1040 If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. Irs 1040 Do not add this amount to your wages on your 2013 return. Irs 1040 If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. Irs 1040 If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. Irs 1040 S. Irs 1040 Individual Income Tax Return. Irs 1040 If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. Irs 1040 If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. Irs 1040 Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. Irs 1040 Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Irs 1040 Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. Irs 1040 ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Irs 1040 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Irs 1040 Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. Irs 1040 If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. Irs 1040 You must include the excess contributions in your income as wages on Form 1040, line 7. Irs 1040 You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. Irs 1040 If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. Irs 1040 The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. Irs 1040 You should receive a Form 1099-R for the year the excess contributions are distributed to you. Irs 1040 Add the distribution to your wages for that year. Irs 1040 Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Irs 1040 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Irs 1040 Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. Irs 1040 Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. Irs 1040 A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. Irs 1040 A corrective payment consisting of your after-tax contributions is not taxable. Irs 1040 If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. Irs 1040 Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Irs 1040 Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. Irs 1040 Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Irs 1040 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Irs 1040 Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), 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 or property acquired through exercise of the option. Irs 1040 The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Irs 1040 Your employer can tell you which kind of option you hold. Irs 1040 Nonstatutory Stock Options Grant of option. Irs 1040   If you are granted a nonstatutory stock option, you may have income when you receive the option. Irs 1040 The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. Irs 1040 The fair market value of an option can be readily determined if it is actively traded on an established market. Irs 1040    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. Irs 1040 You can transfer the option. Irs 1040 You can exercise the option immediately in full. Irs 1040 The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. Irs 1040 The fair market value of the option privilege can be readily determined. Irs 1040 The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. Irs 1040 For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. Irs 1040 The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. Irs 1040 If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. Irs 1040 For more information on the excise tax, see Internal Revenue Code section 4985. Irs 1040 Option with readily determinable value. Irs 1040   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. Irs 1040 See Restricted Property , later, for rules on how much income to include and when to include it. Irs 1040 However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. Irs 1040 Option without readily determinable value. Irs 1040   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. Irs 1040    Exercise or transfer of option. Irs 1040   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. Irs 1040 Option with readily determinable value. Irs 1040   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. Irs 1040 Option without readily determinable value. Irs 1040   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope