Income

 

The eight chapters in this part discuss many kinds of income. They explain which income is and is not taxed. See Part Three for information on gains and losses you report on Form 8949 and Schedule D (Form 1040) and for information on selling your home.

5. Wages, Salaries, and Other Earnings

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted, resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Reminder

Foreign income. If you’re a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it’s exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

 

Introduction

This chapter discusses compensation received for services as an employee, such as wages, salaries, and fringe benefits. The following topics are included.

• Bonuses and awards.
• Special rules for certain employees.
• Sickness and injury benefits.

 

The chapter explains what income is included and isn’t included in the employee’s gross income and what’s not included.

 

Useful Items – You may want to see:

Publication

• 463Travel, Entertainment, Gift, and Car Expenses
• 525Taxable and Nontaxable Income
• 554Tax Guide for Seniors
• 926Household Employer’s Tax Guide
• 3920Tax Relief for Victims of Terrorist Attacks

 

 

Employee Compensation

This section discusses various types of employee compensation, including fringe benefits, retirement plan contributions, stock options, and restricted property.

Form W-2.

 

If you’re an employee, you should receive a Form W-2 from your employer showing the pay you received for your services. Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you don’t receive a Form W-2.

In some instances your employer isn’t required to give you a Form W-2. Your employer isn’t required to give you a Form W-2 if you perform household work in your employer’s home for less than $2,000 in cash wages during the calendar year and you have no federal income taxes withheld from your wages. Household work is work done in or around an employer’s home. Some examples of workers who do household work are:

• Babysitters,
• Caretakers,
• House cleaning workers,
• Domestic workers,
• Drivers,
• Health aides,
• Housekeepers,
• Maids,
• Nannies,
• Private nurses, and
• Yard workers.

 

See Schedule H (Form 1040), Household Employment Taxes, and its instructions, and Pub. 926, Household Employer’s Tax Guide, for more information.

If you performed services, other than as an independent contractor, and your employer didn’t withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. See Form 8919 and its instructions for more information on how to calculate unreported wages and taxes and how to include them on your income tax return.

Childcare providers.

 

If you provide childcare, either in the child’s home or in your home or other place of business, the pay you receive must be included in your income. If you aren’t an employee, you’re probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally aren’t an employee unless you’re subject to the will and control of the person who employs you as to what you’re to do and how you’re to do it.

Babysitting.

If you’re paid to babysit, even for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.

Employment tax.

 

Whether you’re an employee or self-employed person, your income could be subject to self-employment tax. See the instructions for Schedule C and SE (Form 1040) if you’re self-employed. Also see Pub. 926, Household Employer’s Tax Guide, for more information.

 

Miscellaneous Compensation

This section discusses different types of employee compensation.

Advance commissions and other earnings.

If you receive advance commissions or other amounts for services to be performed in the future and you’re a cash-method taxpayer, you must include these amounts in your income in the year you receive them.

If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments in chapter 12.

Allowances and reimbursements.

 

If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Pub. 463. If you’re reimbursed for moving expenses, see Pub. 521, Moving Expenses.

Back pay awards.

 

If you receive an amount in payment of a settlement or judgment for back pay, you must include the amount of the payment in your income. This includes payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W-2.

Bonuses and awards.

If you receive a bonus or award (cash, goods, services) from your employer, you must include its value in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it isn’t taxable until you receive it or it’s made available to you.

Employee achievement award.

If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. The amount you can exclude is limited to your employer’s cost and can’t be more than $1,600 for qualified plan awards or $400 for nonqualified plan awards for all such awards you receive during the year. Your employer can tell you whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that don’t create a significant likelihood of it being disguised pay.

However, the exclusion doesn’t apply to the following awards.

• A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.
• A safety achievement award if you’re a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.

 

Example.

Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, two qualified plan awards of a stereo valued at $1,000, and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 – $1,600) in his income.

Differential wage payments.

This is any payment made to you by an employer for any period during which you’re, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages you would have received from the employer during that period. These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. The payments are reported as wages on Form W-2.

Government cost-of-living allowances.

Most payments received by U.S. Government civilian employees for working abroad are taxable. However, certain cost-of-living allowances are tax free. Pub. 516, U.S. Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad.

Nonqualified deferred compensation plans.

Your employer may report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan on Form W-2, box 12, using code Y. This amount isn’t included in your income.

However, if at any time during the tax year, the plan fails to meet certain requirements, or isn’t operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years to the extent vested and not previously included in income are included in your income for the current year. This amount is included in your wages shown on Form W-2, box 1. It’s also shown on Form W-2, box 12, using code Z.

Note received for services.

If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Don’t include that part again in your income. Include the rest of the payment in your income in the year of payment.

If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them.

Severance pay.

If you receive a severance payment when your employment with your employer ends or is terminated, you must include this amount in your income.

Accrued leave payment.

 

If you’re a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2.

If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on the return and the wages on your Forms W-2.

Outplacement services.

If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income.

However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040).

Sick pay.

Pay you receive from your employer while you’re sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from any of the following payers.

• A welfare fund.
• A state sickness or disability fund.
• An association of employers or employees.
• An insurance company, if your employer paid for the plan.

However, if you paid the premiums on an accident or health insurance policy yourself, the benefits you receive under the policy aren’t taxable. For more information, see Pub. 525.

Social security and Medicare taxes paid by employer.

If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. The payment also is treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. However, these payments aren’t treated as social security and Medicare wages if you’re a household worker or a farm worker.

Stock appreciation rights.

Don’t include a stock appreciation right granted by your employer in income until you exercise (use) the right. When you use the right, you’re generally entitled to a cash payment equal to the fair market value of the corporation’s stock on the date of use minus the fair market value on the date the right was granted. You include the cash payment in your income in the year you use the right.

 

Fringe Benefits

Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they’re specifically excluded by law. Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules.

Accounting period.

You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report taxable noncash fringe benefits by using either of the following rules.

• The general rule: benefits are reported for a full calendar year (January 1–December 31).

 

• The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year.

Your employer doesn’t have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit.

You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example).

Form W-2.

Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips, and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement).

 

Accident or Health Plan

In most cases, the value of accident or health plan coverage provided to you by your employer isn’t included in your income. Benefits you receive from the plan may be taxable, as explained later under Sickness and Injury Benefits .

For information on the items covered in this section, other than Long-term care coverage, see Pub. 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Long-term care coverage.

Contributions by your employer to provide coverage for long-term care services generally aren’t included in your income. However, contributions made through a flexible spending or similar arrangement offered by your employer must be included in your income. This amount will be reported as wages in box 1 of your Form W-2.

Contributions you make to the plan are discussed in Pub. 502, Medical and Dental Expenses.

Archer MSA contributions.

Contributions by your employer to your Archer MSA generally aren’t included in your income. Their total will be reported in box 12 of Form W-2 with code R. You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File the form with your return.

Health flexible spending arrangement (health FSA).

If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, aren’t included in your income.

Note.

Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. For more information, see Notice 2012-40, 2012-26 I.R.B. 1046, available at IRS.gov/irb/2012-26 IRB/ar09.html.

For tax year 2017, the dollar limitation under section 125(i) on voluntary employee salary reductions for contributions to health flexible spending arrangements is $2,600.

Health reimbursement arrangement (HRA).

If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally aren’t included in your income.

Health savings account (HSA).

If you’re an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Contributions made by your employer aren’t included in your income. Distributions from your HSA that are used to pay qualified medical expenses aren’t included in your income. Distributions not used for qualified medical expenses are included in your income. See Pub. 969 for the requirements of an HSA.

Contributions by a partnership to a bona fide partner’s HSA aren’t contributions by an employer. The contributions are treated as a distribution of money and aren’t included in the partner’s gross income. Contributions by a partnership to a partner’s HSA for services rendered are treated as guaranteed payments that are includible in the partner’s gross income. In both situations, the partner can deduct the contribution made to the partner’s HSA.

Contributions by an S corporation to a 2% shareholder-employee’s HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee’s gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee’s HSA.

Qualified HSA funding distribution.

 

You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally won’t include any of the distribution in your income.

 

Adoption Assistance

You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. See the Instructions for Form 8839, Qualified Adoption Expenses, for more information.

Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. They also are included as social security and Medicare wages in boxes 3 and 5. However, they aren’t included as wages in box 1. To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. File the form with your return.

 

De Minimis (Minimal) Benefits

If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, you generally don’t include its value in your income. In most cases, don’t include in your income the value of discounts at company cafeterias, cab fares home when working overtime, and company picnics.

Holiday gifts.

If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, don’t include the value of the gift in your income. However, if your employer gives you cash or a cash equivalent, you must include it in your income.

 

Educational Assistance

You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. For more information, see Pub. 970, Tax Benefits for Education.

 

Group-Term Life Insurance

In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) isn’t included in your income. However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance.

For exceptions, see Entire cost excluded , and Entire cost taxed , later.

If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Also, it’s shown separately in box 12 with code C.

Group-term life insurance.

This insurance is term life insurance protection (insurance for a fixed period of time) that:

• Provides a general death benefit,
• Is provided to a group of employees,
• Is provided under a policy carried by the employer, and
• Provides an amount of insurance to each employee based on a formula that prevents individual selection.

 

Permanent benefits.

If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Your employer should be able to tell you the amount to include in your income.

Accidental death benefits.

Insurance that provides accidental or other death benefits but doesn’t provide general death benefits (travel insurance, for example) isn’t group-term life insurance.

Former employer.

 

If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Also, it’s shown separately in box 12 with code C. Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them on Form 1040, line 62, and follow the instructions there.

Two or more employers.

 

Your exclusion for employer-provided group-term life insurance coverage can’t exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 won’t be correct. You must figure how much to include in your income. Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return.

Figuring the taxable cost.

Use Worksheet 5-1 to figure the amount to include in your income.

 

 

Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance To Include in Income

1.	Enter the total amount of your insurance coverage from your employer(s)			1.
2.	Limit on exclusion for employer-provided group-term life insurance coverage			2.	50,000
3.	Subtract line 2 from line 1			3.
4.	Divide line 3 by $1,000. Figure to the nearest tenth			4.
5.	Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group			5.
6.	Multiply line 4 by line 5			6.
7.	Enter the number of full months of coverage at this cost			7.
8.	Multiply line 6 by line 7			8.
9.	Enter the premiums you paid per month	9.
10.	Enter the number of months you paid the premiums	10.
11.	Multiply line 9 by line 10			11.
12.	Subtract line 11 from line 8. Include this amount in your income as wages			12.

 

 

Table 5-1. Cost of $1,000 of Group-Term Life Insurance for 1 Month

Age	Cost
Under 25	$ 0.05
25 through 29	0.06
30 through 34	0.08
35 through 39	0.09
40 through 44	0.10
45 through 49	0.15
50 through 54	0.23
55 through 59	0.43
60 through 64	0.66
65 through 69	1.27
70 and above	2.06

 

Example.

You are 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the amount to include in your income as shown in Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustratednext.

 

 

Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated

1.	Enter the total amount of your insurance coverage from your employer(s)			1.	80,000
2.	Limit on exclusion for employer-provided group-term life insurance coverage			2.	50,000
3.	Subtract line 2 from line 1			3.	30,000
4.	Divide line 3 by $1,000. Figure to the nearest tenth			4.	30.0
5.	Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group			5.	0.23
6.	Multiply line 4 by line 5			6.	6.90
7.	Enter the number of full months of coverage at this cost			7.	12
8.	Multiply line 6 by line 7			8.	82.80
9.	Enter the premiums you paid per month	9.	4.15
10.	Enter the number of months you paid the premiums	10.	12
11.	Multiply line 9 by line 10			11.	49.80
12.	Subtract line 11 from line 8. Include this amount in your income as wages			12.	33.00

 

Entire cost excluded.

You aren’t taxed on the cost of group-term life insurance if any of the following circumstances apply.

1. You’re permanently and totally disabled and have ended your employment.
2. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.
3. A charitable organization (defined in chapter 24) to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. (You aren’t entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.)
4. The plan existed on January 1, 1984, and
   1. You retired before January 2, 1984, and were covered by the plan when you retired, or
   2. You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.

 

Entire cost taxed.

 

You’re taxed on the entire cost of group-term life insurance if either of the following circumstances apply.

• The insurance is provided by your employer through a qualified employees’ trust, such as a pension trust or a qualified annuity plan.
• You‘re a key employee and your employer’s plan discriminates in favor of key employees.

 

 

Retirement Planning Services

Generally, don’t include the value of qualified retirement planning services provided to you and your spouse by your employer’s qualified retirement plan. Qualified services include retirement planning advice, information about your employer’s retirement plan, and information about how the plan may fit into your overall individual retirement income plan. You can’t exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer.

 

Transportation

If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. A qualified transportation fringe benefit is:

• Transportation in a commuter highway vehicle (such as a van) between your home and work place,
• A transit pass,
• Qualified parking, or
• Qualified bicycle commuting reimbursement.

 

Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass isn’t readily available for direct distribution to you.

Exclusion limit.

The exclusion for commuter vehicle transportation and transit pass fringe benefits can’t be more than $255 a month.

The exclusion for the qualified parking fringe benefit can’t be more than $255 a month.

The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. You can’t exclude from your income any qualified bicycle commuting reimbursement if you can choose between reimbursement and compensation that is otherwise includible in your income.

If the benefits have a value that is more than these limits, the excess must be included in your income.

Commuter highway vehicle.

This is a highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle’s mileage must reasonably be expected to be:

• For transporting employees between their homes and workplace, and
• On trips during which employees occupy at least half of the vehicle’s adult seating capacity (not including the driver).

 

Transit pass.

This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation.

Qualified parking.

This is parking provided to an employee at or near the employer’s place of business. It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. It doesn’t include parking at or near the employee’s home.

Qualified bicycle commuting.

This is reimbursement based on the number of qualified bicycle commuting months for the year. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you don’t receive any of the other qualified transportation fringe benefits. The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage.

 

Retirement Plan Contributions

Your employer’s contributions to a qualified retirement plan for you aren’t included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See Group-Term Life Insurance , earlier, under Fringe Benefits.

If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan isn’t transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you don’t have to include the value of your interest in your income until it’s transferable or is no longer subject to a substantial risk of forfeiture.

 

For information on distributions from retirement plans, see Pub. 575, Pension and Annuity Income (or Pub. 721, Tax Guide to U.S. Civil Service Retirement Benefits, if you’re a federal employee or retiree).

Elective deferrals.

If you’re covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. An elective deferral, other than a designated Roth contribution (discussed later), isn’t included in wages subject to income tax at the time contributed. Rather, it’s subject to income tax when distributed from the plan. However, it’s included in wages subject to social security and Medicare taxes at the time contributed.

Elective deferrals include elective contributions to the following retirement plans.

1. Cash or deferred arrangements (section 401(k) plans).
2. The Thrift Savings Plan for federal employees.
3. Salary reduction simplified employee pension plans (SARSEP).
4. Savings incentive match plans for employees (SIMPLE plans).
5. Tax-sheltered annuity plans (section 403(b) plans).
6. Section 501(c)(18)(D) plans.
7. Section 457 plans.

 

Qualified automatic contribution arrangements.

 

Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. You’re to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. The notice must explain:

• Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and
• How contributions made will be invested in the absence of any investment decision by you.

 

You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions.

Overall limit on deferrals.

 

For 2017, in most cases, you shouldn’t have deferred more than a total of $18,000 of contributions to the plans listed in (1) through (3) and (5) above. The limit for SIMPLE plans is $12,500. The limit for section 501(c)(18)(D) plans is the lesser of $7,000 or 25% of your compensation. The limit for section 457 plans is the lesser of your includible compensation or $18,000. Amounts deferred under specific plan limits are part of the overall limit on deferrals.

