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Snaptax 5. Snaptax   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Prohibited Tax Shelter TransactionsEntity Level Tax Excess Benefit TransactionsTax on Disqualified Persons Tax on Organization Managers Excess Benefit Transaction Excess Business Holdings Taxable Distributions of Sponsoring Organizations Exception. Snaptax A donor advised fund does not include: Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Excise Taxes on Private Foundations Excise Taxes on Black Lung Benefit Trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements Introduction An excise tax may be imposed on certain tax-exempt organizations. Snaptax Topics - This chapter discusses: Prohibited tax shelter transactions Excess benefit transactions Excess business holdings Taxable distributions of sponsoring organizations Taxes on prohibited benefits distributed from donor advised funds Excise taxes on private foundations Excise taxes on 501(c)(21) black lung benefit trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements of Hospitals Useful Items - You may want to see: Forms (and Instructions) 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code See chapter 6 for more information about getting Form 4720. Snaptax Prohibited Tax Shelter Transactions Section 4965 imposes an excise tax on: Certain tax-exempt entities that are party to prohibited tax shelter transactions, and Any entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. Snaptax  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. Snaptax Tax-exempt entities. Snaptax   Tax-exempt entities that are subject to section 4965 include: Entities described in section 501(c), including but not limited to the following common types of entities: Instrumentalities of the United States described in section 501(c)(1); Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3); Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4); Labor, agricultural, or horticultural organizations described in section 501(c)(5); Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6); Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9); Credit unions described in section 501(c)(14); Insurance companies described in section 501(c)(15); and Veterans' organizations described in section 501(c)(19). Snaptax Religious or apostolic associations or corporations described in section 501(d). Snaptax Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States). Snaptax Indian tribal governments within the meaning of section 7701(a)(40). Snaptax Entity manager. Snaptax    An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction. Snaptax Prohibited tax shelter transaction. Snaptax   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. Snaptax A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. Snaptax 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. Snaptax 6011-4(b)(4). Snaptax See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. Snaptax Subsequently listed transaction. Snaptax   Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction. Snaptax Entity Level Tax Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). Snaptax The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. Snaptax The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction. Snaptax To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720. Snaptax For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. Snaptax Manager Level Tax Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. Snaptax The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. Snaptax To report this tax, file Form 4720. Snaptax Excess Benefit Transactions Excise tax on excess benefit transactions. Snaptax   A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. Snaptax A manager of the organization may also have to pay an excise tax under section 4958. Snaptax These taxes are reported on Form 4720. Snaptax   The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange. Snaptax   There are three taxes under section 4958. Snaptax Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. Snaptax    Taxes imposed on excess benefit transactions do not apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred. Snaptax Tax on Disqualified Persons An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. Snaptax The disqualified person who benefited from the transaction is liable for the tax. Snaptax See definition of Disqualified person, later at Disqualified person. Snaptax Additional tax on the disqualified person. Snaptax   If the 25% tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved. Snaptax   If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. Snaptax If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes. Snaptax   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. Snaptax The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued. Snaptax Taxable period. Snaptax   The taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of: The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction, or The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed. Snaptax Tax on Organization Managers If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation was not willful and was due to reasonable cause. Snaptax This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. Snaptax There is also joint and several liability for this tax. Snaptax A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction. Snaptax Organization Manager. Snaptax   An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. Snaptax An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager's responsibilities to the organization. Snaptax For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. Snaptax A person participates in a transaction knowingly if the person: Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction; Is aware that such a transaction under these circumstances may violate the provisions of federal tax law governing excess benefit transactions; and Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction. Snaptax Knowing does not mean having reason to know. Snaptax The organization manager ordinarily will not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relied on the professional's reasoned written opinion on matters within the professional's expertise or if the manager relied on the fact that the requirements for the rebuttable presumption of reasonableness have been satisfied. Snaptax Participation by an organization manager is willful if it is voluntary, conscious, and intentional. Snaptax An organization manager's participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence. Snaptax Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. Snaptax The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization. Snaptax To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. Snaptax For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. Snaptax Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. Snaptax Donor advised fund transactions occurring after August 17, 2006. Snaptax   For a donor advised fund, an excess benefit transaction includes a grant, loan, compensation, or other similar payment from the fund to a: Donor or donor advisor, Family member of a donor, or donor advisor, 35% controlled entity of a donor, or donor advisor, or 35% controlled entity of a family member of a donor, or donor advisor. Snaptax   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. Snaptax For additional information, see the Instructions for Form 4720. Snaptax Supporting organization transactions occurring after July 25, 2006. Snaptax   For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a: Substantial contributor, Family member of a substantial contributor, 35% controlled entity of a substantial contributor, or 35% controlled entity of a family member of a substantial contributor. Snaptax   Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)). Snaptax   The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. Snaptax For additional information, see the Instructions for Form 4720. Snaptax   Excess benefit transaction rules generally do not apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes. Snaptax Date of Occurrence An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. Snaptax However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year. Snaptax In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. Snaptax In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. Snaptax Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes. Snaptax Correcting the excess benefit. Snaptax   An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards. Snaptax   A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. Snaptax The correction amount equals the excess benefit plus the interest on the excess benefit. Snaptax The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. Snaptax   A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. Snaptax In this case, the disqualified person is treated as making a payment equal to the lesser of: The fair market value of the property on the date the property is returned to the organization, or The fair market value of the property on the date the excess benefit transaction occurred. Snaptax   If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference. Snaptax   If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference. Snaptax Exception. Snaptax   For a correction of an excess benefit transaction (discussed earlier), no amount repaid in a manner prescribed by the Secretary can be held in a donor advised fund. Snaptax Applicable Tax-Exempt Organization An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction. Snaptax An applicable tax-exempt organization does not include: A private foundation as defined in section 509(a), A governmental entity that is: Exempt from (or not subject to) taxation without regard to section 501(a), or Not required to file an annual return, or A foreign organization, recognized by the IRS or by treaty, that receives substantially all of its support (other than gross investment income) from sources outside the United States. Snaptax An organization is not treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization was not tax-exempt under section 501(a), but only if the determination was not based on private inurement or one or more excess benefit transactions. Snaptax Disqualified Person A disqualified person is: Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization, A family member of an individual described in 1, and A 35% controlled entity. Snaptax For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. Snaptax   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. Snaptax Donors of donor advised funds, Investment advisors of sponsoring organizations, and Disqualified persons of a section 509(a)(3) supporting organization that supports the applicable tax-exempt organization. Snaptax For certain supporting organization transactions occurring after July 25, 2006. Snaptax   Substantial contributors to supporting organizations will also be considered disqualified persons with respect to the supporting organizations, along with their family members and 35% controlled entities. Snaptax Investment advisor. Snaptax   Investment advisor means for any sponsoring organization, any person compensated by such organization (but not an employee of such organization) for managing the investment of, or providing investment advice for, assets maintained in donor advised funds owned by such sponsoring organization. Snaptax Substantial contributor. Snaptax   In general, a substantial contributor means any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if that amount is more than 2% of the total contributions and bequests received by the end of the organization's tax year in which the contribution or bequest is received. Snaptax A substantial contributor includes the grantor of a trust. Snaptax Family members. Snaptax   Family members of a disqualified person include a disqualified person's spouse, brothers or sisters (whether by whole or half-blood), spouses of brothers or sisters (whether by whole or half-blood), ancestors, children (including a legally adopted child), grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren (whether by whole or half-blood). Snaptax 35% controlled entity. Snaptax   A 35% controlled entity is: A corporation in which disqualified persons own more than 35% of the total combined voting power, A partnership in which such persons own more than 35% of the profits interest, or A trust or estate in which such persons own more than 35% of the beneficial interest. Snaptax   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. Snaptax Persons having substantial influence. Snaptax   Among those who are in a position to exercise substantial influence over the affairs of the organization are, for example, voting members of the governing body, and persons holding the power of: Presidents, chief executives, or chief operating officers. Snaptax Treasurers and chief financial officers. Snaptax Persons with a material financial interest in a provider-sponsored organization. Snaptax Persons not considered to have substantial influence. Snaptax   Persons who are not considered to be in a position to exercise substantial influence over the affairs of an organization include: An employee who receives benefits that total less than the highly compensated amount in section 414(q)(1)(B)(i) and who does not hold the executive or voting powers mentioned earlier in the discussion on Disqualified Person, is not a family member of a disqualified person, and is not a substantial contributor, Tax-exempt organizations described in section 501(c)(3), and Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations. Snaptax Facts and circumstances. Snaptax   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. Snaptax Facts and circumstances that tend to show a person has substantial influence over the affairs of an organization include, but are not limited to, the following. Snaptax The person founded the organization. Snaptax The person is a substantial contributor to the organization under the section 507(d)(2)(A) definition, only taking into account contributions to the organization for the past 5 years. Snaptax The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. Snaptax The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees. Snaptax The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Snaptax The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. Snaptax The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. Snaptax   Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following. Snaptax The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. Snaptax The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the independent contractor will not economically benefit either directly or indirectly aside from customary fees received for the professional advice rendered. Snaptax Any preferential treatment the person receives