Designated Roth contributions.

 

Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Designated Roth contributions are treated as elective deferrals, except that they’re included in income at the time contributed.

Excess deferrals.

 

Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you’re responsible for monitoring the total you defer to ensure that the deferrals aren’t more than the overall limit.

If you set aside more than the limit, the excess generally must be included in your income for that year, unless you have an excess deferral of a designated Roth contribution. See Pub. 525 for a discussion of the tax treatment of excess deferrals.

Catch-up contributions.

 

You may be allowed catch-up contributions (additional elective deferral) if you’re age 50 or older by the end of the tax year.

 

Stock Options

If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option. However, if your option is a statutory stock option, you won’t have any income until you sell or exchange your stock. Your employer can tell you which kind of option you hold. For more information, see Pub. 525.

 

Restricted Property

In most cases, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. However, if you receive stock or other property that has certain restrictions that affect its value, you don’t include the value of the property in your income until it has substantially vested. (Although you can elect to include the value of the property in your income in the year it‘s transferred to you.) For more information, see Restricted Property in Pub. 525.

Dividends received on restricted stock.

 

Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on your Form W-2.

Stock you elected to include in income.

Dividends you receive on restricted stock you elected to include in your income in the year transferred are treated the same as any other dividends. Report them on your return as dividends. For a discussion of dividends, see chapter 8.

For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Pub. 525.

 

Special Rules for Certain Employees

This section deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers.

 

Clergy

Generally, if you’re a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it isn’t taxable to you.

If you’re a member of a religious organization and you give your outside earnings to the religious organization, you still must include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. See chapter 24.

Pension.

 

A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. It must be reported on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.

Housing.

 

Special rules for housing apply to members of the clergy. Under these rules, you don’t include in your income the rental value of a home (including utilities) or a designated housing allowance provided to you as part of your pay. However, the exclusion can’t be more than the lesser of the following amounts: 1) the amount actually used to provide or rent a home; 2) the fair market rental value of the home (including furnishings, utilities, garage, etc.); 3) the amount officially designated (in advance of payment) as a rental or housing allowance; or 4) an amount that represents reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you’re subject to the self-employment tax. For more information, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

 

Members of Religious Orders

If you’re a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order.

Services performed for the order.

 

If you’re performing the services as an agent of the order in the exercise of duties required by the order, don’t include in your income the amounts turned over to the order.

If your order directs you to perform services for another agency of the supervising church or an associated institution, you’re considered to be performing the services as an agent of the order. Any wages you earn as an agent of an order that you turn over to the order aren’t included in your income.

Example.

You’re a member of a church order and have taken a vow of poverty. You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. You’re a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. However, you remain under the general direction and control of the order. You’re considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order aren’t included in your income.

Services performed outside the order.

 

If you’re directed to work outside the order, your services aren’t an exercise of duties required by the order unless they meet both of the following requirements.

• They’re the kind of services that are ordinarily the duties of members of the order.
• They‘re part of the duties that you must exercise for, or on behalf of, the religious order as its agent.

If you’re an employee of a third party, the services you perform for the third party won’t be considered directed or required of you by the order. Amounts you receive for these services are included in your income, even if you have taken a vow of poverty.

Example.

Mark Brown is a member of a religious order and has taken a vow of poverty. He renounces all claims to his earnings and turns over his earnings to the order.

Mark is a schoolteacher. He was instructed by the superiors of the order to get a job with a private tax-exempt school. Mark became an employee of the school, and, at his request, the school made the salary payments directly to the order.

Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. The wages Mark earns working for the school are included in his income.

 

Foreign Employer

Special rules apply if you work for a foreign employer.

U.S. citizen.

If you’re a U.S. citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign employer, you must include your salary in your income.

Social security and Medicare taxes.

You’re exempt from social security and Medicare employee taxes if you’re employed in the United States by an international organization or a foreign government. However, you must pay self-employment tax on your earnings from services performed in the United States, even though you aren’t self-employed. This rule also applies if you’re an employee of a qualifying wholly owned instrumentality of a foreign government.

Employees of international organizations or foreign governments.

Your compensation for official services to an international organization is exempt from federal income tax if you aren’t a citizen of the United States or you’re a citizen of the Philippines (whether or not you‘re a citizen of the United States).

Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true.

• You aren’t a citizen of the United States or you’re a citizen of the Philippines (whether or not you’re a citizen of the United States).
• Your work is like the work done by employees of the United States in foreign countries.
• The foreign government gives an equal exemption to employees of the United States in its country.

 

Waiver of alien status.

If you’re an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration and Nationality Act to keep your immigrant status, different rules may apply. See Foreign Employer in Pub. 525.

Employment abroad.

For information on the tax treatment of income earned abroad, see Pub. 54.

 

Military

Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. Allowances generally aren’t taxed. For more information on the tax treatment of military allowances and benefits, see Pub. 3, Armed Forces’ Tax Guide.

Differential wage payments.

Any payments made to you by an employer during the time you’re performing service in the uniformed services are treated as compensation. These wages are subject to income tax withholding and are reported on a Form W-2. See the discussion under Miscellaneous Compensation , earlier.

Military retirement pay.

If your retirement pay is based on age or length of service, it’s taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Don’t include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman’s Family Protection Plan or the Survivor Benefit Plan.

For more detailed discussion of survivor annuities, see chapter 10.

Disability.

If you’re retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later.

Veterans’ benefits.

Don’t include in your income any veterans’ benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). The following amounts paid to veterans or their families aren’t taxable.

• Education, training, and subsistence allowances.
• Disability compensation and pension payments for disabilities paid either to veterans or their families.
• Grants for homes designed for wheelchair living.
• Grants for motor vehicles for veterans who lost their sight or the use of their limbs.
• Veterans’ insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran’s endowment policy paid before death.
• Interest on insurance dividends you leave on deposit with the VA.
• Benefits under a dependent-care assistance program.
• The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001.
• Payments made under the compensated work therapy program.
• Any bonus payment by a state or political subdivision because of service in a combat zone.

 

 

Volunteers

The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or similar agency is covered in the following discussions.

Peace Corps.

Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are generally exempt from tax.

Taxable allowances.

 

The following allowances, however, must be included in your income and reported as wages.

• Allowances paid to your spouse and minor children while you’re a volunteer leader training in the United States.
• Living allowances designated by the Director of the Peace Corps as basic compensation. These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses.
• Leave allowances.
• Readjustment allowances or termination payments. These are considered received by you when credited to your account.

 

Example.

Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Although the allowance isn’t available to him until the end of his service, Gary must include it in his income on a monthly basis as it’s credited to his account.

Volunteers in Service to America (VISTA).

If you’re a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages.

National Senior Services Corps programs.

 

Don’t include in your income amounts you receive for supportive services or reimbursements for out-of-pocket expenses from the following programs.

• Retired Senior Volunteer Program (RSVP).

 

• Foster Grandparent Program.

 

• Senior Companion Program.

 

Service Corps of Retired Executives (SCORE).

If you receive amounts for supportive services or reimbursements for out-of-pocket expenses from SCORE, don’t include these amounts in gross income.

Volunteer tax counseling.

Don’t include in your income any reimbursements you receive for transportation, meals, and other expenses you have in training for, or actually providing, volunteer federal income tax counseling for the elderly (TCE).

You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA) program. See chapter 24.

 

Sickness and Injury Benefits

This section discusses sickness and injury benefits, including disability pensions, long-term care insurance contracts, workers’ compensation, and other benefits.

In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer’s payments is reported as income. However, certain payments may not be taxable to you. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury.

 

Don’t report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established.

Cost paid by you.

If you pay the entire cost of a health or accident insurance plan, don’t include any amounts you receive from the plan for personal injury or sickness as income on your tax return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. See Reimbursement in a later year in chapter 21.

Cafeteria plans.

In most cases, if you’re covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums wasn’t included in your income, you aren’t considered to have paid the premiums and you must include any benefits you receive in your income. If the amount of the premiums was included in your income, you’re considered to have paid the premiums, and any benefits you receive aren’t taxable.

 

Disability Pensions

If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you’re not disabled.

 

You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit and the definition of permanent and total disability, see chapter 33.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. The rules for reporting pensions are explained in How To Report in chapter 10.

For information on disability payments from a governmental program provided as a substitute for unemployment compensation, see chapter 12.

Retirement and profit-sharing plans.

If you receive payments from a retirement or profit-sharing plan that doesn’t provide for disability retirement, don’t treat the payments as a disability pension. The payments must be reported as a pension or annuity. For more information on pensions, see chapter 10.

Accrued leave payment.

If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment is not a disability payment. Include it in your income in the tax year you receive it.

 

Military and Government Disability Pensions

Certain military and government disability pensions aren’t taxable.

Service-connected disability.

 

You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.

• The armed forces of any country.
• The National Oceanic and Atmospheric Administration.
• The Public Health Service.
• The Foreign Service.

 

Conditions for exclusion.

Don’t include the disability payments in your income if any of the following conditions apply.

1. You were entitled to receive a disability payment before September 25, 1975.
2. You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.
3. You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:
   1. Results directly from armed conflict,
   2. Takes place while you’re engaged in extra-hazardous service,
   3. Takes place under conditions simulating war, including training exercises such as maneuvers, or
   4. Is caused by an instrumentality of war.
4. You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.

 

Pension based on years of service.

If you receive a disability pension based on years of service, in most cases you must include it in your income. However, if the pension qualifies for the exclusion for a Service-connected disability (discussed earlier), don’t include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.

Retroactive VA determination.

If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period. You must include with each Form 1040X a copy of the official VA Determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit.

If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you’re later given a retroactive disability rating by the VA.

Special period of limitation.

In most cases, under the period of limitation, a claim for credit or refund must be filed within 3 years from the time a return was filed or 2 years from the time the tax was paid. However, if you receive a retroactive service-connected disability rating determination, the period of limitation is extended by a 1-year period beginning on the date of the determination. This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and doesn’t apply to any tax year that began more than 5 years before the date of the determination.

Terrorist attack or military action.

Don’t include in your income disability payments you receive for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies), whether outside or within the United States or from military action. See Pub. 3920, Tax Relief for Victims of Terrorist Attacks, for more information.

 

Long-Term Care Insurance Contracts

Long-term care insurance contracts in most cases are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) in most cases are excludable from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return.

A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. The contract must:

• Be guaranteed renewable;
• Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;
• Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract, may only be used to reduce future premiums or increase future benefits; and
• In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.

 

Qualified long-term care services.

Qualified long-term care services are:

• Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services; and
• Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.

 

Chronically ill individual.

A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following.

• An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
• An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

 

Limit on exclusion.

You generally can exclude from gross income up to $360 a day for 2017. See Limit on exclusion, under Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in Pub. 525 for more information.

 

Workers’ Compensation

Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they’re paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors. The exemption, however, doesn’t apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

 

If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For more information, see Pub. 915, Social Security and Equivalent Railroad Retirement Benefits.

Return to work.

If you return to work after qualifying for workers’ compensation, salary payments you receive for performing light duties are taxable as wages.

 

Other Sickness and Injury Benefits

In addition to disability pensions and annuities, you may receive other payments for sickness or injury.

Railroad sick pay.

Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. However, don’t include them in your income if they’re for an on-the-job injury.

If you received income because of a disability, see Disability Pensions , earlier.

Federal Employees’ Compensation Act (FECA).

Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, aren’t taxable. However, you’re taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Report this income as wages. Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages.

 

If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. See Pub. 554 for more information.

You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. It’s a miscellaneous deduction subject to the 2%-of-AGI limit on Schedule A (Form 1040). If you buy back sick leave in the same year you used it, the amount reduces your taxable sick leave pay. Don’t deduct it separately.

Other compensation.

Many other amounts you receive as compensation for sickness or injury aren’t taxable. These include the following amounts.

• Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments.
• Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income.
• Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.
• Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits aren’t taxable even if your employer pays for the accident and health plan that provides these benefits.

 

Reimbursement for medical care.

A reimbursement for medical care is generally not taxable. However, it may reduce your medical expense deduction. For more information, see chapter 21.

6. Tip Income

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

 

To find out whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Introduction

This chapter is for employees who receive tips.

All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.

The value of noncash tips, such as tickets, passes, or other items of value, also is income and subject to tax.

Reporting your tip income correctly isn’t difficult. You must do three things.

1. Keep a daily tip record.
2. Report tips to your employer.
3. Report all your tips on your income tax return.

This chapter will explain these three things and show you what to do on your tax return if you haven’t done the first two. This chapter also will show you how to treat allocated tips.

For information on special tip programs and agreements, see Pub. 531.

 

Useful Items – You may want to see:

Publication

• 531Reporting Tip Income
• 1244Employee’s Daily Record of Tips and Report to Employer

Form (and Instructions)

• 4137Social Security and Medicare Tax on Unreported Tip Income
• 4070Employee’s Report of Tips to Employer

 

 

Keeping a Daily Tip Record

Why keep a daily tip record.

 

You must keep a daily tip record so you can:

• Report your tips accurately to your employer,
• Report your tips accurately on your tax return, and
• Prove your tip income if your return is ever questioned.

 

How to keep a daily tip record.

 

There are two ways to keep a daily tip record. You can either:

• Write information about your tips in a tip diary; or
• Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips.

You should keep your daily tip record with your tax or other personal records. You must keep your records for as long as they’re important for administration of the federal tax law. For information on how long to keep records, see How Long To Keep Records in chapter 1.

To help you keep a record or diary of your tips, you can use Form 4070A, Employee’s Daily Record of Tips. To get Form 4070A, ask your employer for Pub. 1244, which includes a 1-year supply of Form 4070A or go online to IRS.gov/Pub1244 for a copy of Pub. 1244. Each day, write in the information asked for on the form.

In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you don’t report these tips to your employer, you must report them on your tax return.

If you don’t use Form 4070A, start your records by writing your name, your employer’s name, and the name of the business (if it’s different from your employer’s name). Then, each workday, write the date and the following information.

• Cash tips you get directly from customers or from other employees.
• Tips from credit and debit card charge customers that your employer pays you.
• The value of any noncash tips you get, such as tickets, passes, or other items of value.

 

• The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.

 

 

Electronic tip record.

You can use an electronic system provided by your employer to record your daily tips. If you do, you must receive and keep a paper copy of this record.

Service charges.

 

Don’t write in your tip diary the amount of any service charge that your employer adds to a customer’s bill and then pays to you and treats as wages. This is part of your wages, not a tip. See examples below.

Example 1.

Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. Because Jane didn’t have an unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. Don’t include the 18% charge in your tip diary. Service charges that are paid to you are considered wages, not tips.

Example 2.

Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. Be sure to include this amount in your tip diary.

 

Reporting Tips to Your Employer

Why report tips to your employer.

 

You must report tips to your employer so that:

• Your employer can withhold federal income tax and social security, Medicare, Additional Medicare, or railroad retirement taxes;

 

• Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family’s benefits if you die); and

 

• You can avoid the penalty for not reporting tips to your employer (explained later).

 

What tips to report.

Report to your employer only cash, check, and debit and credit card tips you receive.

If your total tips for any 1 month from any one job are less than $20, don’t report the tips for that month to that employer.

If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Don’t report to your employer any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees.

Don’t report the value of any noncash tips, such as tickets or passes, to your employer. You don’t pay social security, Medicare, Additional Medicare, or railroad retirement taxes on these tips.

How to report.

 

If your employer doesn’t give you any other way to report tips, you can use Form 4070. Fill in the information asked for on the form, sign and date the form, and give it to your employer. To get a 1-year supply of the form, ask your employer for Pub. 1244 or go online to IRS.gov/Pub1244 for a copy of Pub. 1244.

If you don’t use Form 4070, give your employer a statement with the following information.

• Your name, address, and social security number.
• Your employer’s name, address, and business name (if it’s different from your employer’s name).
• The month (or the dates of any shorter period) in which you received tips.
• The total tips required to be reported for that period.

You must sign and date the statement. Be sure to keep a copy with your tax or other personal records.

Your employer may require you to report your tips more than once a month. However, the statement can’t cover a period of more than 1 calendar month.

Electronic tip statement.

Your employer can have you furnish your tip statements electronically.

When to report.

 

Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that isn’t a Saturday, Sunday, or legal holiday.

Example 1.

You must report your tips received in October 2018 by November 13, 2018. November 10 is a Saturday and November 12 is a legal holiday (Veterans’ Day). November 13 is the next day that is not a Saturday, Sunday, or legal holiday.

Example 2.

You must report your tips received in September 2018 by October 10, 2018.

Final report.

 

If your employment ends during the month, you can report your tips when your employment ends.

Penalty for not reporting tips.

If you don’t report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security, Medicare, and Additional Medicare taxes or railroad retirement tax you owe on the unreported tips. For information about these taxes, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later. The penalty amount is in addition to the taxes you owe.

You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so, attach a statement to your return explaining why you didn’t report them.

Giving your employer money for taxes.

Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your reported tips. If this happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes.

If you don’t give your employer enough money, your employer will apply your regular pay and any money you give in the following order.

1. All taxes on your regular pay.
2. Social security, Medicare, and Additional Medicare taxes or railroad retirement taxes on your reported tips.
3. Federal, state, and local income taxes on your reported tips.

 

Any taxes that remain unpaid can be collected by your employer from your next paycheck. If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See Pub. 505, Tax Withholding and Estimated Tax, for more information.

 

Uncollected taxes. You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 2017. These uncollected taxes will be shown on your 2017 Form W-2. See Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later.

 

Reporting Tips on Your Tax Return

How to report tips.

 

Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; or Form 1040EZ, line 1.

What tips to report.

 

You must report all tips you received in 2017 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer for 2017 are included in the wages shown on your Form W-2, box 1. Add to the amount in box 1 only the tips you didn’t report to your employer.

 

If you received $20 or more in cash and charge tips in a month and didn’t report all of those tips to your employer, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer, later.

 

If you didn’t keep a daily tip record as required and an amount is shown on your Form W-2, box 8, see Allocated Tips, later.

If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount on your Form W-2, box 1.

• Cash and charge tips you received that totaled less than $20 for any month.
• The value of noncash tips, such as tickets, passes, or other items of value.

 

 

Example.

Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2017) on June 30 and received $10,000 in wages during the year. Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. He wasn’t required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required.

Ben’s Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return.

Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer.

 

If you received $20 or more in cash and charge tips in a month from any one job and didn’t report all of those tips to your employer, you must report the social security, Medicare, and Additional Medicare taxes on the unreported tips as additional tax on your return. To report these taxes, you must file Form 1040, 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A) even if you wouldn’t otherwise have to file.

Use Form 4137 to figure social security and Medicare taxes and/or Form 8959 to figure Additional Medicare Tax. Enter the taxes on your return as instructed, and attach the completed Form 4137 and/or Form 8959 to your return.

 

If you’re subject to the Railroad Retirement Tax Act, you can’t use Form 4137 to pay railroad retirement tax on unreported tips. To get railroad retirement credit, you must report tips to your employer.

Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer.

You may have uncollected taxes if your regular pay wasn’t enough for your employer to withhold all the taxes you owe and you didn’t give your employer enough money to pay the rest of the taxes. For more information, see Giving your employer money for taxes under Reporting Tips to Your Employer, earlier.

If your employer couldn’t collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2017, the uncollected taxes will be shown on your Form W-2, box 12 (codes A and B). You must report these amounts as additional tax on your return. Unlike the uncollected portion of the regular (1.45%) Medicare tax, the uncollected Additional Medicare Tax isn’t reported on your Form W-2.

To report these uncollected taxes, you must file Form 1040, 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A) even if you wouldn’t otherwise have to file. You must report these taxes on Form 1040, line 62, or the corresponding line of Form 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A). See the instructions for these forms for exact reporting information.

 

Allocated Tips

If your employer allocated tips to you, they’re shown separately on your Form W-2, box 8. They aren’t included in box 1 with your wages and reported tips. If box 8 is blank, this discussion doesn’t apply to you.

What are allocated tips.

 

These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. Your employer will have done this only if:

• You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees; and
• The tips you reported to your employer were less than your share of 8% of food and drink sales.

No income, social security, Medicare, Additional Medicare, or railroad retirement taxes are withheld on allocated tips.

How were your allocated tips figured.

 

The tips allocated to you are your share of an amount figured by subtracting the reported tips of all employees from 8% (or an approved lower rate) of food and drink sales (other than carryout sales and sales with a service charge of 10% or more). Your share of that amount was figured using either a method provided by an employer-employee agreement or a method provided by IRS regulations based on employees’ sales or hours worked. For information about the exact allocation method used, ask your employer.

Must you report your allocated tips on your tax return.

 

You must report all tips you received in 2017, including both cash tips and noncash tips, on your tax return. Any tips you reported to your employer for 2017 are included in the wages shown on your Form W-2, box 1. Add to the amount in box 1 only the tips you didn’t report to your employer. This should include any allocated tips shown on your Form(s) W-2, box 8, unless you have adequate records to show that you received less tips in the year than the allocated figures.

See What tips to report under Reporting Tips on Your Tax Return, and Keeping a Daily Tip Record , earlier.

How to report allocated tips.

 

Report the amounts shown on your Form(s) W-2, box 1 (wages and tips) and box 8 (allocated tips), as wages on Form 1040, line 7; Form 1040NR, line 8; or Form 1040NR-EZ, line 3. You can’t file Form 1040A or Form 1040EZ when you have allocated tips.

Because social security, Medicare, and Additional Medicare taxes weren’t withheld from the allocated tips, you must report those taxes as additional tax on your return. Complete Form 4137, and include the allocated tips on line 1 of the form. See Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier.

7. Interest Income

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted, resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Reminder

Foreign-source income. If you are a U.S. citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

Automatic 6-month extension. If you receive your Form 1099 reporting your interest income late and you need more time to file your tax return, you can request a 6-month extension of time to file. See Automatic Extension in chapter 1.

 

Introduction

This chapter discusses the following topics.

• Different types of interest income.
• What interest is taxable and what interest is nontaxable.
• When to report interest income.
• How to report interest income on your tax return.

 

In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. Exceptions to this rule are discussed later in this chapter.

You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. See Money borrowed to invest in certificate of deposit , later, and chapter 28.

 

Useful Items – You may want to see:

Publication

• 537 Installment Sales
• 550 Investment Income and Expenses
• 1212Guide to Original Issue Discount (OID) Instruments

Form (and Instructions)

• Schedule A (Form 1040) Itemized Deductions
• Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends
• 8615Tax for Certain Children Who Have Unearned Income
• 8814Parents’ Election To Report Child’s Interest and Dividends
• 8815Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
• 8818Optional Form To Record Redemption of Series EE and I U.S. Savings Bonds Issued After 1989

 

 

General Information

A few items of general interest are covered here.

 

Recordkeeping. You should keep a list showing sources of interest income and interest amounts received during the year. Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records.

Tax on unearned income of certain children.

Part of a child’s 2017 unearned income may be taxed at the parent’s tax rate. If so, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child’s tax return. If not, Form 8615 isn’t required and the child’s income is taxed at his or her own tax rate.

Some parents can choose to include the child’s interest and dividends on the parent’s return. If you can, use Form 8814, Parents’ Election To Report Child’s Interest and Dividends, for this purpose.

For more information about the tax on unearned income of children and the parents’ election, see chapter 31.

Beneficiary of an estate or trust.

Interest you receive as a beneficiary of an estate or trust is generally taxable income. You should receive a Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc., from the fiduciary. Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040.

Social security number (SSN).

 

You must give your name and SSN or individual taxpayer identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. This includes payers of interest. If you don’t give your SSN or ITIN to the payer of interest, you may have to pay a penalty.

SSN for joint account.

 

If the funds in a joint account belong to one person, list that person’s name first on the account and give that person’s SSN to the payer. (For information on who owns the funds in a joint account, seeJoint accounts , later.) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. This is because only one name and SSN can be shown on Form 1099.

These rules apply to both joint ownership by a married couple and to joint ownership by other individuals. For example, if you open a joint savings account with your child using funds belonging to the child, list the child’s name first on the account and give the child’s SSN.

Custodian account for your child.

 

If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child’s SSN to the payer. For example, you must give your child’s SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian.

Penalty for failure to supply SSN.

 

If you don’t give your SSN to the payer of interest, you may have to pay a penalty. See Failure to supply SSN under Penalties in chapter 1. Backup withholding also may apply.

Backup withholding.

Your interest income is generally not subject to regular withholding. However, it may be subject to backup withholding to ensure that income tax is collected on the income. Under backup withholding, the payer of interest must withhold, as income tax, on the amount you are paid, by applying the appropriate withholding rate.

Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. For more information, see Backup Withholding in chapter 4.

Reporting backup withholding.

 

If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year indicating the amount withheld. The Form 1099-INT will show any backup withholding as “Federal income tax withheld.”

Joint accounts.

If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person’s share of any interest from the property is determined by local law.

Income from property given to a child.

Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child’s property.

Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation.

Savings account with parent as trustee.

 

Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true.

• The savings account legally belongs to the child.
• The parents aren’t legally permitted to use any of the funds to support the child.

 

Form 1099-INT.

Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. This form shows you the interest income you received during the year. Keep this form for your records. You don’t have to attach it to your tax return.

Report on your tax return the total interest income you receive for the tax year. See the instructions to Form 1099-INT to see whether you need to adjust any of the amounts reported to you.

Interest not reported on Form 1099-INT.

 

Even if you don’t receive a Form 1099-INT, you must still report all of your interest income. For example, you may receive distributive shares of interest from partnerships or S corporations. This interest is reported to you on Schedule K-1 (Form 1065), Partner’s Share of Income, Deduction, Credits, etc., or Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Deductions, Credits, etc.

Nominees.

Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf.

If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Pub. 550, or the Schedule B (Form 1040A or 1040) instructions.

Incorrect amount.

 

If you receive a Form 1099-INT that shows an incorrect amount or other incorrect information, you should ask the issuer for a corrected form. The new Form 1099-INT you receive will have the “CORRECTED” box checked.

Form 1099-OID.

 

Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter.

Exempt-interest dividends.

Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, aren’t included in your taxable income. (However, see Information-reporting requirement next.) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. You don’t reduce your basis for distributions that are exempt-interest dividends.

Information-reporting requirement.

 

Although exempt-interest dividends aren’t taxable, you must show them on your tax return if you have to file. This is an information-reporting requirement and doesn’t change the exempt-interest dividends into taxable income.

Note.

Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. See Alternative Minimum Tax (AMT) in chapter 30 for more information. Chapter 1 of Pub. 550 contains a discussion on private activity bonds under State or Local Government Obligations.

Interest on VA dividends.

 

Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) isn’t taxable. This includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance policies.

Individual retirement arrangements (IRAs).

 

Interest on a Roth IRA generally isn’t taxable. Interest on a traditional IRA is tax deferred. You generally don’t include interest earned in an IRA in your income until you make withdrawals from the IRA. See chapter 17.

 

Taxable Interest

Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.

Dividends that are actually interest.

 

Certain distributions commonly called dividends are actually interest. You must report as interest so-called “dividends” on deposits or on share accounts in:

• Cooperative banks,
• Credit unions,
• Domestic building and loan associations,
• Domestic savings and loan associations,
• Federal savings and loan associations, and
• Mutual savings banks.

The “dividends” will be shown as interest income on Form 1099-INT.

Money market funds.

 

Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock brokerage houses. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.

Certificates of deposit and other deferred interest accounts.

If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later.

Interest subject to penalty for early withdrawal.

 

If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings in chapter 1 of Pub. 550 for more information on how to report the interest and deduct the penalty.

Money borrowed to invest in certificate of deposit.

 

The interest expense you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest income you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3 of Pub. 550.

Example.

You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. The certificate earned $575 at maturity in 2017, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. The bank gives you a Form 1099-INT for 2017 showing the $575 interest you earned. The bank also gives you a statement showing that you paid $310 of interest for 2017. You must include the $575 in your income. If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit.

Gift for opening account.

 

If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest.

For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.

Example.

You open a savings account at your local bank and deposit $800. The account earns $20 interest. You also receive a $15 calculator. If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. You must report $35 interest income on your tax return.

Interest on insurance dividends.

Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs.

Prepaid insurance premiums.

Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw.

U.S. obligations.

Interest on U.S. obligations, such as U.S. Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes.

Interest on tax refunds.

Interest you receive on tax refunds is taxable income.

Interest on condemnation award.

 

If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable.

Installment sale payments.

 

If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Generally, that interest is taxable when you receive it. If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. See Unstated Interest and Original Issue Discount in Pub. 537, Installment Sales.

Interest on annuity contract.

 

Accumulated interest on an annuity contract you sell before its maturity date is taxable.

Usurious interest.

Usurious interest is interest charged at an illegal rate. This is taxable as interest unless state law automatically changes it to a payment on the principal.

Interest income on frozen deposits.

Exclude from your gross income interest on frozen deposits. A deposit is frozen if, at the end of the year, you can’t withdraw any part of the deposit because:

• The financial institution is bankrupt or insolvent, or
• The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.

 

The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of:

• The net amount you withdrew from these deposits during the year, and
• The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit).

If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2017, see Frozen deposits under How To Report Interest Income in chapter 1 of Pub. 550 for information about reporting this interest income exclusion on your tax return.

The interest you exclude is treated as credited to your account in the following year. You must include it in income in the year you can withdraw it.

Example.

$100 of interest was credited on your frozen deposit during the year. You withdrew $80 but couldn’t withdraw any more as of the end of the year. You must include $80 in your income and exclude $20 from your income for the year. You must include the $20 in your income for the year you can withdraw it.

Bonds traded flat.

 

If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but hasn’t been paid, the transaction is described as trading a bond flat. The defaulted or unpaid interest isn’t income and isn’t taxable as interest if paid later. When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Interest that accrues after the date of purchase, however, is taxable interest income for the year it is received or accrued. See Bonds Sold Between Interest Dates , later, for more information.

Below-market loans.

 

In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. See Below-Market Loans in chapter 1 of Pub. 550 for more information.

 

U.S. Savings Bonds

This section provides tax information on U.S. savings bonds. It explains how to report the interest income on these bonds and how to treat transfers of these bonds.

 

For other information on U.S. savings bonds, write to:

For series HH/H:
Series HH and Series H
Treasury Retail Securities Site
P.O. Box 2186
Minneapolis, MN 55480-2186

For series EE and I paper savings bonds:
Series EE and Series I
Treasury Retail Securities Site
P.O. Box 214
Minneapolis, MN 55480-0214

For series EE and I electronic bonds:
Series EE and Series I
Treasury Retail Securities Site
P.O. Box 7015
Minneapolis, MN 55480-7015

 

 

Or, on the Internet, visit
www.treasurydirect.gov/indiv/indiv.htm.

Accrual method taxpayers.