based on the size of the person's donation is also offered to others making comparable widely solicited donations. Snaptax The direct supervisor of the person is not a disqualified person. Snaptax The person does not participate in any management decisions affecting the organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Snaptax   In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made separately for each applicable tax-exempt organization. Snaptax A person may be a disqualified person with respect to transactions with more than one organization. Snaptax Reasonable Compensation. Snaptax    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Snaptax The section 162 standard will apply in determining the reasonableness of compensation. Snaptax The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. Snaptax   To determine the reasonableness of compensation, all items of compensation provided by an applicable tax-exempt organization in exchange for performance of services are taken into account in determining the value of compensation (except for economic benefits that are disregarded under the discussion Disregarded benefits , later). Snaptax Items of compensation include: All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred noncash compensation, The payment of liability insurance premiums for, or the payment or reimbursement by the organization of penalties, taxes, or certain expenses under section 4958, unless excludable from income as a de minimis fringe benefit under section 132(a)(4), All other compensatory benefits, whether or not included in gross income for income tax purposes, Taxable and nontaxable fringe benefits, except fringe benefits described in section 132, and Foregone interest on loans. Snaptax    Intent to treat benefits as compensation. Snaptax An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. Snaptax   An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. Snaptax Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation include: The organization produces a signed written employment contract, The organization reports the benefit as compensation on an original Form W-2, Form 1099, or Form 990, or on an amended form filed before starting an IRS examination, or The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination. Snaptax Exception. Snaptax   If the economic benefit is excluded from the disqualified person's gross income for income tax purposes, the applicable tax-exempt organization is not required to indicate its intent to provide an economic benefit as compensation for services. Snaptax Rebuttable presumption that a transaction is not an excess benefit transaction. Snaptax   Payments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met. Snaptax The transaction is approved in advance by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. Snaptax Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. Snaptax (There is a special safe harbor for small organizations. Snaptax If the organization has gross receipts of less than $1 million, appropriate comparability data includes data on compensation paid by three comparable organizations in the same or similar communities for similar services. Snaptax ) The authorized body adequately documents the basis for its determination concurrently with making that determination. Snaptax The documentation should include: The terms of the approved transaction and the date approved, The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it, The comparability data obtained and relied upon by the authorized body and how the data was obtained, Any actions by a member of the authorized body having conflict of interest, and Documentation of the basis of the determination before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body are taken, and approval of records as reasonable, accurate, and complete within a reasonable time thereafter. Snaptax Disregarded benefits. Snaptax   The following economic benefits are disregarded for section 4958 purposes. Snaptax Nontaxable fringe benefits that are excluded from income under section 132. Snaptax Benefits provided to a volunteer for the organization if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less. Snaptax Benefits provided to a member of an organization due to the payment of a membership fee or to a donor as a result of a deductible contribution, if a significant number of disqualified persons make similar payments or contributions and are offered a similar economic benefit. Snaptax Benefits provided to a person solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. Snaptax A transfer of an economic benefit to or for the use of a governmental unit, as defined in section 170(c)(1), if exclusively for public purposes. Snaptax Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. Snaptax   A fixed payment is an amount of cash or other property specified in the contract, or determined by a fixed formula that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. Snaptax   A fixed formula can, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus). Snaptax   An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract. Snaptax   A binding written contract, providing it can be terminated or canceled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial penalty, is treated as a new contract, as of the earliest date any termination or cancellation would be effective. Snaptax Also, if the parties make a material change to a contract, which includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option by the disqualified person), or a more than incidental change to the amount payable under the contract, it is treated as a new contract as of the effective date of the material change. Snaptax More information. Snaptax   For more information, see the Instructions to Forms 990 and 4720. Snaptax Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. Snaptax They may be subject to an excise tax on the amount of any excess business holdings. Snaptax For purposes of section 4943, for tax years beginning after August 17, 2006, donor advised funds and certain supporting organizations are considered private foundations. Snaptax Donor advised fund. Snaptax   In general, a donor advised fund is a fund or account separately identified by reference to contributions of a donor or donors that is owned and controlled by a sponsoring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. Snaptax Supporting organizations. Snaptax   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. Snaptax These include (1) Type III supporting organizations that are not functionally integrated and (2) Type II supporting organizations that accept any gift or contribution from a person who by himself or in connection with a related party controls the supported organization that the Type II supporting organization supports. Snaptax Taxes. Snaptax   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. Snaptax The initial tax is 10% (5% for tax years beginning before August 18, 2006) of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. Snaptax The excess holdings are determined on the day during the tax year when they were the largest. Snaptax   A foundation that fails to correct the excess business holdings becomes liable for an additional tax of 200% of the remaining excess business holdings as of the earlier of tax assessment or mailing of a notice of deficiency. Snaptax   For more information on the tax on excess business holdings, see the Instructions for Form 4720. Snaptax Taxable Distributions of Sponsoring Organizations An excise tax is imposed on a sponsoring organization for each taxable distribution it makes from a donor advised fund. Snaptax An excise tax is also imposed on any fund manager of the sponsoring organization who agreed to the making of a distribution, knowing that it is a taxable distribution. Snaptax Taxable distribution. Snaptax   A taxable distribution is any distribution from a donor advised fund to any natural person or to any other person if: The distribution is for any purpose other than one specified in section 170(c)(2)(B), or The sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to the distribution in accordance with section 4945(h). Snaptax    However, a taxable distribution does not include a distribution from a donor advised fund to: Any organization described in section 170(b)(1)(A) (other than a disqualified supporting organization), The sponsoring organization of the donor advised fund, or Any other donor advised fund. Snaptax The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. Snaptax Sponsoring organization. Snaptax   A sponsoring organization is a section 170(c) organization that is neither a government organization (as referred to in section 170(c)(1) and (2)(A)) nor a private foundation. Snaptax Donor advised fund. Snaptax    A donor advised fund is a fund or account: Which is separately identified by reference to contributions of a donor or donors, Which is owned and controlled by a sponsoring organization, and For which the donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of the funds held in the donor advised funds or accounts because of the donor's status as a donor. Snaptax Exception. Snaptax A donor advised fund does not include:    A fund or account that makes distributions only to a single identified organization or governmental entity, or Any fund or account for a person described in 3 above that gives advice about which individuals receive grants for travel, study, or similar purposes, if the following three requirements are met: The person's advisory privileges are performed exclusively by such person in their capacity as a committee member of which all the committee members are appointed by the sponsoring organization, No combination of persons with advisory privileges, described in 3 above, or persons related to those in 3 above directly or indirectly control the committee, and All grants from the fund or account are awarded on an objective and nondiscriminatory basis according to a procedure approved in advance by the board of directors of the sponsoring organization. Snaptax The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). Snaptax Disqualified supporting organization. Snaptax   A disqualified supporting organization includes (1) a Type III supporting organization that is not functionally integrated and (2) any supporting organization where the donor or donor advisor (and any related parties) directly or indirectly controls a supported organization of the supporting organization. Snaptax Tax on sponsoring organization. Snaptax   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. Snaptax Tax on fund manager. Snaptax   If a tax is imposed on a taxable distribution of the sponsoring organization, a tax of 5% of the distribution will be imposed on any fund manager who agreed to the distribution knowing that it was a taxable distribution. Snaptax Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Snaptax The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Snaptax If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Snaptax   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. Snaptax Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. Snaptax   If any donor, donor advisor, or related party advises the sponsoring organization about making a distribution which results in a donor, donor advisor, or related party receiving (either directly or indirectly) a more than incidental benefit, then such benefit is a prohibited benefit. Snaptax The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. Snaptax Donor advisor. Snaptax   A donor advisor is any person appointed or designated by a donor to advise a sponsoring organization on the distribution or investment of amounts held in the donor's fund or account. Snaptax Related party. Snaptax   A related party includes any family member or 35% controlled entity. Snaptax See the definition of those terms under Disqualified Person , earlier. Snaptax Tax on donor, donor advisor, or related person. Snaptax    A tax of 125% of the benefit resulting from the distribution is imposed on both the party who advised as to the distribution (which might be a donor, donor advisor, or related party) and the party who received such benefit (which might be a donor, donor advisor, or related party). Snaptax The advisor and the party who received the benefit are jointly and severally liable for the tax. Snaptax Tax on fund managers. Snaptax   If a tax is imposed on a prohibited benefit received by a donor, donor advisor, or related person, a tax of 10% of the amount of the prohibited benefit is imposed on any fund manager who agreed to the distribution knowing that it would confer a prohibited benefit. Snaptax Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Snaptax The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Snaptax If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Snaptax Exception. Snaptax   If a person engaged in an excess benefit transaction and received a prohibited benefit for the same transaction, the person is taxed under section 4958, and no tax is imposed under section 4967 for a prohibited benefit. Snaptax   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. Snaptax Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. Snaptax Capital gains from appreciation are included in the tax base on private foundation net investment income. Snaptax This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. Snaptax Form 990-W is used to calculate the estimated tax. Snaptax In addition, there are several other rules that apply to excise taxes on private foundations. Snaptax These include: Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons, Requirements that the foundation annually distribute income for charitable purposes, Limits on their holdings in any business enterprise (see Excess Business Holdings, earlier), Provisions that investments must not jeopardize the carrying out of exempt purposes, and Provisions to assure that expenditures further the organization's exempt purposes. Snaptax Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. Snaptax For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF. Snaptax Excise Taxes on Black Lung Benefit Trusts A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. Snaptax If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. Snaptax Both of these excise taxes are reported on Schedule A (Form 990-BL). Snaptax See the Form 990-BL instructions for more information on these taxes and what has to be filed, even if the trust is excepted from filing. Snaptax Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. Snaptax These entities must meet section 501(r)(3) requirements at all times during their tax year. Snaptax Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). Snaptax See Schedule H, Hospitals (Form 990), for details. Snaptax Prev  Up  Next   Home   More Online Publications
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Understanding Your CP2566 Notice