 

If you use an accrual method of accounting, you must report interest on U.S. savings bonds each year as it accrues. You can’t postpone reporting interest until you receive it or until the bonds mature. Accrual methods of accounting are explained in chapter 1 under Accounting Methods .

Cash method taxpayers.

 

If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U.S. savings bonds when you receive it. The cash method of accounting is explained in chapter 1 under Accounting Methods . But see Reporting options for cash method taxpayers , later.

Series HH bonds.

These bonds were issued at face value. Interest is paid twice a year by direct deposit to your bank account. If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it.

Series HH bonds were first offered in 1980 and last offered in August 2004. Before 1980, series H bonds were issued. Series H bonds are treated the same as series HH bonds. If you are a cash method taxpayer, you must report the interest when you receive it.

Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years. The last series H bonds matured in 2009.

Series EE and series I bonds.

Interest on these bonds is payable when you redeem the bonds. The difference between the purchase price and the redemption value is taxable interest.

Series EE bonds.

 

Series EE bonds were first offered in January 1980 and have a maturity period of 30 years.

Before July 1980, series E bonds were issued. The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Paper series EE and series E bonds are issued at a discount. The face value is payable to you at maturity. Electronic series EE bonds are issued at their face value. The face value plus accrued interest is payable to you at maturity. As of January 1, 2012, paper savings bonds were no longer sold at financial institutions.

Owners of paper series EE bonds can convert them to electronic bonds. These converted bonds don’t retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest).

Series I bonds.

 

Series I bonds were first offered in 1998. These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. The face value plus all accrued interest is payable to you at maturity.

Reporting options for cash method taxpayers.

 

If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways.

1. Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. (However, see Savings bonds traded, later.)
2. Method 2. Choose to report the increase in redemption value as interest each year.

You must use the same method for all series EE, series E, and series I bonds you own. If you don’t choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.

 

If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. To learn how, see Education Savings Bond Program, later.

Change from method 1.

 

If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. In the year of change, you must report all interest accrued to date and not previously reported for all your bonds.

Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next.

Change from method 2.

 

To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements.

1. You have typed or printed the following number at the top: “131.”
2. It includes your name and social security number under “131.”
3. It includes the year of change (both the beginning and ending dates).
4. It identifies the savings bonds for which you are requesting this change.
5. It includes your agreement to:
   1. Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and
   2. Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.

 

You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions).

You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. To get this extension, you must have filed your original return for the year of the change by the due date (including extensions).

Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. In that case, follow the form instructions for an automatic change. No user fee is required.

Co-owners.

 

If a U.S. savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond.

One co-owner’s funds used.

 

If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. The co-owner who redeemed the bond is a “nominee.” See Nominee distributions under How To Report Interest Income in chapter 1 of Pub. 550 for more information about how a person who is a nominee reports interest income belonging to another person.

Both co-owners’ funds used.

 

If you and the other co-owner each contribute part of the bond’s purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid.

Community property.

If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond interest. For more information about community property, see Pub. 555.

Table 7-1.

 

These rules are also shown in Table 7-1.

Ownership transferred.

 

If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner’s name or beneficiary’s name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. But, if the bonds were reissued in your name alone, you don’t have to report the interest accrued at that time.

This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce.

Purchased jointly.

 

If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner’s name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. The former co-owner doesn’t have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. This interest, however, as well as all interest earned after the reissue, is income to the former co-owner.

This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. But the new co-owner will report only his or her share of the interest earned after the transfer.

If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued.

 

 

Table 7-1. Who Pays the Tax on U.S. Savings Bond Interest

IF…	THEN the interest must be reported by…
you buy a bond in your name and the name of another person as co-owners, using only your own funds	you.
you buy a bond in the name of another person, who is the sole owner of the bond	the person for whom you bought the bond.
you and another person buy a bond as co-owners, each contributing part of the purchase price	both you and the other co-owner, in proportion to the amount each paid for the bond.
you and your spouse, who live in a community property state, buy a bond that is community property	you and your spouse. If you file separate returns, both you and your spouse generally report one-half of the interest.

 

Example 1.

You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse’s name. At that time, neither you nor your spouse has to report the interest earned to the date of reissue.

Example 2.

You bought a $1,000 series EE savings bond entirely with your own funds. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse’s name. You must report half the interest earned to the date of reissue.

Transfer to a trust.

 

If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier.

The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. See Savings bonds traded , later.

Decedents.

The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. This is explained in chapter 1 of Pub. 550.

Savings bonds traded.

 

If you postponed reporting the interest on your series EE or series E bonds, you didn’t recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. (You can’t trade series I bonds for series HH bonds. After August 31, 2004, you can’t trade any other series of bonds for series HH bonds.) Any cash you received is income up to the amount of the interest earned on the bonds traded. When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade.

Example.

You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. You reported the $223 as taxable income on your tax return. At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. You hold the series HH bonds until maturity, when you receive $2,500. You must report $300 as interest income in the year of maturity. This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade.

Choice to report interest in year of trade.

 

You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade. If you made this choice, it is treated as a change from method 1. See Change from method 1 , earlier.

Form 1099-INT for U.S. savings bonds interest.

 

When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. However, your Form 1099-INT may show more interest than you have to include on your income tax return. For example, this may happen if any of the following are true.

• You chose to report the increase in the redemption value of the bond each year. The interest shown on your Form 1099-INT won’t be reduced by amounts previously included in income.
• You received the bond from a decedent. The interest shown on your Form 1099-INT won’t be reduced by any interest reported by the decedent before death, or on the decedent’s final return, or by the estate on the estate’s income tax return.
• Ownership of the bond was transferred. The interest shown on your Form 1099-INT won’t be reduced by interest that accrued before the transfer.
• You were named as a co-owner, and the other co-owner contributed funds to buy the bond. The interest shown on your Form 1099-INT won’t be reduced by the amount you received as nominee for the other co-owner. (See Co-owners, earlier in this chapter, for more information about the reporting requirements.)
• You received the bond in a taxable distribution from a retirement or profit-sharing plan. The interest shown on your Form 1099-INT won’t be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year of distribution.)

 

For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. Pub. 550 includes examples showing how to report these amounts.

 

Interest on U.S. savings bonds is exempt from state and local taxes. The Form 1099-INT you receive will indicate the amount that is for U.S. savings bond interest in box 3.

 

Education Savings Bond Program

You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U.S. savings bonds during the year if you pay qualified higher educational expenses during the same year. This exclusion is known as the Education Savings Bond Program.

You don’t qualify for this exclusion if your filing status is married filing separately.

Form 8815.

Use Form 8815 to figure your exclusion. Attach the form to your Form 1040 or Form 1040A.

Qualified U.S. savings bonds.

 

A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (sole owner) or in your and your spouse’s names (co-owners). You must be at least 24 years old before the bond’s issue date. For example, a bond bought by a parent and issued in the name of his or her child under age 24 doesn’t qualify for the exclusion by the parent or child.

 

The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased.

Beneficiary.

 

You can designate any individual (including a child) as a beneficiary of the bond.

Verification by IRS.

 

If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the Treasury.

Qualified expenses.

 

Qualified higher education expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution.

Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account.

Qualified expenses don’t include expenses for room and board or for courses involving sports, games, or hobbies that aren’t part of a degree or certificate granting program.

Eligible educational institutions.

 

These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the U.S. Department of Education.

Reduction for certain benefits.

 

You must reduce your qualified higher education expenses by all of the following tax-free benefits.

1. Tax-free part of scholarships and fellowships (see Scholarships and fellowshipsin chapter 12).
2. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA.
3. Expenses used to figure the tax-free portion of distributions from a qualified tuition program.
4. Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as:
   1. Veterans’ educational assistance benefits,
   2. Qualified tuition reductions, or
   3. Employer-provided educational assistance.
5. Any expense used in figuring the American opportunity and lifetime learning credits.

 

Amount excludable.

 

If the total proceeds (interest and principal) from the qualified U.S. savings bonds you redeem during the year aren’t more than your adjusted qualified higher education expenses for the year, you may be able to exclude all of the interest. If the proceeds are more than the expenses, you may be able to exclude only part of the interest.

To determine the excludable amount, multiply the interest part of the proceeds by a fraction. The numerator of the fraction is the qualified higher education expenses you paid during the year. The denominator of the fraction is the total proceeds you received during the year.

Example.

In February 2017, Mark and Joan, a married couple, cashed qualified series EE U.S. savings bonds with a total denomination of $10,000 that they bought in April 2001 for $5,000. They received proceeds of $7,520, representing principal of $5,000 and interest of $2,520. In 2017, they paid $4,000 of their daughter’s college tuition. They aren’t claiming an education credit for that amount, and their daughter doesn’t have any tax-free educational assistance. They can exclude $1,340 ($2,520 × ($4,000 ÷ $7,520)) of interest in 2017. They must include the remaining $1,180 ($2,520 − $1,340) interest in gross income.

Modified adjusted gross income limit.

 

The interest exclusion is limited if your modified adjusted gross income (modified AGI) is:

• $78,150 to $93,150 for taxpayers filing single or head of household, and
• $117,250 to $147,250 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child.

You don’t qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status.

Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21) figured before the interest exclusion, and modified by adding back any:

1. Foreign earned income exclusion,
2. Foreign housing exclusion and deduction,
3. Exclusion of income for bona fide residents of American Samoa,
4. Exclusion for income from Puerto Rico,
5. Exclusion for adoption benefits received under an employer’s adoption assistance program,
6. Deduction for student loan interest, and
7. Deduction for domestic production activities.

 

Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI.

If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Pub. 550.

 

Recordkeeping. If you claim the interest exclusion, you must keep a written record of the qualified U.S. savings bonds you redeem. Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. You can use Form 8818 to record this information. You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher education expenses during the year.

 

U.S. Treasury Bills, Notes, and Bonds

Treasury bills, notes, and bonds are direct debts (obligations) of the U.S. Government.

Taxation of interest.

 

Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. You should receive a Form 1099-INT showing the interest paid to you for the year in box 3.

Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system.

Treasury bills.

 

These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. They are generally issued at a discount in the amount of $100 and multiples of $100. The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Generally, you report this interest income when the bill is paid at maturity. If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity.

Treasury notes and bonds.

 

Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Maturity periods for Treasury bonds are longer than 10 years. Both generally are issued in denominations of $100 to $1 million and generally pay interest every 6 months. Generally, you report this interest for the year paid. For more information, see U.S. Treasury Bills, Notes, and Bonds in chapter 1 of Pub. 550.

 

For other information on Treasury notes or bonds, write to:

Treasury Retail Securities Site
P.O. Box 7015
Minneapolis, MN 55480-7015

 

 

Or, click on the link to the Treasury website at: www.treasurydirect.gov/indiv/indiv.htm.

For information on series EE, series I, and series HH savings bonds, see U.S. Savings Bonds , earlier.

Treasury inflation-protected securities (TIPS).

 

These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID) in Pub. 550.

 

Bonds Sold Between Interest Dates

If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale.

If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a nontaxable return of your capital investment, rather than as interest income. See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Pub. 550 for information on reporting the payment.

 

Insurance

Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income.

For more information about insurance proceeds received in installments, see Pub. 525, Taxable and Nontaxable Income.

Annuity.

 

If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. See chapter 10 for information on pension and annuity income from nonqualified plans.

 

State or Local Government Obligations

Interest on a bond used to finance government operations generally isn’t taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions.

Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function.

For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Pub. 550.

Information-reporting requirement.

 

If you file a tax return, you are required to show any tax-exempt interest you received on your return. This is an information-reporting requirement only. It doesn’t change tax-exempt interest to taxable interest.

 

Original Issue Discount (OID)

Original issue discount (OID) is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.

A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price.

All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments.

The OID accrual rules generally don’t apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). See Discount on Short-Term Obligations in chapter 1 of Pub. 550.

De minimis OID.

 

You can treat the discount as zero if it is less than one-fourth of 1% (0.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. This small discount is known as “de minimis” OID.

Example 1.

You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Because the $20 discount is less than $25, the OID is treated as zero. (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain.)

Example 2.

The facts are the same as in Example 1, except that the bond was issued at $950. The OID is $50. Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond.

Debt instrument bought after original issue.

 

If you buy a debt instrument with de minimis OID at a premium, the discount isn’t includible in income. If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. See Market Discount Bonds in chapter 1 of Pub. 550.

Exceptions to reporting OID as current income.

 

The OID rules discussed in this chapter don’t apply to the following debt instruments.

1. Tax-exempt obligations. (However, see Stripped tax-exempt obligationsunder Stripped Bonds and Coupons in chapter 1 of Pub. 550).
2. S. savings bonds.
3. Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue).
4. Obligations issued by an individual before March 2, 1984.
5. Loans between individuals if all the following are true.
   1. The lender isn’t in the business of lending money.
   2. The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less.
   3. Avoiding any federal tax isn’t one of the principal purposes of the loan.

 

Form 1099-OID.

The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form 1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. Form 1099-OID will show, in box 1, the amount of OID for the part of the year that you held the bond. It also will show, in box 2, the stated interest you must include in your income. Box 8 shows OID on a U.S. Treasury obligation for the part of the year you owned it and isn’t included in box 1. A copy of Form 1099-OID will be sent to the IRS. Don’t file your copy with your return. Keep it for your records.

In most cases, you must report the entire amount in boxes 1, 2, and 8 of Form 1099-OID as interest income. But see Refiguring OID shown on Form 1099-OID , later in this discussion, for more information.

Form 1099-OID not received.

 

If you had OID for the year but didn’t receive a Form 1099-OID, you may have to figure the correct amount of OID to report on your return. See Pub. 1212 for details on how to figure the correct OID.

Nominee.

If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives a Form 1099-OID on your behalf, that person must give you a Form 1099-OID.

Refiguring OID shown on Form 1099-OID.

 

You may need to refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply.

• You bought the debt instrument after its original issue and paid a premium or an acquisition premium.
• The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments).

For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Pub. 1212 and the instructions for Form 1099-OID.

Refiguring periodic interest shown on Form 1099-OID.

 

If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument.

Certificates of deposit (CDs).

If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID.

This also applies to similar deposit arrangements with banks, building and loan associations, etc., including:

• Time deposits,
• Bonus plans,
• Savings certificates,
• Deferred income certificates,
• Bonus savings certificates, and
• Growth savings certificates.

 

Bearer CDs.

 

CDs issued after 1982 generally must be in registered form. Bearer CDs are CDs not in registered form. They aren’t issued in the depositor’s name and are transferable from one individual to another.

Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT.

More information.

 

See chapter 1 of Pub. 550 for more information about OID and related topics, such as market discount bonds.

 

When To Report Interest Income

When to report your interest income depends on whether you use the cash method or an accrual method to report income.

Cash method.

 

Most individual taxpayers use the cash method. If you use this method, you generally report your interest income in the year in which you actually or constructively receive it. However, there are special rules for reporting the discount on certain debt instruments. See U.S. Savings Bonds and Original Issue Discount (OID) , earlier.

Example.

On September 1, 2015, you loaned another individual $2,000 at 12%, compounded annually. You aren’t in the business of lending money. The note stated that principal and interest would be due on August 31, 2017. In 2017, you received $2,508.80 ($2,000 principal and $508.80 interest). If you use the cash method, you must include in income on your 2017 return the $508.80 interest you received in that year.

Constructive receipt.

You constructively receive income when it is credited to your account or made available to you. You don’t need to have physical possession of it. For example, you are considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to your account and subject to your withdrawal. This is true even if they aren’t yet entered in your passbook.

You constructively receive income on the deposit or account even if you must:

• Make withdrawals in multiples of even amounts,
• Give a notice to withdraw before making the withdrawal,
• Withdraw all or part of the account to withdraw the earnings, or
• Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity.

 

Accrual method.

 

If you use an accrual method, you report your interest income when you earn it, whether or not you have received it. Interest is earned over the term of the debt instrument.

Example.

If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. You would report the interest as follows: 2015, $80; 2016, $249.60; and 2017, $179.20.

Coupon bonds.

Interest on bearer bonds with detachable coupons is generally taxable in the year the coupon becomes due and payable. It doesn’t matter when you mail the coupon for payment.

 

How To Report Interest Income

Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2.

You can’t use Form 1040EZ if your taxable interest income is more than $1,500. Instead, you must use Form 1040A or Form 1040.

Form 1040A.

You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true.

1. Your taxable interest income is more than $1,500.
2. You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).
3. You received interest from a seller-financed mortgage, and the buyer used the property as a home.
4. You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported in a previous tax year.
5. You received, as a nominee, interest that actually belongs to someone else.
6. You received a Form 1099-INT for interest on frozen deposits.
7. You are reporting OID in an amount less than the amount shown on Form 1099-OID.
8. You received a Form 1099-INT for interest on a bond you bought between interest payment dates.
9. You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortizationin chapter 3 of Pub. 550).

List each payer’s name and the amount of interest income received from each payer on line 1. If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer.

You can’t use Form 1040A if you must use Form 1040, as described next.

Form 1040.

You must use Form 1040 instead of Form 1040A or Form 1040EZ if:

1. You forfeited interest income because of the early withdrawal of a time deposit;
2. You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortizationin chapter 3 of Pub. 550); or
3. You received tax-exempt interest from private activity bonds issued after August 7, 1986.

 

Schedule B (Form 1040A or 1040).

 

You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply.

1. Your taxable interest income is more than $1,500.
2. You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).
3. You received interest from a seller-financed mortgage, and the buyer used the property as a home.
4. You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported in a previous tax year.
5. You received, as a nominee, interest that actually belongs to someone else.
6. You received a Form 1099-INT for interest on frozen deposits.
7. You received a Form 1099-INT for interest on a bond you bought between interest payment dates.
8. You are reporting OID in an amount less than the amount shown on Form 1099-OID.
9. Statement (2) in the preceding list under Form 1040 is true.

In Part I, line 1, list each payer’s name and the amount received from each. If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer.

Reporting tax-exempt interest.

 

Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including zero coupon municipal bonds) reported on Form 1099-INT, box 8, and exempt-interest dividends from a mutual fund or other regulated investment company reported on Form 1099-DIV, box 10. Add these amounts to any other tax-exempt interest you received. Report the total on line 8b of Form 1040A or Form 1040.

If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. Don’t add tax-exempt interest in the total on Form 1040EZ, line 2.

Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Don’t add the amounts in Form 1099-INT, box 9, and Form 1099-DIV, box 11, to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10.

 

Don’t report interest from an individual retirement account (IRA) as tax-exempt interest.

Form 1099-INT.

Your taxable interest income, except for interest from U.S. savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. Add this amount to any other taxable interest income you received. See the instructions for Form 1099-INT if you have interest from a security acquired at a premium. You must report all of your taxable interest income even if you don’t receive a Form 1099-INT. Contact your financial institution if you don’t receive a Form 1099-INT by February 15. Your identifying number may be truncated on any paper Form 1099-INT you receive.

If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. See Penalty on early withdrawal of savings in chapter 1 of Pub. 550.

Box 3 of Form 1099-INT shows the interest income you received from U.S. savings bonds, Treasury bills, Treasury notes, and Treasury bonds. Generally, add the amount shown in box 3 to any other taxable interest income you received. If part of the amount shown in box 3 was previously included in your interest income, see U.S. savings bond interest previously reported , later. If you acquired the security at a premium, see the instructions for Form 1099-INT.

Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. Include the amount from box 4 on Form 1040EZ, line 7; Form 1040A, line 40; or Form 1040, line 64 (federal income tax withheld).

Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. See chapter 28 for more information about investment expenses.

If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. You may be able to take a credit for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). To take the credit, you may have to file Form 1116, Foreign Tax Credit. For more information, see Pub. 514, Foreign Tax Credit for Individuals.

U.S. savings bond interest previously reported.

If you received a Form 1099-INT for U.S. savings bond interest, the form may show interest you don’t have to report. See Form 1099-INT for U.S. savings bonds interest , earlier.

On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Then follow these steps.

1. Several lines above line 2, enter a subtotal of all interest listed on line 1.
2. Below the subtotal, enter “U.S. Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond.
3. Subtract these amounts from the subtotal and enter the result on line 2.

 

More information.

 

For more information about how to report interest income, see chapter 1 of Pub. 550 or the instructions for the form you must file.

8. Dividends and Other Distributions

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted, resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Reminder

Foreign-source income. If you are a U.S. citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

Automatic 6-month extension. If you receive your Form 1099 reporting dividends or other distributions late and you need more time to file your tax return, you can request a 6-month extension of time to file. See Automatic Extension in chapter 1.

 

Introduction

This chapter discusses the tax treatment of:

• Ordinary dividends,
• Capital gain distributions,
• Nondividend distributions, and
• Other distributions you may receive from a corporation or a mutual fund.

 

This chapter also explains how to report dividend income on your tax return.

Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. However, some amounts you receive that are called dividends are actually interest income. (See Dividends that are actually interest in chapter 7.)

Most distributions are paid in cash (or check). However, distributions can consist of more stock, stock rights, other property, or services.

 

Useful Items – You may want to see:

Publication

• 514 Foreign Tax Credit for Individuals
• 550 Investment Income and Expenses

Form (and Instructions)

• Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends

 

 

General Information

This section discusses general rules for dividend income.

Tax on unearned income of certain children.

Part of a child’s 2017 unearned income may be taxed at the parent’s tax rate. If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child’s tax return. If not, Form 8615 isn’t required and the child’s income is taxed at his or her own tax rate.

Some parents can choose to include the child’s interest and dividends on the parent’s return if certain requirements are met. Use Form 8814, Parents’ Election To Report Child’s Interest and Dividends, for this purpose.

For more information about the tax on unearned income of children and the parents’ election, see chapter 31.

Beneficiary of an estate or trust.

Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. You should receive a Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc., from the fiduciary. Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040.

Social security number (SSN) or individual taxpayer identification number (ITIN).

You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. This includes payers of dividends. If you don’t give your SSN or ITIN to the payer of dividends, you may have to pay a penalty.

For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1.

Backup withholding.

Your dividend income is generally not subject to regular withholding. However, it may be subject to backup withholding to ensure that income tax is collected on the income. Under backup withholding, the payer of dividends must withhold income tax on the amount you are paid, by applying the appropriate withholding rate.

Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. For more information, see Backup Withholding in chapter 4.

Stock certificate in two or more names.

If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person’s share of any dividends from the stock is determined by local law.

Form 1099-DIV.

Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to report the distributions you received from them during the year. Keep this form with your records. You don’t have to attach it to your tax return.

Dividends not reported on Form 1099-DIV.

 

Even if you don’t receive a Form 1099-DIV, you must still report all your taxable dividend income. For example, you may receive distributive shares of dividends from partnerships or S corporations. These dividends are reported to you on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., and Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Deductions, Credits, etc.

Reporting tax withheld.

If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld.

Nominees.

If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf.

Form 1099-MISC.

Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. See Reporting Substitute Payments under Short Sales in chapter 4 of Pub. 550 for more information about reporting these payments.

Incorrect amount shown on a Form 1099.

If you receive a Form 1099 that shows an incorrect amount or other incorrect information, you should ask the issuer for a corrected form. The new Form 1099 you receive will have the “CORRECTED” box checked.

Dividends on stock sold.

If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income.

Dividends received in January.

 

If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. You report the dividend in the year it was declared.

 

Ordinary Dividends

Ordinary dividends are the most common type of distribution from a corporation or a mutual fund and are taxable. They are paid out of earnings and profits and are ordinary income to you. This means they aren’t capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive.

 

Qualified Dividends

Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive.

The maximum rate of tax on qualified dividends is the following.

• 0% on any amount that otherwise would be taxed at a 10% or 15% rate.
• 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%.
• 20% on any amount that otherwise would be taxed at a 39.6% rate.

 

To qualify for the maximum rate, all of the following requirements must be met.

• The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. (See Qualified foreign corporation, later.)
• The dividends aren’t of the type listed later under Dividends that aren’t qualified dividends, later.
• You meet the holding period (discussed next).

 

Holding period.

 

You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock isn’t entitled to receive the next dividend payment. Instead, the seller will get the dividend.

When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples later.

Exception for preferred stock.

 

In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies.

Example 1.

You bought 5,000 shares of XYZ Corp. common stock on July 9, 2017. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 16, 2017. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on August 12, 2017. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 10, 2017, through August 12, 2017). The 121-day period began on May 17, 2017 (60 days before the ex-dividend date), and ended on September 14, 2017. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.

Example 2.

Assume the same facts as in Example 1 , except that you bought the stock on July 15, 2017 (the day before the ex-dividend date), and you sold the stock on September 16, 2017. You held the stock for 63 days (from July 16, 2017, through September 16, 2017). The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2017, through September 14, 2017).

Example 3.

You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2017. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 16, 2017. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 12, 2017. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.

Holding period reduced where risk of loss is diminished.

 

When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions.

1. You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities.
2. You were the grantor (writer) of an option to buy substantially identical stock or securities.
3. Your risk of loss is diminished by holding one or more other positions in substantially similar or related property.

 

For information about how to apply condition (3), see Regulations section 1.246-5.

Qualified foreign corporation.

 

A foreign corporation is a qualified foreign corporation if it meets any of the following conditions.

1. The corporation is incorporated in a U.S. possession.
2. The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Department of the Treasury determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, see Table 8-1.
3. The corporation doesn’t meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. See Readily tradable stock, later.

 

Exception.

 

A corporation isn’t a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year.

Readily tradable stock.

 

Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement 3 under Qualified foreign corporation , earlier, if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. For a list of the exchanges that meet these requirements, seewww.sec.gov/divisions/marketreg/mrexchanges.shtml.

Dividends that aren’t qualified dividends.

 

The following dividends aren’t qualified dividends. They aren’t qualified dividends even if they are shown in box 1b of Form 1099-DIV.

• Capital gain distributions.
• Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions. (Report these amounts as interest income.)
• Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year.
• Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.
• Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
• Payments in lieu of dividends, but only if you know or have reason to know the payments aren’t qualified dividends.
• Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments aren’t qualified dividends.

 

 

Table 8-1. Income Tax Treaties

Income tax treaties the United States has with the following countries satisfy requirement 2 under Qualified foreign corporation , earlier.
Australia	Indonesia	Portugal
Austria	Ireland	Romania
Bangladesh	Israel	Russian
Barbados	Italy	Federation
Belgium	Jamaica	Slovak
Bulgaria	Japan	Republic
Canada	Kazakhstan	Slovenia
China	Korea,	South Africa
Cyprus	Republic of	Spain
Czech	Latvia	Sri Lanka
Republic	Lithuania	Sweden
Denmark	Luxembourg	Switzerland
Egypt	Malta	Thailand
Estonia	Mexico	Trinidad and
Finland	Morocco	Tobago
France	Netherlands	Tunisia
Germany	New Zealand	Turkey
Greece	Norway	Ukraine
Hungary	Pakistan	United
Iceland	Philippines	Kingdom
India	Poland	Venezuela

 

 

Dividends Used To Buy More Stock

The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See chapter 28for more information about deducting expenses of producing income.

In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date.

 

Money Market Funds

Report amounts you receive from money market funds as dividend income. Money market funds are a type of mutual fund and shouldn’t be confused with bank money market accounts that pay interest.

 

Capital Gain Distributions

Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT.

Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT.

Undistributed capital gains of mutual funds and REITs.

Some mutual funds and REITs keep their long-term capital gains and pay tax on them. You must treat your share of these gains as distributions, even though you didn’t actually receive them. However, they aren’t included on Form 1099-DIV. Instead, they are reported to you in box 1a of Form 2439.

Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), line 11, column (h).

The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. You take credit for this tax by including it on Form 1040, line 73, and following the instructions there.

Basis adjustment.

 

Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid.

Additional information.

 

For more information on the treatment of distributions from mutual funds, see Pub. 550.

 

Nondividend Distributions

A nondividend distribution is a distribution that isn’t paid out of the earnings and profits of a corporation or a mutual fund. You should receive a Form 1099-DIV or other statement showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you don’t receive such a statement, you report the distribution as an ordinary dividend.

Basis adjustment.

 

A nondividend distribution reduces the basis of your stock. It isn’t taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.

When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 14.

Example.

You bought stock in 2004 for $100. In 2007, you received a nondividend distribution of $80. You didn’t include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2017. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2017. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.

 

Liquidating Distributions

Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.

For more information on liquidating distributions, see chapter 1 of Pub. 550.

 

Distributions of Stock and Stock Rights

Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as stock options) are distributions by a corporation of rights to acquire the corporation’s stock. Generally, stock dividends and stock rights aren’t taxable to you, and you don’t report them on your return.

Taxable stock dividends and stock rights.

 

Distributions of stock dividends and stock rights are taxable to you if any of the following apply.

1. You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights.
2. The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation’s assets or earnings and profits to other shareholders.
3. The distribution is in convertible preferred stock and has the same result as in (2).
4. The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders.
5. The distribution is on preferred stock. (The distribution, however, isn’t taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right.)

 

The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities.

If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income.

Preferred stock redeemable at a premium.

If you receive preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. For more information, see chapter 1 of Pub. 550.

Basis.

Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. If you receive stock or stock rights that aren’t taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Pub. 550 for information on how to figure their basis.

Fractional shares.

You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares aren’t issued but instead are sold, and the cash proceeds are given to the shareholders. Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. Enter your gain or loss (the difference between the cash you receive and the basis of the fractional shares sold) in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate.

 

Report these transactions on Form 8949. Also, check the correct box to show how the transaction was reported on Form 1099-B.

For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Pub. 550. Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040).

Example.

You own one share of common stock that you bought on January 3, 2008, for $100. The corporation declared a common stock dividend of 5% on June 30, 2017. The fair market value of the stock at the time the stock dividend was declared was $200. You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. You figure your gain or loss as follows:

Fair market value of old stock	$200.00
Fair market value of stock dividend (cash received)	+10.00
Fair market value of old stock and stock dividend	$210.00
Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100)	$95.24
Basis (cost) of stock dividend (($10 ÷ $210) × $100)	+ 4.76
Total	$100.00
Cash received	$10.00
Basis (cost) of stock dividend	− 4.76
Gain	$5.24

 

Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain.

Scrip dividends.

A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. The certificate is generally nontaxable when you receive it. If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation’s stock allocated to the certificate.

However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. You must include its fair market value in income on the date you receive it.

 

Other Distributions

You may receive any of the following distributions during the year.

Exempt-interest dividends.

Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, aren’t included in your taxable income. Exempt-interest dividends should be shown in box 10 of Form 1099-DIV.

Information-reporting requirement.

Although exempt-interest dividends aren’t taxable, you must show them on your tax return if you have to file a return. This is an information-reporting requirement and doesn’t change the exempt-interest dividends to taxable income.

Alternative minimum tax treatment.

Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. See Alternative Minimum Tax (AMT) in chapter 30 for more information.

Dividends on insurance policies.

Insurance policy dividends the insurer keeps and uses to pay your premiums aren’t taxable. However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company.