We didn't receive your tax return. We have calculated your tax, penalty and interest based on wages and other income reported to us by employers, financial institutions and others.


What you need to do

  • File your tax return immediately, or
  • Accept our proposed assessment by signing and returning the Response form, or
  • Call us if you think you don't have to file.

You may want to…


Answers to Common Questions

What should I do if I disagree with the notice?

Call us at the toll free number listed on the top right corner of your notice. Please have your paperwork ready when you call. If you prefer, you can write to us using the notice's response form and return address listed.

Where do I send my return?

Attach the Response form and send the return to the address listed on the notice.

What should I do if I've just filed my tax return?

You don't have to do anything if you filed your tax return(s) within the last eight weeks.

What should I do if I didn't file my tax return or it's been more than eight weeks since I filed it?

Complete the Response form from your notice. Check the name, Social Security number (or Taxpayer Identification Number), and tax year on your notice. Make sure they match the name, number, and year on the return. Mail us a copy of the tax return. Sign the return and date it; if filing a joint return your spouse must also sign the return. Send the return with the Response form to the address listed on the notice.

What happens if I can't pay the full amount I owe when I file my return?

You can make a payment plan with us when you can't pay the full amount you owe.


Tips for next year

File your return on time.

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 28-Feb-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Snaptax

Snaptax Publication 575 - Main Content Table of Contents General InformationPension. Snaptax Annuity. Snaptax Qualified employee plan. Snaptax Qualified employee annuity. Snaptax Designated Roth account. Snaptax Tax-sheltered annuity plan. Snaptax Fixed-period annuities. Snaptax Annuities for a single life. Snaptax Joint and survivor annuities. Snaptax Variable annuities. Snaptax Disability pensions. Snaptax Variable Annuities Section 457 Deferred Compensation Plans Disability Pensions Insurance Premiums for Retired Public Safety Officers Railroad Retirement Benefits Withholding Tax and Estimated Tax Cost (Investment in the Contract)Foreign employment contributions while a nonresident alien. Snaptax Taxation of Periodic PaymentsPeriod of participation. Snaptax Fully Taxable Payments Partly Taxable Payments Taxation of Nonperiodic PaymentsFiguring the Taxable Amount Loans Treated as Distributions Transfers of Annuity Contracts Lump-Sum Distributions RolloversExceptions. Snaptax No tax withheld. Snaptax Partial rollovers. Snaptax Frozen deposits. Snaptax Reasonable period of time. Snaptax 20% Mandatory withholding. Snaptax How to report. Snaptax How to report. Snaptax Special rule for Roth IRAs and designated Roth accounts. Snaptax Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and BeneficiariesGuaranteed payments. Snaptax How To Get Tax HelpLow Income Taxpayer Clinics General Information Definitions. Snaptax   Some of the terms used in this publication are defined in the following paragraphs. Snaptax Pension. Snaptax   A pension is generally a series of definitely determinable payments made to you after you retire from work. Snaptax Pension payments are made regularly and are based on such factors as years of service and prior compensation. Snaptax Annuity. Snaptax   An annuity is a series of payments under a contract made at regular intervals over a period of more than one full year. Snaptax They can be either fixed (under which you receive a definite amount) or variable (not fixed). Snaptax You can buy the contract alone or with the help of your employer. Snaptax Qualified employee plan. Snaptax   A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries and that meets Internal Revenue Code requirements. Snaptax It qualifies for special tax benefits, such as tax deferral for employer contributions and capital gain treatment or the 10-year tax option for lump-sum distributions (if participants qualify). Snaptax To determine whether your plan is a qualified plan, check with your employer or the plan administrator. Snaptax Qualified employee annuity. Snaptax   A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Snaptax Designated Roth account. Snaptax   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Snaptax Elective deferrals that are designated as Roth contributions are included in your income. Snaptax However, qualified distributions (explained later) are not included in your income. Snaptax You should check with your plan administrator to determine if your plan will accept designated Roth contributions. Snaptax Tax-sheltered annuity plan. Snaptax   A tax-sheltered annuity plan (often referred to as a 403(b) plan or a tax-deferred annuity plan) is a retirement plan for employees of public schools and certain tax-exempt organizations. Snaptax Generally, a tax-sheltered annuity plan provides retirement benefits by purchasing annuity contracts for its participants. Snaptax Types of pensions and annuities. Snaptax   Pensions and annuities include the following types. Snaptax Fixed-period annuities. Snaptax   You receive definite amounts at regular intervals for a specified length of time. Snaptax Annuities for a single life. Snaptax   You receive definite amounts at regular intervals for life. Snaptax The payments end at death. Snaptax Joint and survivor annuities. Snaptax   The first annuitant receives a definite amount at regular intervals for life. Snaptax After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Snaptax The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Snaptax Variable annuities. Snaptax   You receive payments that may vary in amount for a specified length of time or for life. Snaptax The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds, cost-of-living indexes, or earnings from a mutual fund. Snaptax Disability pensions. Snaptax   You receive disability payments because you retired on disability and have not reached minimum retirement age. Snaptax More than one program. Snaptax   You may receive employee plan benefits from more than one program under a single trust or plan of your employer. Snaptax If you participate in more than one program, you may have to treat each as a separate pension or annuity contract, depending upon the facts in each case. Snaptax Also, you may be considered to have received more than one pension or annuity. Snaptax Your former employer or the plan administrator should be able to tell you if you have more than one contract. Snaptax Example. Snaptax Your employer set up a noncontributory profit-sharing plan for its employees. Snaptax The plan provides that the amount held in the account of each participant will be paid when that participant retires. Snaptax Your employer also set up a contributory defined benefit pension plan for its employees providing for the payment of a lifetime pension to each participant after retirement. Snaptax The amount of any distribution from the profit-sharing plan depends on the contributions (including allocated forfeitures) made for the participant and the earnings from those contributions. Snaptax Under the pension plan, however, a formula determines the amount of the pension benefits. Snaptax The amount of contributions is the amount necessary to provide that pension. Snaptax Each plan is a separate program and a separate contract. Snaptax If you get benefits from these plans, you must account for each separately, even though the benefits from both may be included in the same check. Snaptax Distributions from a designated Roth account are treated separately from other distributions from the plan. Snaptax Qualified domestic relations order (QDRO). Snaptax   A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a retirement plan. Snaptax The QDRO must contain certain specific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant's benefits to be paid to each alternate payee. Snaptax A QDRO may not award an amount or form of benefit that is not available under the plan. Snaptax   A spouse or former spouse who receives part of the benefits from a retirement plan under a QDRO reports the payments received as if he or she were a plan participant. Snaptax The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. Snaptax The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. Snaptax The denominator is the present value of all benefits payable to the participant. Snaptax   A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant. Snaptax Variable Annuities The tax rules in this publication apply both to annuities that provide fixed payments and to annuities that provide payments that vary in amount based on investment results or other factors. Snaptax For example, they apply to commercial variable annuity contracts, whether bought by an employee retirement plan for its participants or bought directly from the issuer by an individual investor. Snaptax Under these contracts, the owner can generally allocate the purchase payments among several types of investment portfolios or mutual funds and the contract value is determined by the performance of those investments. Snaptax The earnings are not taxed until distributed either in a withdrawal or in annuity payments. Snaptax The taxable part of a distribution is treated as ordinary income. Snaptax Net investment income tax. Snaptax   Beginning in 2013, annuities under a nonqualified plan are included in calculating your net investment income for the net investment income tax (NIIT). Snaptax For information see the Instructions for Form 8960, Net Investment Income Tax — Individuals, Estates and Trusts. Snaptax For information on the tax treatment of a transfer or exchange of a variable annuity contract, see Transfers of Annuity Contracts under Taxation