If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Don’t include them in your gross income until they are more than the total of all net premiums you paid for the contract. Report any taxable distributions on insurance policies on Form 1040, line 21.

Dividends on veterans’ insurance.

Dividends you receive on veterans’ insurance policies aren’t taxable. In addition, interest on dividends left with the Department of Veterans Affairs isn’t taxable.

Patronage dividends.

Generally, patronage dividends you receive in money from a cooperative organization are included in your income.

Don’t include in your income patronage dividends you receive on:

• Property bought for your personal use, or
• Capital assets or depreciable property bought for use in your business. But you must reduce the basis (cost) of the items bought. If the dividend is more than the adjusted basis of the assets, you must report the excess as income.

 

These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative.

Alaska Permanent Fund dividends.

Don’t report these amounts as dividends. Instead, include these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3.

 

How To Report Dividend Income

Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Report qualified dividends on line 9b of Form 1040 or Form 1040A.

If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. You cannot use Form 1040EZ if you receive any dividend income other than Alaska Permanent Fund dividends.

Form 1099-DIV.

If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. Even if you don’t receive Form 1099-DIV, you must report all your dividend income.

See Form 1099-DIV for more information on how to report dividend income.

Form 1040A or 1040.

You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040 if:

• Your ordinary dividends, which are reported on Form 1099-DIV, box 1a, are more than $1,500; or
• You received, as a nominee, dividends that actually belong to someone else.

If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III.

List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer’s name and the ordinary dividends you received. If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited.

Enter on line 6 the total of the amounts listed on line 5. Also enter this total on line 9a of Form 1040A or 1040.

Qualified dividends.

Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. The amount in box 1b is already included in box 1a. Don’t add the amount in box 1b to, or subtract it from, the amount in box 1a.

Don’t include any of the following on line 9b.

• Qualified dividends you received as a nominee. See Nomineesunder How To Report Dividend Income in chapter 1 of Pub. 550.
• Dividends on stock for which you didn’t meet the holding period. See Holding period, earlier, underQualified Dividends.
• Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
• Payments in lieu of dividends, but only if you know or have reason to know the payments aren’t qualified dividends.
• Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments aren’t qualified dividends.

 

If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. Enter qualified dividends on line 2 of the worksheet.

Investment interest deducted.

 

If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. For more information about the limit on investment interest, see Investment expenses in chapter 23.

Expenses related to dividend income.

You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). See chapter 28 for general information about deducting expenses of producing income.

More information.

 

For more information about how to report dividend income, see chapter 1 of Pub. 550 or the instructions for the form you must file.

9. Rental Income and Expenses

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

Disaster tax relief. Disaster relief was enacted for those impacted by Hurricane Harvey, Irma, or Maria, including a provision that modified the calculation of casualty and theft losses. See Publication 976, Disaster Relief, for more information.

 

Introduction

This chapter discusses rental income and expenses. It also covers the following topics.

• Personal use of dwelling unit (including vacation home).
• Limits on rental losses.
• How to report your rental income and expenses.

 

If you sell or otherwise dispose of your rental property, see Pub. 544, Sales and Other Dispositions of Assets.

If you have a loss from damage to, or theft of, rental property, see Pub. 547, Casualties, Disasters, and Thefts.

If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. See Pub. 527, Residential Rental Property, for more information.

 

Useful Items – You may want to see:

Publication

• 527Residential Rental Property
• 534Depreciating Property Placed in Service Before 1987
• 535Business Expenses
• 925Passive Activity and At-Risk Rules
• 946How To Depreciate Property

Form (and Instructions)

• 4562Depreciation and Amortization
• 6251Alternative Minimum Tax—Individuals
• 8582Passive Activity Loss Limitations
• Schedule E (Form 1040) Supplemental Income and Loss

 

 

Rental Income

In most cases, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. It isn’t limited to amounts you receive as normal rental payments.

When to report.

If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.

For more information about when you constructively receive income, see Accounting Methods in chapter 1.

Advance rent.

Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.

Example.

You sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year’s rent and $5,000 as rent for the last year of the lease. You must include $10,000 in your income in the first year.

Canceling a lease.

If your tenant pays you to cancel a lease, the amount you receive is rent. Include the payment in your income in the year you receive it regardless of your method of accounting.

Expenses paid by tenant.

If your tenant pays any of your expenses, those payments are rental income. Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. See Rental Expenses , later, for more information.

Property or services.

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.

If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

Security deposits.

Don’t include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant doesn’t live up to the terms of the lease, include the amount you keep in your income in that year.

If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.

Part interest.

If you own a part interest in rental property, you must report your part of the rental income from the property.

Rental of property also used as your home.

If you rent property that you also use as your home and you rent it less than 15 days during the tax year, don’t include the rent you receive in your income and don’t deduct rental expenses. However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. See Personal Use of Dwelling Unit (Including Vacation Home) , later.

 

Rental Expenses

This part discusses expenses of renting property that you ordinarily can deduct from your rental income. It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Depreciation, which you can also deduct from your rental income, is discussed later under Depreciation of Rental Property .

Personal use of rental property.

If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Also, your rental expense deductions may be limited. See Personal Use of Dwelling Unit (Including Vacation Home) , later.

Part interest.

If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership.

When to deduct.

If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them.

Depreciation.

You can begin to depreciate rental property when it is ready and available for rent. See Placed in Service under When Does Depreciation Begin and End in chapter 2 of Pub. 527.

Pre-rental expenses.

You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.

Uncollected rent.

If you are a cash-basis taxpayer, don’t deduct uncollected rent. Because you haven’t included it in your income, it isn’t deductible.

Vacant rental property.

If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.

Vacant while listed for sale.

If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses.

 

Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.

Improvements.

You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.

Betterments.

 

Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.

Restoration.

 

Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.

Adaptation.

 

Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property.

Safe harbor for routine maintenance.

 

If you determine that your cost was for an improvement to a building or equipment, you may still be able to deduct your cost under the routine maintenance safe harbor. See Pub. 535 for more information.

 

Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements when you sell or depreciate your property. The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property.

 

Other Expenses

Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next.

Insurance premiums paid in advance.

If you pay an insurance premium for more than 1 year in advance, you can’t deduct the total premium in the year you pay it. For each year of coverage, you deduct only the part of the premium payment that applies to that year.

Legal and other professional fees.

You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. For example, on your 2017 Schedule E, you can deduct fees paid in 2017 to prepare your 2016 Schedule E, Part I. You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities.

Local benefits taxes.

In most cases, you can’t deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. These charges are nondepreciable capital expenditures, and must be added to the basis of your property. However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits.

Local transportation expenses.

You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. See Pub. 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business.

Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. For 2017, the standard mileage rate for business use is 53.5 cents per mile. For more information, see chapter 26.

 

To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. In addition, you must complete Form 4562, Part V, and attach it to your tax return.

Rental of equipment.

You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts are actually purchase contracts. If so, you can’t deduct these payments. You can recover the cost of purchased equipment through depreciation.

Rental of property.

 

You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease.

Travel expenses.

You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and nonrental activities. You can’t deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. You recover the cost of improvements by taking depreciation. For information on travel expenses, see chapter 26.

 

To deduct travel expenses, you must keep records that follow the rules in chapter 26.

See Rental Expenses in Pub. 527 for more information.

 

Property Changed to Rental Use

If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use.

You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes.

You can’t deduct depreciation or insurance for the part of the year the property was held for personal use. However, you can include the home mortgage interest and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040).

 

At the time this publication was prepared for printing, Congress was considering legislation that would extend the separate deduction for qualified mortgage insurance premiums, which expired at the end of 2016. If extended, your qualified mortgage insurance premiums may be deductible for 2017. To see if the legislation was enacted, go to Recent Developments at IRS.gov/Pub17.

Example.

Your tax year is the calendar year. You moved from your home in May and started renting it out on June 1. You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance.

Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities.

 

Renting Part of Property

If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property.

You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest and real estate taxes, as rental expenses on Schedule E (Form 1040). You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house.

There is no change in the types of expenses deductible for the personal-use part of your property. Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040).

You can’t deduct any part of the cost of the first phone line even if your tenants have unlimited use of it.

You don’t have to divide the expenses that belong only to the rental part of your property. For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. If you install a second phone line strictly for your tenants’ use, all of the cost of the second line is deductible as a rental expense. You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes.

How to divide expenses.

 

If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. You can use any reasonable method for dividing the expense. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home.

 

Not Rented for Profit

If you don’t rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Pub. 535.

Where to report.

 

Report your not-for-profit rental income on Form 1040, line 21. For example, you can include your mortgage interest (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions.

If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Pub. 535, as miscellaneous itemized deductions on Schedule A (Form 1040). You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income.

 

Personal Use of Dwelling Unit (Including Vacation Home)

If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. In general, your rental expenses will be no more than your total expenses multiplied by a fraction, the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Only your rental expenses may be deducted on Schedule E (Form 1040). Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040).

You must also determine if the dwelling unit is considered a home. The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year.

Dwelling unit.

A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. It also includes all structures or other property belonging to the dwelling unit. A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities.

A dwelling unit doesn’t include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and isn’t used by an owner as a home during the year.

Example.

 

You rent a room in your home that is always available for short-term occupancy by paying customers. You don’t use the room yourself, and you allow only paying customers to use the room. The room is used solely as a hotel, motel, inn, or similar establishment and isn’t a dwelling unit.

 

Dividing Expenses

If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose.

When dividing your expenses, follow these rules.

• Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. (This rule doesn’t apply when determining whether you used the unit as a home.)
• Any day that the unit is available for rent but not actually rented isn’t a day of rental use.

 

Example.

Your beach cottage was available for rent from June 1 through August 31 (92 days). During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Your family also used the cottage during the last 2 weeks of May (14 days). The cottage wasn’t used at all before May 17 or after August 31.

You figure the part of the cottage expenses to treat as rental expenses as follows.

• The cottage was used for rental purposes for a total of 85 days (92 − 7). The days it was available for rent but not rented (7 days) aren’t days of rental use. The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend.
• You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
• The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
• Your rental expenses are 85/99 (86%) of the cottage expenses.

 

Note.

When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. If you have a net loss, you may not be able to deduct all of the rental expenses. See Dwelling Unit Used as a Home next.

 

Dwelling Unit Used as a Home

If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home.

You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of:

1. 14 days, or
2. 10% of the total days it is rented to others at a fair rental price.

See What is a day of personal use , later.

Fair rental price.

A fair rental price for your property generally is the amount of rent that a person who isn’t related to you would be willing to pay. The rent you charge isn’t a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area.

If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, don’t count that day as a day of rental use in applying (2) just described. Instead, count it as a day of personal use in applying both (1) and (2) just described.

What is a day of personal use?

A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.

1. You or any other person who owns an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). However, see Days used as a main home before or after renting, later.
2. A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
3. Anyone under an arrangement that lets you use some other dwelling unit.
4. Anyone at less than a fair rental price.

 

Main home.

If the other person or member of the family in (1) or (2) just described has more than one home, his or her main home is ordinarily the one he or she lived in most of the time.

Shared equity financing agreement.

This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners.

Donation of use of property.

You use a dwelling unit for personal purposes if:

• You donate the use of the unit to a charitable organization,
• The organization sells the use of the unit at a fundraising event, and

 

• The “purchaser” uses the unit.

 

Examples.

 

The following examples show how to determine days of personal use.

Example 1.

You and your neighbor are co-owners of a condominium at the beach. Last year, you rented the unit to vacationers whenever possible. The unit wasn’t used as a main home by anyone. Your neighbor used the unit for 2 weeks last year; you didn’t use it at all.

Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks.

Example 2.

You and your neighbors are co-owners of a house under a shared equity financing agreement. Your neighbors live in the house and pay you a fair rental price.

Even though your neighbors have an interest in the house, the days your neighbors live there aren’t counted as days of personal use by you. This is because your neighbors rent the house as their main home under a shared equity financing agreement.

Example 3.

You own a rental property that you rent to your son. Your son doesn’t own any interest in this property. He uses it as his main home and pays you a fair rental price.

Your son’s use of the property isn’t personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price.

Example 4.

You rent your beach house to Joshua. Joshua rents his cabin in the mountains to you. You each pay a fair rental price.

You are using your beach house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his cabin.

Days used for repairs and maintenance.

Any day that you spend working substantially full time repairing and maintaining (not improving) your property isn’t counted as a day of personal use. Don’t count such a day as a day of personal use even if family members use the property for recreational purposes on the same day.

Days used as a main home before or after renting.

 

For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Don’t count them as days of personal use if:

• You rented or tried to rent the property for 12 or more consecutive months.
• You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property.

However, this special rule doesn’t apply when dividing expenses between rental and personal use.

Examples.

The following examples show how to determine whether you used your rental property as a home.

Example 1.

You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. You rented the basement apartment at a fair rental price to college students during the regular school year. You rented to them on a 9-month lease (273 days). You figured 10% of the total days rented to others at a fair rental price is 27 days.

During June (30 days), your brothers stayed with you and lived in the basement apartment rent free.

Your basement apartment was used as a home because you used it for personal purposes for 30 days. Rent-free use by your brothers is considered personal use. Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days).

Example 2.

You rented the guest bedroom in your home at a fair rental price during the local college’s homecoming, commencement, and football weekends (a total of 27 days). Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. You figured 10% of the total days rented to others at a fair rental price is 3 days.

The room was used as a home because you used it for personal purposes for 21 days. That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days).

Example 3.

You own a condominium apartment in a resort area. You rented it at a fair rental price for a total of 170 days during the year. For 12 of those days, the tenant wasn’t able to use the apartment and allowed you to use it even though you didn’t refund any of the rent. Your family actually used the apartment for 10 of those days. Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. You figured 10% of the total days rented to others at a fair rental price is 16 days. Your family also used the apartment for 7 other days during the year.

You used the apartment as a home because you used it for personal purposes for 17 days. That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days).

Minimal rental use.

If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period isn’t treated as rental activity. See Used as a home but rented less than 15 days , later, for more information.

Limit on deductions.

 

Renting a dwelling unit that is considered a home isn’t a passive activity. Instead, if your rental expenses are more than your rental income, some or all of the excess expenses can’t be used to offset income from other sources. The excess expenses that can’t be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Any expenses carried forward to the next year will be subject to any limits that apply for that year. This limitation will apply to expenses carried forward to another year even if you don’t use the property as your home for that subsequent year.

To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1.

 

Reporting Income and Deductions

Property not used for personal purposes.

 

If you don’t use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses.

Property used for personal purposes.

 

If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home.

Not used as a home.

 

If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Because you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use, as described earlier in Dividing Expenses . The expenses for personal use aren’t deductible as rental expenses.

Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses, later.

Used as a home but rented less than 15 days.

 

If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function isn’t considered to be rental and it shouldn’t be reported on Schedule E (Form 1040). You aren’t required to report the rental income and rental expenses from this activity. The expenses, including mortgage interest, property taxes, and any qualified casualty loss, will be reported as normally allowed on Schedule A (Form 1040). See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses.

Used as a home and rented 15 days or more.

 

If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use, as described earlier inDividing Expenses . The expenses for personal use aren’t deductible as rental expenses.

If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. You don’t need to use Worksheet 9-1.

However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1.

 

Depreciation of Rental Property

You recover the cost of income-producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.

Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You can’t simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense.

You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.

You may have to use Form 4562 to figure and report your depreciation. See How To Report Rental Income and Expenses , later.

Alternative minimum tax (AMT).

 

If you use accelerated depreciation, you may be subject to the AMT. Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year).

Claiming the correct amount of depreciation.

You should claim the correct amount of depreciation each tax year. If you didn’t claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted.