of Nonperiodic Payments, later. Snaptax Withdrawals. Snaptax   If you withdraw funds before your annuity starting date and your annuity is under a qualified retirement plan, a ratable part of the amount withdrawn is tax free. Snaptax The tax-free part is based on the ratio of your cost (investment in the contract) to your account balance under the plan. Snaptax   If your annuity is under a nonqualified plan (including a contract you bought directly from the issuer), the amount withdrawn is allocated first to earnings (the taxable part) and then to your cost (the tax-free part). Snaptax However, if you bought your annuity contract before August 14, 1982, a different allocation applies to the investment before that date and the earnings on that investment. Snaptax To the extent the amount withdrawn does not exceed that investment and earnings, it is allocated first to your cost (the tax-free part) and then to earnings (the taxable part). Snaptax   If you withdraw funds (other than as an annuity) on or after your annuity starting date, the entire amount withdrawn is generally taxable. Snaptax   The amount you receive in a full surrender of your annuity contract at any time is tax free to the extent of any cost that you have not previously recovered tax free. Snaptax The rest is taxable. Snaptax   For more information on the tax treatment of withdrawals, see Taxation of Nonperiodic Payments , later. Snaptax If you withdraw funds from your annuity before you reach age 59½, also see Tax on Early Distributions under Special Additional Taxes, later. Snaptax Annuity payments. Snaptax   If you receive annuity payments under a variable annuity plan or contract, you recover your cost tax free under either the Simplified Method or the General Rule, as explained under Taxation of Periodic Payments , later. Snaptax For a variable annuity paid under a qualified plan, you generally must use the Simplified Method. Snaptax For a variable annuity paid under a nonqualified plan (including a contract you bought directly from the issuer), you must use a special computation under the General Rule. Snaptax For more information, see Variable annuities in Publication 939 under Computation Under the General Rule. Snaptax Death benefits. Snaptax    If you receive a single-sum distribution from a variable annuity contract because of the death of the owner or annuitant, the distribution is generally taxable only to the extent it is more than the unrecovered cost of the contract. Snaptax If you choose to receive an annuity, the payments are subject to tax as described above. Snaptax If the contract provides a joint and survivor annuity and the primary annuitant had received annuity payments before death, you figure the tax-free part of annuity payments you receive as the survivor in the same way the primary annuitant did. Snaptax See Survivors and Beneficiaries , later. Snaptax Section 457 Deferred Compensation Plans If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Snaptax If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Snaptax You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Snaptax You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Snaptax Your 457(b) plan may have a designated Roth account option. Snaptax If so, you may be able to roll over amounts to the designated Roth account or make contributions. Snaptax Elective deferrals to a designated Roth account are included in your income. Snaptax Qualified distributions (explained later) are not included in your income. Snaptax See the Designated Roth accounts discussion under Taxation of Periodic Payments, later. Snaptax This publication covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Snaptax For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525. Snaptax Is your plan eligible?   To find out if your plan is an eligible plan, check with your employer. Snaptax Plans that are not eligible section 457 plans include the following: Bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plans. Snaptax Nonelective deferred compensation plans for nonemployees (independent contractors). Snaptax Deferred compensation plans maintained by churches. Snaptax Length of service award plans for bona fide volunteer firefighters and emergency medical personnel. Snaptax An exception applies if the total amount paid to a volunteer exceeds $3,000 for any year of service. Snaptax Disability Pensions If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Snaptax You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Snaptax Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Snaptax You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Snaptax For information on this credit, see Publication 524. Snaptax Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Snaptax Report the payments on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. Snaptax Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Snaptax For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Snaptax Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. Snaptax The premiums can be for coverage for you, your spouse, or dependents. Snaptax The distribution must be made directly from the plan to the insurance provider. Snaptax You can exclude from income the smaller of the amount of the insurance premiums or $3,000. Snaptax You can only make this election for amounts that would otherwise be included in your income. Snaptax The amount excluded from your income cannot be used to claim a medical expense deduction. Snaptax An eligible retirement plan is a governmental plan that is: a qualified trust, a section 403(a) plan, a section 403(b) annuity, or a section 457(b) plan. Snaptax If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. Snaptax The amount shown in box 2a of Form 1099-R does not reflect this exclusion. Snaptax Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Snaptax Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Snaptax Enter “PSO” next to the appropriate line on which you report the taxable amount. Snaptax If you are retired on disability and reporting your disability pension on line 7 of Form 1040 or Form 1040A, or line 8 of Form 1040NR, include only the taxable amount on that line and enter “PSO” and the amount excluded on the dotted line next to the applicable line. Snaptax Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. Snaptax These categories are treated differently for income tax purposes. Snaptax The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. Snaptax This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and you treat it for tax purposes like social security benefits. Snaptax If you received, repaid, or had tax withheld from the SSEB portion of tier 1 benefits during 2013, you will receive Form RRB-1099, Payments by the Railroad Retirement Board (or Form RRB-1042S, Statement for Nonresident Alien Recipients of Payments by the Railroad Retirement Board, if you are a nonresident alien) from the U. Snaptax S. Snaptax Railroad Retirement Board (RRB). Snaptax For more information about the tax treatment of the SSEB portion of tier 1 benefits and Forms RRB-1099 and RRB-1042S, see Publication 915. Snaptax The second category contains the rest of the tier 1 railroad retirement benefits, called the non-social security equivalent benefit (NSSEB). Snaptax It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Snaptax Treat this category of benefits, shown on Form RRB-1099-R, as an amount received from a qualified employee plan. Snaptax This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Snaptax (The NSSEB and tier 2 benefits, less certain repayments, are combined into one amount called the Contributory Amount Paid on Form RRB-1099-R. Snaptax ) Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. Snaptax See Taxation of Periodic Payments , later, for information on how to report your benefits and how to recover the employee contributions tax free. Snaptax Form RRB-1099-R is used for U. Snaptax S. Snaptax citizens, resident aliens, and nonresident aliens. Snaptax Nonresident aliens. Snaptax   A nonresident alien is an individual who is not a citizen or a resident alien of the United States. Snaptax Nonresident aliens are subject to mandatory U. Snaptax S. Snaptax tax withholding unless exempt under a tax treaty between the United States and their country of legal residency. Snaptax A tax treaty exemption may reduce or eliminate tax withholding from railroad retirement benefits. Snaptax See Tax withholding next for more information. Snaptax   If you are a nonresident alien and your tax withholding rate changed or your country of legal residence changed during the year, you may receive more than one Form RRB-1042S or Form RRB-1099-R. Snaptax To determine your total benefits paid or repaid and total tax withheld for the year, you should add the amounts shown on all forms you received for that year. Snaptax For information on filing requirements for aliens, see Publication 519, U. Snaptax S. Snaptax Tax Guide for Aliens. Snaptax For information on tax treaties between the United States and other countries that may reduce or eliminate U. Snaptax S. Snaptax tax on your benefits, see Publication 901, U. Snaptax S. Snaptax Tax Treaties. Snaptax Tax withholding. Snaptax   To request or change your income tax withholding from SSEB payments, U. Snaptax S. Snaptax citizens should contact the IRS for Form W-4V, Voluntary Withholding Request, and file it with the RRB. Snaptax To elect, revoke, or change your income tax withholding from NSSEB, tier 2, VDB, and supplemental annuity payments received, use Form RRB W-4P, Withholding Certificate for Railroad Retirement Payments. Snaptax If you are a nonresident alien or a U. Snaptax S. Snaptax citizen living abroad, you should provide Form RRB-1001, Nonresident Questionnaire, to the RRB to furnish citizenship and residency information and to claim any treaty exemption from U. Snaptax S. Snaptax tax withholding. Snaptax Nonresident U. Snaptax S. Snaptax citizens cannot elect to be exempt from withholding on payments delivered outside of the U. Snaptax S. Snaptax Help from the RRB. Snaptax   To request an RRB form or to get help with questions about an RRB benefit, you should contact your nearest RRB field office if you reside in the United States (call 1-877-772-5772 for the nearest field office) or U. Snaptax S. Snaptax consulate/Embassy if you reside outside the United States. Snaptax You can visit the RRB on the Internet at www. Snaptax rrb. Snaptax gov. Snaptax Form RRB-1099-R. Snaptax   The following discussion explains the items shown on Form RRB-1099-R. Snaptax The amounts shown on this form are before any deduction for: Federal income tax withholding, Medicare premiums, Legal process garnishment payments, Recovery of a prior year overpayment of an NSSEB, tier 2 benefit, VDB, or supplemental annuity benefit, or Recovery of Railroad Unemployment Insurance Act benefits received while awaiting payment of your railroad retirement annuity. Snaptax   The amounts shown on this form are after any offset for: Social Security benefits, Age reduction, Public Service pensions or public disability benefits, Dual railroad retirement entitlement under another RRB claim number, Work deductions, Legal process partition deductions, Actuarial adjustment, Annuity waiver, or Recovery of a current-year overpayment of NSSEB, tier 2, VDB, or supplemental annuity benefits. Snaptax   The amounts shown on Form RRB-1099-R do not reflect any special rules, such as capital gain treatment or the special 10-year tax option for lump-sum payments, or tax-free rollovers. Snaptax To determine if any of these rules apply to your benefits, see the discussions about them later. Snaptax   Generally, amounts shown on your Form RRB-1099-R are considered a normal distribution. Snaptax Use distribution code “7” if you are asked for a distribution code. Snaptax Distribution codes are not shown on Form RRB-1099-R. Snaptax   There are three copies of this form. Snaptax Copy B is to be included with your income tax return if federal income tax is withheld. Snaptax Copy C is for your own records. Snaptax Copy 2 is filed with your state, city, or local income tax return, when required. Snaptax See the illustrated Copy B (Form RRB-1099-R) above. Snaptax       Each beneficiary will receive his or her own Form RRB-1099-R. Snaptax If you receive benefits on more than one railroad retirement record, you may get more than one Form RRB-1099-R. Snaptax So that you get your form timely, make sure the RRB always has your current mailing address. Snaptax Please click here for the text description of the image. Snaptax Form RRB-1099-R Box 1—Claim Number and Payee Code. Snaptax   Your claim number is a six- or nine-digit number preceded by an alphabetical prefix. Snaptax This is the number under which the RRB paid your benefits. Snaptax Your payee code follows your claim number and is the last number in this box. Snaptax It is used by the RRB to identify you under your claim number. Snaptax In all your correspondence with the RRB, be sure to use the claim number and payee code shown in this box. Snaptax Box 2—Recipient's Identification Number. Snaptax   This is the recipient's U. Snaptax S. Snaptax taxpayer identification number. Snaptax It is the social security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN), if known, for the person or estate listed as the recipient. Snaptax If you are a resident or nonresident alien who must furnish a taxpayer identification number to the IRS and are not eligible to obtain an SSN, use Form W-7, Application for IRS Individual Taxpayer Identification Number, to apply for an ITIN. Snaptax The Instructions for Form W-7 explain how and when to apply. Snaptax Box 3—Employee Contributions. Snaptax   This is the amount of taxes withheld from the railroad employee's earnings that exceeds the amount of taxes that would have been withheld had the earnings been covered under the social security system. Snaptax This amount is the employee's cost that you use to figure the tax-free part of the NSSEB and tier 2 benefit you received (the amount shown in box 4). Snaptax (For information on how to figure the tax-free part, see Partly Taxable Payments under Taxation of Periodic Payments, later. Snaptax ) The amount shown is the total employee contribution amount, not reduced by any amounts that the RRB calculated as previously recovered. Snaptax It is the latest amount reported for 2013 and may have increased or decreased from a previous Form RRB-1099-R. Snaptax If this amount has changed, the change is retroactive. Snaptax You may need to refigure the tax-free part of your NSSEB/tier 2 benefit for 2013 and prior tax years. Snaptax If this box is blank, it means that the amount of your NSSEB and tier 2 payments shown in box 4 is fully taxable. Snaptax    If you had a previous annuity entitlement that ended and you are figuring the tax-free part of your NSSEB/tier 2 benefit for your current annuity entitlement, you should contact the RRB for confirmation of your correct employee contribution amount. Snaptax Box 4—Contributory Amount Paid. Snaptax   This is the gross amount of the NSSEB and tier 2 benefit you received in 2013, less any 2013 benefits you repaid in 2013. Snaptax (Any benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Snaptax ) This amount is the total contributory pension paid in 2013. Snaptax It may be partly taxable and partly tax free or fully taxable. Snaptax If you determine you are eligible to compute a tax-free part as explained later in Partly Taxable Payments under Taxation of Periodic Payments, use the latest reported employee contribution amount shown in box 3 as the cost. Snaptax Box 5—Vested Dual Benefit. Snaptax   This is the gross amount of vested dual benefit (VDB) payments paid in 2013, less any 2013 VDB payments you repaid in 2013. Snaptax It is fully taxable. Snaptax VDB payments you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Snaptax Note. Snaptax The amounts shown in boxes 4 and 5 may represent payments for 2013 and/or other years after 1983. Snaptax Box 6—Supplemental Annuity. Snaptax   This is the gross amount of supplemental annuity benefits paid in 2013, less any 2013 supplemental annuity benefits you repaid in 2013. Snaptax It is fully taxable. Snaptax Supplemental annuity benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8. Snaptax Box 7—Total Gross Paid. Snaptax   This is the sum of boxes 4, 5, and 6. Snaptax The amount represents the total pension paid in 2013. Snaptax Include this amount on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Snaptax Box 8—Repayments. Snaptax   This amount represents any NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit you repaid to the RRB in 2013 for years before 2013 or for unknown years. Snaptax The amount shown in this box has not been deducted from the amounts shown in boxes 4, 5, and 6. Snaptax It only includes repayments of benefits that were taxable to you. Snaptax This means it only includes repayments in 2013 of NSSEB benefits paid after 1985, tier 2 and VDB benefits paid after 1983, and supplemental annuity benefits paid in any year. Snaptax If you included the benefits in your income in the year you received them, you may be able to deduct the repaid amount. Snaptax For more information about repayments, see Repayment of benefits received in an earlier year , later. Snaptax    You may have repaid an overpayment of benefits by returning a payment, by making a payment, or by having an amount withheld from your railroad retirement annuity payment. Snaptax Box 9—Federal Income Tax Withheld. Snaptax   This is the total federal income tax withheld from your NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit. Snaptax Include this on your income tax return as tax withheld. Snaptax If you are a nonresident alien and your tax withholding rate and/or country of legal residence changed during 2013, you will receive more than one Form RRB-1099-R for 2013. Snaptax Determine the total amount of U. Snaptax S. Snaptax federal income tax withheld from your 2013 RRB NSSEB, tier 2, VDB, and supplemental annuity payments by adding the amounts in box 9 of all original 2013 Forms RRB-1099-R, or the latest corrected or duplicate Forms RRB-1099-R you receive. Snaptax Box 10—Rate of Tax. Snaptax   If you are taxed as a U. Snaptax S. Snaptax citizen or resident alien, this box does not apply to you. Snaptax If you are a nonresident alien, an entry in this box indicates the rate at which tax was withheld on the NSSEB, tier 2, VDB, and supplemental annuity payments that were paid to you in 2013. Snaptax If you are a nonresident alien whose tax was withheld at more than one rate during 2013, you will receive a separate Form RRB-1099-R for each rate change during 2013. Snaptax Box 11—Country. Snaptax   If you are taxed as a U. Snaptax S. Snaptax citizen or resident alien, this box does not apply to you. Snaptax If you are a nonresident alien, an entry in this box indicates the country of which you were a resident for tax purposes at the time you received railroad retirement payments in 2013. Snaptax If you are a nonresident alien who was a resident of more than one country during 2013, you will receive a separate Form RRB-1099-R for each country of residence during 2013. Snaptax Box 12—Medicare Premium Total. Snaptax   This is for information purposes only. Snaptax The amount shown in this box represents the total amount of Part B Medicare premiums deducted from your railroad retirement annuity payments in 2013. Snaptax Medicare premium refunds are not included in the Medicare total. Snaptax The Medicare total is normally shown on Form RRB-1099 (if you are a citizen or resident alien of the United States) or Form RRB-1042S (if you are a nonresident alien). Snaptax However, if Form RRB-1099 or Form RRB-1042S is not required for 2013, then this total will be shown on Form RRB-1099-R. Snaptax If your Medicare premiums were deducted from your social security benefits, paid by a third