If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U.S. Individual Income Tax Return. If you aren’t allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. See Claiming the Correct Amount of Depreciation in chapter 2 of Pub. 527 for more information.

Changing your accounting method to deduct unclaimed depreciation.

To change your accounting method, you generally must file Form 3115 to get the consent of the IRS. In some instances, that consent is automatic. For more information, see chapter 1 of Pub. 946.

Land.

You can’t depreciate the cost of land because land generally doesn’t wear out, become obsolete, or get used up. The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and can’t be depreciated.

More information.

 

See Pub. 527 for more information about depreciating rental property and see Pub. 946 for more information about depreciation.

 

Limits on Rental Losses

If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. You must consider these rules in the order shown below.

1. At-risk rules. These rules are applied first if there is investment in your rental real estate activity for which you aren’t at risk. This applies only if the real property was placed in service after 1986.
2. Passive activity limits. Generally, rental real estate activities are considered passive activities and losses aren’t deductible unless you have income from other passive activities to offset them. However, there are exceptions.

 

 

At-Risk Rules

You may be subject to the at-risk rules if you have:

• A loss from an activity carried on as a trade or business or for the production of income, and
• Amounts invested in the activity for which you aren’t fully at risk.

 

Losses from holding real property (other than mineral property) placed in service before 1987 aren’t subject to the at-risk rules.

In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. See Pub. 925 for more information.

 

Passive Activity Limits

In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services.

Limits on passive activity deductions and credits.

Deductions or losses from passive activities are limited. You generally can’t offset income, other than passive income, with losses from passive activities. Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Any excess loss or credit is carried forward to the next tax year.

For a detailed discussion of these rules, see Pub. 925.

You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return.

Real estate professionals.

Rental activities in which you materially participated during the year aren’t passive activities if, for that year, you were a real estate professional. For a detailed discussion of the requirements, see Pub. 527. For a detailed discussion of material participation, see Pub. 925.

 

Exception for Personal Use of Dwelling Unit

If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use is not taken into account for purposes of the passive activity loss limitation. Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home) , earlier.

 

Exception for Rental Real Estate Activities With Active Participation

If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

Active participation.

 

You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.

Maximum special allowance.

 

The maximum special allowance is:

• $25,000 for single individuals and married individuals filing a joint return for the tax year,
• $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and
• $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.

 

If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI.

Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance.

More information.

 

See Pub. 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity.

 

How To Report Rental Income and Expenses

The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). However, don’t use that schedule to report a not-for-profit activity. See Not Rented for Profit , earlier.

Providing substantial services.

 

If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Substantial services don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For information, see Pub. 334, Tax Guide for Small Business. You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax.

Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture).

Qualified joint venture.

 

If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. This election, in most cases, won’t increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. For more information, see Pub. 527.

Form 1098, Mortgage Interest Statement.

If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or a similar statement showing the interest you paid for the year. If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Attach a statement to your return showing the name and address of the other person. See the Instructions for Schedule E (Form 1040) for more information.

 

Schedule E (Form 1040)

If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc., you normally report your rental income and expenses on Schedule E (Form 1040), Part I.

Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. See the Instructions for Schedule E (Form 1040).

 

Worksheet 9-1. Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home

If you suffered a loss due to a federally declared disaster after August 22, use the worksheet in Pub. 527 instead of this worksheet. Otherwise, use this worksheet only if you answer “Yes” to all of the following questions. ·                     Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home , earlier.) ·                     Did you rent the dwelling unit at a fair rental price 15 days or more this year? ·                     Is the total of your rental expenses and depreciation more than your rental income?
PART I. Rental Use Percentage
A.	Total days available for rent at fair rental price	A.
B.	Total days available for rent (line A) but not rented	B.
C.	Total days of rental use. Subtract line B from line A	C.
D.	Total days of personal use (including days rented at less than fair rental price)	D.
E.	Total days of rental and personal use.  Add lines C and D	E.
F.	Percentage of expenses allowed for rental. Divide line C by line E			F.
PART II. Allowable Rental Expenses
1.	Enter rents received			1.
2a.	Enter the rental portion of deductible home mortgage interest. See instructions	2a.
b.	Enter the rental portion of real estate taxes	b.
c.	Enter the rental portion of deductible casualty and theft losses. See instructions	c.
d.	Enter direct rental expenses. See instructions	d.
e.	Fully deductible rental expenses. Add lines 2a–2d. Enter here and on the appropriate lines on Schedule E. See instructions			2e.
3.	Subtract line 2e from line 1. If zero or less, enter -0-			3.
4a.	Enter the rental portion of expenses directly related to operating or maintaining the dwelling unit (such as repairs, insurance, and utilities)	4a.
b.	Enter the rental portion of excess mortgage interest. See instructions	b.
c.	Carryover of operating expenses from 2016 worksheet	c.
d.	Add lines 4a–4c	d.
e.	Allowable expenses. Enter the smaller of line 3 or line 4d. See instructions			4e.
5.	Subtract line 4e from line 3. If zero or less, enter -0-			5.
6a.	Enter the rental portion of excess casualty and theft losses. See instructions	6a.
b.	Enter the rental portion of depreciation of the dwelling unit	b.
c.	Carryover of excess casualty and theft losses and depreciation from 2016 worksheet	c.
d.	Add lines 6a–6c	d.
e.	Allowable excess casualty and theft losses and depreciation. Enter the smaller of line 5 or line 6d. See instructions			6e.
PART III. Carryover of Unallowed Expenses to Next Year
7a.	Operating expenses to be carried over to next year. Subtract line 4e from line 4d			7a.
b.	Excess casualty and theft losses and depreciation to be carried over to next year. Subtract line 6e from line 6d			b.

 

Worksheet 9-1 Instructions. Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home

Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of Part II.
Line 2a.	Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Don’t include interest on a loan that didn’t benefit the dwelling unit. For example, don’t include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Include the rental portion of this interest in the total you enter on line 2a of the worksheet.
	Caution. At the time this publication was prepared for printing, Congress was considering legislation that would extend the separate deduction for qualified mortgage insurance premiums, which expired at the end of 2016. If extended, your qualified mortgage insurance premiums may be deductible for 2017. To see if the legislation was enacted, go to Recent Developments at IRS.gov/Pub17.
	Note. Don’t file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Instead, figure the personal portion on a separate Schedule A. If you have deducted mortgage interest on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount.
Line 2c.	Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. To do this, complete Section A of Form 4684 treating the losses as personal losses. Don’t use this worksheet if any of the loss is due to a federally declared disaster after August 22; instead, use the worksheet in Pub. 527. On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet.
	Note. Don’t file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on a separate Form 4684.
Line 2d.	Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity.
Line 2e.	You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E.
Line 4b.	On line 2a, you entered the rental portion of the mortgage interest you could deduct on Schedule A if you had not rented the dwelling unit. If you had additional mortgage interest that wouldn’t be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Don’t include interest on a loan that didn’t benefit the dwelling unit (as explained in the line 2a instructions).
Line 4e.	You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they aren’t more than the amount on line 4e.*
Line 6a.	To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet.
	A.	Enter the amount from Form 4684, line 10
	B.	Enter the rental portion of line A
	C.	Enter the amount from line 2c of this worksheet
	D.	Subtract line C from line B. Enter the result here and on line 6a of this worksheet
Line 6e.	You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they aren’t more than the amount on line 6e.*
*Allocating the limited deduction. If you can’t deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I.

10. Retirement Plans, Pensions, and Annuities

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Reminders

Net Investment Income Tax (NIIT). For purposes of the NIIT, net investment income doesn’t include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). However, these distributions are taken into account when determining the modified adjusted gross income threshold. Distributions from a nonqualified retirement plan are included in net investment income. See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information.

 

Introduction

This chapter discusses the tax treatment of distributions you receive from:

• An employee pension or annuity from a qualified plan,
• A disability retirement, and
• A purchased commercial annuity.

 

What isn’t covered in this chapter.

 

The following topics are not discussed in this chapter.

The General Rule.

 

This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). For a qualified plan, you generally can’t use the General Rule unless your annuity starting date is before November 19, 1996. For more information about the General Rule, see Pub. 939, General Rule for Pensions and Annuities.

Individual retirement arrangements (IRAs).

 

Information on the tax treatment of amounts you receive from an IRA is in chapter 17.

Civil service retirement benefits.

 

If you are retired from the federal government (regular, phased, or disability retirement), see Pub. 721, Tax Guide to U.S. Civil Service Retirement Benefits. Pub. 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died.

 

Useful Items – You may want to see:

Publication

• 560Retirement Plans for Small Business
• 575Pension and Annuity Income
• 721Tax Guide to U.S. Civil Service Retirement Benefits
• 939General Rule for Pensions and Annuities

Form (and Instructions)

• W-4PWithholding Certificate for Pension or Annuity Payments
• 1099-RDistributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
• 4972Tax on Lump-Sum Distributions
• 5329Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

 

 

General Information

Designated Roth accounts.

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. Elective deferrals that are designated as Roth contributions are included in your income. However, qualified distributions aren’t included in your income. See Pub. 575 for more information.

In-plan rollovers to designated Roth accounts.

 

If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. The rollover of any untaxed amounts must be included in income in the year you receive the distribution. See Pub. 575 for more information.

More than one program.

If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract.

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. If your plan is an eligible plan, you aren’t taxed currently on pay that is deferred under the plan or on any earnings from the plan’s investment of the deferred pay. You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you.

Your 457(b) plan may have a designated Roth account option. If so, you may be able to roll over amounts to the designated Roth account or make contributions. Elective deferrals to a designated Roth account are included in your income. Qualified distributions from a designated Roth account aren’t subject to tax.

This chapter covers the tax treatment of benefits under eligible section 457 plans, but it doesn’t cover the treatment of deferrals. For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Pub. 525.

For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Pub. 575.

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. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you aren’t disabled.

 

You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on the credit for the elderly or the disabled, see chapter 33.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b.

 

Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) aren’t included in income. For more information about payments to survivors of terrorist attacks, see Pub. 3920.

For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5.

Retired public safety officers.

An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. See Insurance Premiums for Retired Public Safety Officers in Pub. 575 for more information.

Railroad retirement benefits.

Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. For information about railroad retirement benefits treated as social security benefits, see Pub. 915. For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Pub. 575.

Withholding and estimated tax.

The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. If you choose not to have tax withheld, or you don’t have enough tax withheld, you may have to pay estimated tax.

If you receive an eligible rollover distribution, you can’t choose not to have tax withheld. Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. See Direct rollover option under Rollovers, later.

For more information, see Pensions and Annuities under Tax Withholding for 2018 in chapter 4.

Qualified plans for self-employed individuals.

Qualified plans set up by self-employed individuals are sometimes called Keogh or H.R. 10 plans. Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees.

Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. For more information about qualified plans, see Pub. 560.

Purchased annuities.

If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. For more information about the General Rule, see Pub. 939. Also, see Variable Annuities in Pub. 575 for the special provisions that apply to these annuity contracts.

Loans.

If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. This means that you must include in income all or part of the amount borrowed. Even if you don’t have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. For details, see Loans Treated as Distributions in Pub. 575. For information on the deductibility of interest, see chapter 23.

Tax-free exchange.

No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. See Transfers of Annuity Contracts in Pub. 575 for more information about exchanges of annuity contracts.

 

How To Report

If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. If your pension or annuity is fully taxable, enter it on line 16b; don’t make an entry on line 16a.

If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. If your pension or annuity is fully taxable, enter it on line 12b; don’t make an entry on line 12a.

More than one annuity.

If you receive more than one annuity and at least one of them isn’t fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b.

Joint return.

If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b.

 

Cost (Investment in the Contract)

Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. This includes the amounts your employer contributed that were taxable to you when paid. Cost doesn’t include any amounts you deducted or were excluded from your income.

From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that weren’t included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment.

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.

Designated Roth accounts.

Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Your cost also will include any in-plan Roth rollovers you included in income.

Foreign employment contributions.

If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. See Foreign employment contributions under Cost (Investment in the Contract) in Pub. 575.

 

Taxation of Periodic Payments

Fully taxable payments.

 

Generally, if you didn’t pay any part of the cost of your employee pension or annuity and your employer didn’t withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. You must report them on your income tax return.

Partly taxable payments.

If you paid part of the cost of your pension or annuity, you aren’t taxed on the part of the pension or annuity you receive that represents a return of your cost. The rest of the amount you receive is generally taxable. You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Your annuity starting date and whether or not your plan is qualified determine which method you must or may use.

If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you can’t use this method if your annuity is paid under a qualified plan.

If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately.

If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method.

Exclusion limit.

Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Once your annuity starting date is determined, it doesn’t change. 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. That recovery period begins on your annuity starting date and isn’t affected by the date you first complete the worksheet.

Exclusion limited to cost.

 

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 can’t exceed your total cost. 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. This deduction isn’t subject to the 2%-of-adjusted-gross-income limit.

Exclusion not limited to cost.

 

If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. 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. The total exclusion may be more than your cost.

 

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. 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. For any other annuity, this number is the number of monthly annuity payments under the contract.

Who must use the Simplified Method.

 

You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both:

1. Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan; and
2. On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments.

 

Guaranteed payments.

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 don’t live to receive the minimum. 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.

How to use the Simplified Method.

Complete the Simplified Method Worksheet in Pub. 575 to figure your taxable annuity for 2017.

Single-life annuity.

 

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. Enter on line 3 the number shown for your age at the annuity starting date.

Multiple-lives annuity.

 

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. Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date.

However, if your annuity starting date is before 1998, don’t use Table 2 and don’t combine the annuitants’ ages. Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant’s age on the annuity starting date.

 

Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year.

Example.

Bill Smith, age 65, began receiving retirement benefits in 2017, under a joint and survivor annuity. Bill’s annuity starting date is January 1, 2017. The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. 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.

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. 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 the worksheet in completing line 3 of the worksheet. His completed worksheet is shown in Worksheet 10-A.

Bill’s tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Upon Bill’s death, if Bill hasn’t recovered the full $31,000 investment, Kathy also will exclude $100 from her $600 monthly payment. The full amount of any annuity payments received after 310 payments are paid must be included in gross income.

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. This deduction isn’t subject to the 2%-of-adjusted- gross-income limit.

 

Worksheet 10-A. Simplified Method Worksheet for Bill Smith

1.		Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a							1.	14,400
2.		Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion.* See Cost (Investment in the Contract) , earlier			2.		31,000
		Note.  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). Otherwise, go to line 3.
3.		Enter the appropriate number from Table 1 below. 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.		310
4.		Divide line 2 by the number on line 3			4.		100
5.		Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6			5.		1,200
6.		Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year			6.		-0-
7.		Subtract line 6 from line 2			7.		31,000
8.		Enter the smaller of line 5 or line 7							8.	1,200
9.		Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b							9.	13,200
		Note.  If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Pub. 575 before entering an amount on your tax return.
10.		Was your annuity starting date before 1987? □ Yes. STOP. Don’t complete the rest of this worksheet. ☑ No. Add lines 6 and 8. This is the amount you have recovered tax free through 2017. You will need this number if you need to fill out this worksheet next year							10.	1,200
11.		Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you won’t have to complete this worksheet next year. The payments you receive next year will generally be fully taxable							11.	29,800
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
Table 1 for Line 3 Above
			AND your annuity starting date was—
	IF the age at annuity starting date was…		BEFORE November 19, 1996, enter on line 3…	AFTER November 18, 1996, enter on line 3…
	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…			THEN enter on line 3…
	110 or under			410
	111–120			360
	121–130			310
	131–140			260
	141 or older			210

Who must use the General Rule.