party, refunded to you, and/or you paid the premiums by direct billing, your Medicare total will not be shown in this box. Snaptax Repayment of benefits received in an earlier year. Snaptax   If you had to repay any railroad retirement benefits that you had included in your income in an earlier year because at that time you thought you had an unrestricted right to it, you can deduct the amount you repaid in the year in which you repaid it. Snaptax   If you repaid $3,000 or less in 2013, deduct it on Schedule A (Form 1040), line 23. Snaptax The 2%-of-adjusted-gross-income limit applies to this deduction. Snaptax You cannot take this deduction if you file Form 1040A. Snaptax    If you repaid more than $3,000 in 2013, you can either take a deduction for the amount repaid on Schedule A (Form 1040), line 28 or you can take a credit against your tax. Snaptax For more information, see Repayments in Publication 525. Snaptax Withholding Tax and Estimated Tax Your retirement plan distributions are subject to federal income tax withholding. Snaptax However, you can choose not to have tax withheld on payments you receive unless they are eligible rollover distributions. Snaptax (These are distributions, described later under Rollovers, that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. Snaptax ) If you choose not to have tax withheld or if you do not have enough tax withheld, you may have to make estimated tax payments. Snaptax See Estimated tax , later. Snaptax The withholding rules apply to the taxable part of payments you receive from: An employer pension, annuity, profit-sharing, or stock bonus plan, Any other deferred compensation plan, A traditional individual retirement arrangement (IRA), or A commercial annuity. Snaptax For this purpose, a commercial annuity means an annuity, endowment, or life insurance contract issued by an insurance company. Snaptax There will be no withholding on any part of a distribution where it is reasonable to believe that it will not be includible in gross income. Snaptax Choosing no withholding. Snaptax   You can choose not to have income tax withheld from retirement plan payments unless they are eligible rollover distributions. Snaptax You can make this choice on Form W-4P for periodic and nonperiodic payments. Snaptax This choice generally remains in effect until you revoke it. Snaptax   The payer will ignore your choice not to have tax withheld if: You do not give the payer your social security number (in the required manner), or The IRS notifies the payer, before the payment is made, that you gave an incorrect social security number. Snaptax   To choose not to have tax withheld, a U. Snaptax S. Snaptax citizen or resident alien must give the payer a home address in the United States or its possessions. Snaptax Without that address, the payer must withhold tax. Snaptax For example, the payer has to withhold tax if the recipient has provided a U. Snaptax S. Snaptax address for a nominee, trustee, or agent to whom the benefits are delivered, but has not provided his or her own U. Snaptax S. Snaptax home address. Snaptax   If you do not give the payer a home address in the United States or its possessions, you can choose not to have tax withheld only if you certify to the payer that you are not a U. Snaptax S. Snaptax citizen, a U. Snaptax S. Snaptax resident alien, or someone who left the country to avoid tax. Snaptax But if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. Snaptax This 30% rate will not apply if you are exempt or subject to a reduced rate by treaty. Snaptax For details, get Publication 519. Snaptax Periodic payments. Snaptax   Unless you choose no withholding, your annuity or similar periodic payments (other than eligible rollover distributions) will be treated like wages for withholding purposes. Snaptax Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Snaptax You should give the payer a completed withholding certificate (Form W-4P or a similar form provided by the payer). Snaptax If you do not, tax will be withheld as if you were married and claiming three withholding allowances. Snaptax   Tax will be withheld as if you were single and were claiming no withholding allowances if: You do not give the payer your social security number (in the required manner), or The IRS notifies the payer (before any payment is made) that you gave an incorrect social security number. Snaptax   You must file a new withholding certificate to change the amount of withholding. Snaptax Nonperiodic distributions. Snaptax    Unless you choose no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution is 10% of the distribution. Snaptax You can also ask the payer to withhold an additional amount using Form W-4P. Snaptax The part of any loan treated as a distribution (except an offset amount to repay the loan), explained later, is subject to withholding under this rule. Snaptax Eligible rollover distribution. Snaptax    If you receive an eligible rollover distribution, 20% of it generally will be withheld for income tax. Snaptax You cannot choose not to have tax withheld from an eligible rollover distribution. Snaptax However, tax will not be withheld if you have the plan administrator pay the eligible rollover distribution directly to another qualified plan or an IRA in a direct rollover. Snaptax For more information about eligible rollover distributions, see Rollovers , later. Snaptax Estimated tax. Snaptax   Your estimated tax is the total of your expected income tax, self-employment tax, and certain other taxes for the year, minus your expected credits and withheld tax. Snaptax Generally, you must make estimated tax payments for 2014 if you expect to owe at least $1,000 in tax (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your 2014 return, or 100% of the tax shown on your 2013 return. Snaptax If your adjusted gross income for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing separately), substitute 110% for 100% in (2) above. Snaptax For more information, get Publication 505, Tax Withholding and Estimated Tax. Snaptax In figuring your withholding or estimated tax, remember that a part of your monthly social security or equivalent tier 1 railroad retirement benefits may be taxable. Snaptax See Publication 915. Snaptax You can choose to have income tax withheld from those benefits. Snaptax Use Form W-4V to make this choice. Snaptax Cost (Investment in the Contract) Distributions from your pension or annuity plan may include amounts treated as a recovery of your cost (investment in the contract). Snaptax If any part of a distribution is treated as a recovery of your cost under the rules explained in this publication, that part is tax free. Snaptax Therefore, the first step in figuring how much of a distribution is taxable is to determine the cost of your pension or annuity. Snaptax In general, your cost is your net investment in the contract as of the annuity starting date (or the date of the distribution, if earlier). Snaptax To find this amount, you must first figure the total premiums, contributions, or other amounts you paid. Snaptax This includes the amounts your employer contributed that were taxable to you when paid. Snaptax (However, see Foreign employment contributions , later. Snaptax ) It does not include amounts withheld from your pay on a tax-deferred basis (money that was taken out of your gross pay before taxes were deducted). Snaptax It also does not include amounts you contributed for health and accident benefits (including any additional premiums paid for double indemnity or disability benefits). Snaptax From this total cost you must subtract the following amounts. Snaptax Any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income and that you received by the later of the annuity starting date or the date on which you received your first payment. Snaptax Any other tax-free amounts you received under the contract or plan by the later of the dates in (1). Snaptax If you must use the Simplified Method for your annuity payments, the tax-free part of any single-sum payment received in connection with the start of the annuity payments, regardless of when you received it. Snaptax (See Simplified Method , later, for information on its required use. Snaptax ) If you use the General Rule for your annuity payments, the value of the refund feature in your annuity contract. Snaptax (See General Rule , later, for information on its use. Snaptax ) Your annuity contract has a refund feature if the annuity payments are for your life (or the lives of you and your survivor) and payments in the nature of a refund of the annuity's cost will be made to your beneficiary or estate if all annuitants die before a stated amount or a stated number of payments are made. Snaptax For more information, see Publication 939. Snaptax The tax treatment of the items described in (1) through (3) is discussed later under Taxation of Nonperiodic Payments . Snaptax Form 1099-R. Snaptax If you began receiving periodic payments of a life annuity in 2013, the payer should show your total contributions to the plan in box 9b of your 2013 Form 1099-R. Snaptax Annuity starting date defined. Snaptax   Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Snaptax Example. Snaptax On January 1, you completed all your payments required under an annuity contract providing for monthly payments starting on August 1 for the period beginning July 1. Snaptax The annuity starting date is July 1. Snaptax This is the date you use in figuring the cost of the contract and selecting the appropriate number from Table 1 for line 3 of the Simplified Method Worksheet. Snaptax Designated Roth accounts. Snaptax   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Snaptax Your cost will also include any in-plan Roth rollovers you included in income. Snaptax Foreign employment contributions. Snaptax   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. Snaptax The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (not including the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) but only if the contributions would be excludible from your gross income had they been paid directly to you. Snaptax Foreign employment contributions while a nonresident alien. Snaptax   In determining your cost, special rules apply if you are a U. Snaptax S. Snaptax citizen or resident alien who received distributions in 2013 from a plan to which contributions were made while you were a nonresident alien. Snaptax Your contributions and your employer's contributions are not included in your cost if the contribution: Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed. Snaptax Taxation of Periodic Payments This section explains how the periodic payments you receive from a pension or annuity plan are taxed. Snaptax Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Snaptax These payments are also known as amounts received as an annuity. Snaptax If you receive an amount from your plan that is not a periodic payment, see Taxation of Nonperiodic Payments , later. Snaptax In general, you can recover the cost of your pension or annuity tax free over the period you are to receive the payments. Snaptax The amount of each payment that is more than the part that represents your cost is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Snaptax Designated Roth accounts. Snaptax   If you receive a qualified distribution from a designated Roth account, the distribution is not included in your gross income. Snaptax This applies to both your cost in the account and income earned on that account. Snaptax A qualified distribution is generally a distribution that is: Made after a 5-tax-year period of participation, and Made on or after the date you reach age 59½, made to a beneficiary or your estate on or after your death, or attributable to your being disabled. Snaptax   If the distribution is not a qualified distribution, the rules discussed in this section apply. Snaptax The designated Roth account is treated as a separate contract. Snaptax Period of participation. Snaptax   The 5-tax-year period of participation is the 5-tax-year period beginning with the first tax year for which the participant made a designated Roth contribution to the plan. Snaptax Therefore, for designated Roth contributions made for 2013, the first year for which a qualified distribution can be made is 2018. Snaptax   However, if a direct rollover is made to the plan from a designated Roth account under another plan, the 5-tax-year period for the recipient plan begins with the first tax year for which the participant first had designated Roth contributions made to the other plan. Snaptax   Your 401(k), 403(b), or 457(b) plan may permit you to roll over amounts from those plans to a designated Roth account within the same plan. Snaptax This is known as an in-plan Roth rollover. Snaptax For more details, see In-plan Roth rollovers , later. Snaptax Fully Taxable Payments The pension or annuity payments that you receive are fully taxable if you have no cost in the contract because any of the following situations applies to you (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Snaptax You did not pay anything or are not considered to have paid anything for your pension or annuity. Snaptax Amounts withheld from your pay on a tax-deferred basis are not considered part of the cost of the pension or annuity payment. Snaptax Your employer did not withhold contributions from your salary. Snaptax You got back all of your contributions tax free in prior years (however, see Exclusion not limited to cost under Partly Taxable Payments, later). Snaptax Report the total amount you got on Form 1040, line 16b; Form 1040A, line 12b; or on Form 1040NR, line 17b. Snaptax You should make no entry on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Snaptax Deductible voluntary employee contributions. Snaptax   Distributions you receive that are based on your accumulated deductible voluntary employee contributions are generally fully taxable in the year distributed to you. Snaptax Accumulated deductible voluntary employee contributions include net earnings on the contributions. Snaptax If distributed as part of a lump sum, they do not qualify for the 10-year tax option or capital gain treatment, explained later. Snaptax Partly Taxable Payments If you have a cost to recover from your pension or annuity plan (see Cost (Investment in the Contract) , earlier), you can exclude part of each annuity payment from income as a recovery of your cost. Snaptax This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. Snaptax The rest of each payment is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier). Snaptax You figure the tax-free part of the payment using one of the following methods. Snaptax Simplified Method. Snaptax You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). Snaptax You cannot use this method if your annuity is paid under a nonqualified plan. Snaptax General Rule. Snaptax You must use this method if your annuity is paid under a nonqualified plan. Snaptax You generally cannot use this method if your annuity is paid under a qualified plan. Snaptax You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Snaptax If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Snaptax Qualified plan annuity starting before November 19, 1996. Snaptax   If your annuity is paid under a qualified plan and your annuity starting date (defined earlier under Cost (Investment in the Contract) ) is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the Simplified Method or the General Rule. Snaptax If your annuity starting date is before July 2, 1986, you use the General Rule unless your annuity qualified for the Three-Year Rule. Snaptax If you used the Three-Year Rule (which was repealed for annuities starting after July 1, 1986), your annuity payments are generally now fully taxable. Snaptax Exclusion limit. Snaptax   Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years. Snaptax Once your annuity starting date is determined, it does not change. Snaptax If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Snaptax That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Snaptax Exclusion limited to cost. Snaptax   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Snaptax Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Snaptax This deduction is not subject to the 2%-of-adjusted-gross-income limit. Snaptax Example 1. Snaptax Your annuity starting date is after 1986, and you exclude $100 a month ($1,200 a year) under the Simplified Method. Snaptax The total cost of your annuity is $12,000. Snaptax Your exclusion ends when you have recovered your cost tax free, that is, after 10 years (120 months). Snaptax After that, your annuity payments are generally fully taxable. Snaptax Example 2. Snaptax The facts are the same as in Example 1, except you die (with no surviving annuitant) after the eighth year of retirement. Snaptax You have recovered tax free only $9,600 (8 × $1,200) of your cost. Snaptax An itemized deduction for your unrecovered cost of $2,400 ($12,000 – $9,600) can be taken on your final return. Snaptax Exclusion not limited to cost. Snaptax   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Snaptax If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Snaptax The total exclusion may be more than your cost. Snaptax Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Snaptax For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Snaptax For any other annuity, this number is the number of monthly annuity payments under the contract. Snaptax Who must use the Simplified Method. Snaptax   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you meet both of the following conditions. Snaptax You receive your pension or annuity payments from any of the following plans. Snaptax A qualified employee plan. Snaptax A qualified employee annuity. Snaptax A tax-sheltered annuity plan (403(b) plan). Snaptax On your annuity starting date, at least one of the following conditions applies to you. Snaptax You are under age 75. Snaptax You are entitled to less than 5 years of guaranteed payments. Snaptax Guaranteed payments. Snaptax   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Snaptax If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Snaptax Annuity starting before November 19, 1996. Snaptax   If your annuity starting date is after July 1, 1986, and before November 19, 1996, and you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. Snaptax You could have chosen to use the Simplified Method if your annuity is payable for your life (or the lives of you and your survivor annuitant) and you met both of the conditions listed earlier under Who must use the Simplified Method . Snaptax Who cannot use the Simplified Method. Snaptax   You cannot use the Simplified Method if you receive your pension or annuity from a nonqualified plan or otherwise do not meet the conditions described in the preceding discussion. Snaptax See General Rule , later. Snaptax How to use the Simplified Method. Snaptax    Complete Worksheet A in the back of this publication to figure your taxable annuity for 2013. Snaptax Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. Snaptax   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. Snaptax How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. Snaptax For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. Snaptax    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Snaptax Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Snaptax Single-life annuity. Snaptax   If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Snaptax Enter on line 3 the number shown for your age on your annuity starting date. Snaptax This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Snaptax Multiple-lives annuity. Snaptax   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Snaptax Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. Snaptax For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. Snaptax For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Snaptax Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. Snaptax   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Snaptax Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Snaptax This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Snaptax Fixed-period annuity. Snaptax   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Snaptax Line 6. Snaptax   The amount on line 6 should include all amounts that could have been recovered in prior years. Snaptax If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. Snaptax Example. Snaptax Bill Smith, age 65, began receiving retirement benefits in 2013 under a joint and survivor annuity. Snaptax Bill's annuity starting date is January 1, 2013. Snaptax The benefits are to be paid for the joint lives of Bill and his wife, Kathy, age 65. Snaptax Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Snaptax Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Snaptax Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Snaptax Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of Worksheet A in completing line 3 of the worksheet. Snaptax His completed worksheet is shown later. Snaptax Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Snaptax Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Snaptax The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Snaptax If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Snaptax This deduction is not subject to the 2%-of-adjusted-gross-income limit. Snaptax Worksheet A. Snaptax Simplified Method Worksheet for Bill Smith 1. Snaptax Enter the total pension or annuity payments received this year. Snaptax Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Snaptax $14,400 2. Snaptax Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion. Snaptax * See Cost (Investment in the Contract) , earlier 2. Snaptax 31,000   Note. Snaptax If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Snaptax Otherwise, go to line 3. Snaptax     3. Snaptax Enter the appropriate number from Table 1 below. Snaptax But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Snaptax 310 4. Snaptax Divide line 2 by the number on line 3 4. Snaptax 100 5. Snaptax Multiply line 4 by the number of months for which this year's payments were made. Snaptax If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Snaptax Otherwise, go to line 6 5. Snaptax 1,200 6. Snaptax Enter any amount previously recovered tax free in years after 1986. Snaptax This is the amount shown on line 10 of your worksheet for last year 6. Snaptax -0- 7. Snaptax Subtract line 6 from line 2 7. Snaptax 31,000 8. Snaptax Enter the smaller of line 5 or line 7 8. Snaptax 1,200 9. Snaptax Taxable amount for year. Snaptax Subtract line 8 from line 1. Snaptax Enter the result, but not less than zero. Snaptax Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Snaptax Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Snaptax If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers , earlier, before entering an amount on your tax return 9. Snaptax $13,200 10. Snaptax Was your annuity starting date before 1987? □ Yes. Snaptax STOP. Snaptax Do not complete the rest of this worksheet. Snaptax  ☑ No. Snaptax Add lines 6 and 8. Snaptax This is the amount you have recovered tax free through 2013. Snaptax You will need this number if you need to fill out this worksheet next year 10. Snaptax 1,200 11. Snaptax Balance of cost to be recovered. Snaptax Subtract line 10 from line 2. Snaptax If zero, you will not have to complete this worksheet next year. Snaptax The payments you receive next year will generally be fully taxable 11. Snaptax $29,800         * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Snaptax           Table 1 for Line 3 Above       AND your annuity starting date was—     IF the age at annuity starting date was. Snaptax . Snaptax . Snaptax BEFORE November 19, 1996, enter on line 3. Snaptax . Snaptax . Snaptax AFTER November 18, 1996, enter on line 3. Snaptax . Snaptax . Snaptax     55 or under 300 360     56-60 260 310     61-65 240 260     66-70 170 210     71 or older 120 160     Table 2 for Line 3 Above     IF the combined ages at  annuity starting date were. Snaptax . Snaptax . Snaptax THEN enter on line 3. Snaptax . Snaptax . Snaptax     110 or under   410     111-120   360     121-130   310     131-140   260     141 or older   210   Multiple annuitants. Snaptax   If you and one or more other annuitants receive payments at the same time, you exclude from each annuity payment a pro rata share of the monthly tax-free amount. Snaptax Figure your share by taking the following steps. Snaptax Complete your worksheet through line 4 to figure the monthly tax-free amount. Snaptax Divide the amount of your monthly payment by the total amount of the monthly payments to all annuitants. Snaptax Multiply the amount on line 4 of your worksheet by the amount figured in (2) above. Snaptax The result is your share of the monthly tax-free amount. Snaptax   Replace the amount on line 4 of the worksheet with the result in (3) above. Snaptax Enter that amount on line 4 of your worksheet each year. Snaptax General Rule Under the General Rule, you determine the tax-free part of each annuity payment based on the ratio of the cost of the contract to the total expected return. Snaptax Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Snaptax To figure it, you must use life expectancy (actuarial) tables prescribed by the IRS. Snaptax Who must use the General Rule. Snaptax   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Snaptax Annuity starting before November 19, 1996. Snaptax   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Snaptax You also had to use it for any fixed-period annuity. Snaptax If you did not have to use the General Rule, you could have chosen to use it. Snaptax If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Snaptax   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Snaptax Who cannot use the General Rule. Snaptax   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Snaptax See Simplified Method , earlier. Snaptax More information. Snaptax   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Snaptax Taxation of Nonperiodic Payments This section of the publication explains how any nonperiodic distributions you receive under a pension or annuity plan are taxed. Snaptax Nonperiodic distributions are also known as amounts not received as an annuity. Snaptax They include all payments other than periodic payments and corrective distributions. Snaptax For example, the following items are treated as nonperiodic distributions. Snaptax Cash withdrawals. Snaptax Distributions of current earnings (dividends) on your investment. Snaptax However, do not include these distributions in your income to the extent the insurer keeps them to pay premiums or other consideration for the contract. Snaptax Certain loans. Snaptax See Loans Treated as Distributions , later. Snaptax The value of annuity contracts transferred without full and adequate consideration. Snaptax See Transfers of Annuity Contracts , later. Snaptax Corrective distributions of excess plan contributions. Snaptax   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Snaptax To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Snaptax Although the plan reports the corrective distributions on Form 1099-R, the distribution is not treated as a nonperiodic distribution from the plan. Snaptax It is not subject to the allocation rules explained in the following discussion, it cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Snaptax    If your retirement plan made a corrective distribution of excess amounts (excess deferrals, excess contributions, or excess annual additions), your Form 1099-R should have the code “8,” “B,” “P,” or “E” in box 7. Snaptax   For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Snaptax Figuring the Taxable Amount How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Snaptax If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Snaptax If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Snaptax You may be able to roll over the taxable amount of a nonperiodic distribution from a qualified retirement plan into another qualified retirement plan or a traditional IRA tax free. Snaptax See Rollovers, later. Snaptax If you do not make a tax-free rollover and the distribution qualifies as a lump-sum distribution, you may be able to elect an optional method of figuring the tax on the taxable amount. Snaptax See Lump-Sum Distributions, later. Snaptax Annuity starting date. Snaptax   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Snaptax Distributions of employer securities. Snaptax    If you receive a distribution of employer securities from a qualified retirement plan, you may be able to defer the tax on the net unrealized appreciation (NUA) in the securities. Snaptax The NUA is the net increase in the securities' value while they were in the trust. Snaptax This tax deferral applies to distributions of the employer corporation's stocks, bonds, registered debentures, and debentures with interest coupons attached. Snaptax   If the distribution is a lump-sum distribution, tax is deferred on all of the NUA unless you choose to include it in your income for the year of the distribution. Snaptax    A lump-sum distribution for this purpose is the distribution or payment of a plan participant's entire balance (within a single tax year) from all of the employer's qualified plans of one kind (pension, profit-sharing, or stock bonus plans), but only if paid: Because of the plan participant's death, After the participant reaches age 59½, Because the participant, if an employee, separates from service, or After the participant, if a self-employed individual, becomes totally and permanently disabled. Snaptax    If you choose to include NUA in your income for the year of the distribution and the participant was born before January 2, 1936, you may be able to figure the tax on the NUA using the optional methods described und