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.

 

Annuity starting before November 19, 1996.

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. You also had to use it for any fixed-period annuity. If you didn’t have to use the General Rule, you could have chosen to use it. 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.

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.

Who can’t use the General Rule.

 

You can’t 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. See Who must use the Simplified Method , earlier.

More information.

 

For complete information on using the General Rule, including the actuarial tables you need, see Pub. 939.

 

Taxation of Nonperiodic Payments

Nonperiodic distributions are also known as amounts not received as an annuity. They include all payments other than periodic payments and corrective distributions. Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration.

Corrective distributions of excess plan contributions.

 

Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. To correct an excess, your plan may distribute it to you (along with any income earned on the excess). For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions underEmployee Compensation in Pub. 525.

Figuring the taxable amount of nonperiodic payments.

 

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. 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. 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.

Annuity starting date.

 

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.

Distribution on or after annuity starting date.

 

If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income.

Distribution before annuity starting date.

 

If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. You exclude from your gross income the part that you allocate to the cost. You include the remainder in your gross income.

Distribution before annuity starting date from a nonqualified plan.

 

If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer.

 

Distributions from nonqualified plans are subject to the NIIT. See the Instructions for Form 8960.

For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Pub. 575.

 

Lump-Sum Distributions

 

This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier.

A lump-sum distribution is the distribution or payment in one tax year of a plan participant’s entire balance from all of the employer’s qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) can’t qualify as a lump-sum distribution.

The participant’s entire balance from a plan doesn’t include certain forfeited amounts. It also doesn’t include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. For more information about distributions that don’t qualify as lump-sum distributions, see Distributions that don’t qualifyunder Lump-Sum Distributions in Pub. 575.

If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974 that you don’t report as capital gain) is ordinary income. You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part.

Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. The tax figured on Form 4972 is added to the regular tax figured on your other income. This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax.

How to treat the distribution.

 

If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part.

• Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income.
• Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify).
• Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify).
• Roll over all or part of the distribution. See Rollovers, later. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.
• Report the entire taxable part of the distribution as ordinary income on your tax return.

 

The first three options are explained in the following discussions.

Electing optional lump-sum treatment.

You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. If you make this choice, you can’t use either of these optional treatments for any future distributions for the participant.

Taxable and tax-free parts of the distribution.

The taxable part of a lump-sum distribution is the employer’s contributions and income earned on your account. You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free.

Cost.

In general, your cost is the total of:

• The plan participant’s nondeductible contributions to the plan,
• The plan participant’s taxable costs of any life insurance contract distributed,
• Any employer contributions that were taxable to the plan participant, and
• Repayments of any loans that were taxable to the plan participant.

You must reduce this cost by amounts previously distributed tax free.

Net unrealized appreciation (NUA).

The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Pub. 575.

 

Capital Gain Treatment

Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. The amount treated as capital gain is taxed at a 20% rate. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.

Complete Part II of Form 4972 to choose the 20% capital gain election. For more information, see Capital Gain Treatment under Lump-Sum Distributions in Pub. 575.

 

10-Year Tax Option

The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.

The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you don’t choose capital gain treatment for that part.

Complete Part III of Form 4972 to choose the 10-year tax option. You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Pub. 575 illustrates how to complete Form 4972 to figure the separate tax.

 

Rollovers

If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can generally defer tax on the distribution by rolling it over into another qualified retirement plan, a traditional IRA, or, after 2 years of participation in a SIMPLE IRA plan sponsored by your employer, a SIMPLE IRA under that plan.

For this purpose, the following plans are qualified retirement plans.

• A qualified employee plan.
• A qualified employee annuity.

 

• A tax-sheltered annuity plan (403(b) plan).

 

• An eligible state or local government section 457 deferred compensation plan.

 

Rollovers to SIMPLE retirement accounts.

You can roll over amounts from a qualified retirement plan (as described next) or an IRA into a SIMPLE retirement account as follows.

1. During the first 2 years of participation in a SIMPLE retirement account, you may roll over amounts from one SIMPLE retirement account into another SIMPLE retirement account.
2. After 2 years of participation in a SIMPLE retirement account, you may roll over amounts from a SIMPLE retirement, a qualified retirement plan, or an IRA into a SIMPLE retirement account.

 

Eligible rollover distributions.

Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. For information about exceptions to eligible rollover distributions, see Pub. 575.

Rollover of nontaxable amounts.

You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA.

If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.

Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. For more information, see the Form 8606 instructions.

Direct rollover option.

You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan.

Payment to you option.

If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. However, the full amount is treated as distributed to you even though you actually receive only 80%. You generally must include in income any part (including the part withheld) that you don’t roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. (See Pensions and Annuities under Tax Withholding for 2018 in chapter 4.)

 

Rolling over more than amount received. If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld.

Time for making rollover.

 

You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer’s plan. (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution.)

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution.

Qualified domestic relations order (QDRO).

You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. If you receive the distribution as an employee’s spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. See Rollovers in Pub. 575 for more information on benefits received under a QDRO.

Rollover by surviving spouse.

You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. The rollover rules apply to you as if you were the employee. You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later.

A distribution paid to a beneficiary other than the employee’s surviving spouse is generally not an eligible rollover distribution. However, see Rollovers by nonspouse beneficiary next.

Rollovers by nonspouse beneficiary.

If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Pub. 590-B.

Retirement bonds.

If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Pub. 590-A) or a qualified employer plan.

Designated Roth accounts.

You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. If you want to roll over the part of the distribution that isn’t included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. For more information on rollovers from designated Roth accounts, see Rollovers in Pub. 575.

In-plan rollovers to designated Roth accounts.

 

If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. The rollover of any untaxed amounts must be included in income. See Designated Roth accounts underRollovers in Pub. 575 for more information.

Rollovers to Roth IRAs.

You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA.

You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you hadn’t rolled them over into a Roth IRA. You don’t include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. In addition, the 10% tax on early distributions doesn’t apply.

More information.

 

For more information on the rules for rolling over distributions, see Rollovers in Pub. 575.

 

Special Additional Taxes

To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Ordinarily, you won’t be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. These special additional taxes are the taxes on:

• Early distributions, and
• Excess accumulation (not receiving minimum distributions).

 

These taxes are discussed in the following sections.

If you must pay either of these taxes, report them on Form 5329. However, you don’t have to file Form 5329 if you owe only the tax on early distributions and all your Forms 1099-R correctly show a “1” in box 7. Instead, enter 10% of the taxable part of the distribution on Form 1040, line 59, and write “No” under the heading “Other Taxes” to the left of line 59.

Even if you don’t owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R doesn’t indicate an exception.

 

Tax on Early Distributions

Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. This tax applies to the part of the distribution that you must include in gross income.

For this purpose, a qualified retirement plan is:

• A qualified employee plan,

 

• A qualified employee annuity plan,
• A tax-sheltered annuity plan, or

 

• An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA).

 

 

5% rate on certain early distributions from deferred annuity contracts.

If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. On line 4 of Form 5329, multiply the line 3 amount by 5% (0.05) instead of 10% (0.10). Attach an explanation to your return.

Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period.

 

If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. The additional tax is figured on Form 5329. For more information, see Form 5329 and its instructions. For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Pub. 590-B.

Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period.

If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. The additional tax is figured on Form 5329. For more information, see Form 5329 and its instructions. For information on qualified distributions from designated Roth accounts, see Designated Roth accounts underTaxation of Periodic Payments in Pub. 575.

Exceptions to tax.

Certain early distributions are excepted from the early distribution tax. If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you don’t have to report the distribution on Form 5329. If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions.

 

If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Enter exception number “12” on line 2.

General exceptions.

 

The tax doesn’t apply to distributions that are:

• Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service),
• Made because you are totally and permanently disabled (see Exceptions to Taxunder Tax on Early Distributions in Pub. 575), or
• Made on or after the death of the plan participant or contract holder.

 

Additional exceptions for qualified retirement plans.

The tax doesn’t apply to distributions that are:

• From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees);
• From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order;
• From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% of your adjusted gross income, whether or not you itemize your deductions for the year;
• From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election;
• From an employee stock ownership plan for dividends on employer securities held by the plan;
• From a qualified retirement plan due to an IRS levy of the plan;
• From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions; or
• Phased retirement annuity payments made to federal employees. See Pub. 721 for more information on the phased retirement program.

 

Qualified public safety employees.

 

If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan aren’t subject to the additional tax on early distributions. You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50.

Note.

For tax years after December 31, 2015, the definition of qualified public safety employees is expanded to include the following.

• Federal law enforcement officers.
• Federal customs and border protection officers.
• Federal firefighters.
• Air traffic controllers.
• Nuclear materials couriers.
• Members of the United States Capital Police.
• Members of the Supreme Court Police.
• Diplomatic security special agents of the United States Department of State.

 

Qualified reservist distributions.

A qualified reservist distribution isn’t subject to the additional tax on early distributions. A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement; (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period; and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. You must have been ordered or called to active duty after September 11, 2001. For more information, see Qualified reservist distributions under Special Additional Taxes in Pub. 575.

Additional exceptions for nonqualified annuity contracts.

The tax doesn’t apply to distributions from:

• A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982;
• A deferred annuity contract under a qualified personal injury settlement;
• A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service; or
• An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually).

 

 

Tax on Excess Accumulation

To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). The payments each year can’t be less than the required minimum distribution.

Required distributions not made.

If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. The tax equals 50% of the part of the required minimum distribution that wasn’t distributed.

For this purpose, a qualified retirement plan includes:

• A qualified employee plan,

 

• A qualified employee annuity plan,
• An eligible section 457 deferred compensation plan, or
• A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986).

 

Waiver.

 

The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax.

State insurer delinquency proceedings.

You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Under certain conditions, you won’t have to pay the 50% excise tax.

Required beginning date.

 

Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of:

• The calendar year in which you reach age 70½, or
• The calendar year in which you retire from employment with the employer maintaining the plan.

However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you haven’t retired.

If you reached age 70½ in 2017, you may be required to receive your first distribution by April 1, 2018. Your required distribution then must be made for 2018 by December 31, 2018.

5% owners.

 

If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½.

You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer.

Age 70½.

You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday.

For example, if you are retired and your 70th birthday was on June 30, 2017, you were age 70½ on December 30, 2017. If your 70th birthday was on July 1, 2017, you reached age 70½ on January 1, 2018.

Required distributions.

By the required beginning date, as explained earlier, you must either:

• Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or
• Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period).

 

Additional information.

 

For more information on this rule, see Tax on Excess Accumulation in Pub. 575.

Form 5329.

You must file Form 5329 if you owe tax because you didn’t receive a minimum required distribution from your qualified retirement plan.

 

Survivors and Beneficiaries

Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. However, some special rules apply. See Pub. 575 for more information.

Survivors of employees.

 

If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee’s investment in the contract. You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee.

Survivors of retirees.

 

If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable.

If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. The resulting tax-free amount will then remain fixed. Any increases in the survivor annuity are fully taxable.

If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. This amount remains fixed even if the annuity payments are increased or decreased. See Simplified Method , earlier.

In any case, if the annuity starting date is after 1986, the total exclusion over the years can’t be more than the cost.

Estate tax deduction.

If your annuity was a joint and survivor annuity that was included in the decedent’s estate, an estate tax may have been paid on it. You can deduct the part of the total estate tax that was based on the annuity. The deceased annuitant must have died after the annuity starting date. (For details, see section 1.691(d)-1 of the regulations.) Deduct it in equal amounts over your remaining life expectancy.

If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent’s cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction.

You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. This deduction isn’t subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. See Pub. 559 for more information on the estate tax deduction.

11. Social Security and Equivalent Railroad Retirement Benefits

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Introduction

This chapter explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. It explains the following topics.

• How to figure whether your benefits are taxable.
• How to report your taxable benefits.
• How to use the social security benefits worksheet (with examples).
• Deductions related to your benefits and how to treat repayments that are more than the benefits you received during the year.

 

Social security benefits include monthly retirement, survivor, and disability benefits. They don’t include Supplemental Security Income (SSI) payments, which aren’t taxable.

Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. They are commonly called the social security equivalent benefit (SSEB) portion of tier 1 benefits.

If you received these benefits during 2017, you should have received a Form SSA-1099, Social Security Benefit Statement; or Form RRB-1099, Payments by the Railroad Retirement Board. These forms show the amounts received and repaid, and taxes withheld for the year. You may receive more than one of these forms for the same year. You should add the amounts shown on all the Forms SSA-1099 and Forms RRB-1099 you receive for the year to determine the total amounts received and repaid, and taxes withheld for that year. See the Appendix at the end of Pub. 915 for more information.

Note.

When the term “benefits” is used in this chapter, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits.

my Social Security account.

 

Social Security beneficiaries may quickly and easily obtain various information from the SSA’s website with a my Social Security account to:

• Keep track of your earnings and verify them every year;
• Get an estimate of your future benefits if you are still working;
• Get a letter with proof of your benefits if you currently receive them;
• Change your address;
• Start or change your direct deposit;
• Get a replacement Medicare card; and
• Get a replacement Form SSA-1099 for the tax season.

For more information and to set up an account, go to SSA.gov/myaccount.

What isn’t covered in this chapter.

This chapter doesn’t cover the tax rules for the following railroad retirement benefits.

• Non-social security equivalent benefit (NSSEB) portion of tier 1 benefits.
• Tier 2 benefits.
• Vested dual benefits.
• Supplemental annuity benefits.

For information on these benefits, see Pub. 575, Pension and Annuity Income.

This chapter doesn’t cover the tax rules for social security benefits reported on Form SSA-1042S, Social Security Benefit Statement; or Form RRB-1042S, Statement for Nonresident Alien Recipients of: Payments by the Railroad Retirement Board. For information about these benefits, see Pub. 519, U.S. Tax Guide for Aliens; and Pub. 915, Social Security and Equivalent Railroad Retirement Benefits.

This chapter also doesn’t cover the tax rules for foreign social security benefits. These benefits are taxable as annuities, unless they are exempt from U.S. tax or treated as a U.S. social security benefit under a tax treaty.

 

Useful Items – You may want to see:

Publication

• 505Tax Withholding and Estimated Tax
• 575 Pension and Annuity Income
• 590-A Contributions to Individual Retirement Arrangements (IRAs)
• 915 Social Security and Equivalent Railroad Retirement Benefits

Forms (and Instructions)

• 1040-ESEstimated Tax for Individuals
• SSA-1099Social Security Benefit Statement
• RRB-1099Payments by the Railroad Retirement Board
• W-4VVoluntary Withholding Request

 

 

Are Any of Your Benefits Taxable?

To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:

1. One-half of your benefits; plus
2. All your other income, including tax-exempt interest.

 

Exclusions.

 

When making this comparison, don’t reduce your other income by any exclusions for:

• Interest from qualified U.S. savings bonds,
• Employer-provided adoption benefits,
• Foreign earned income or foreign housing, or
• Income earned by bona fide residents of American Samoa or Puerto Rico.

 

Children’s benefits.

 

The rules in this chapter apply to benefits received by children. See Who is taxed , later.

Figuring total income.

 

To figure the total of one-half of your benefits plus your other income, use Worksheet 11-1 later in this discussion. If the total is more than your base amount, part of your benefits may be taxable.

If you are married and file a joint return for 2017, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Even if your spouse didn’t receive any benefits, you must add your spouse’s income to yours to figure whether any of your benefits are taxable.

 

If the only income you received during 2017 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally aren’t taxable and you probably don’t have to file a return. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. See Do I Have To File a Return? in chapter 1, earlier; Pub. 501, Exemptions, Standard Deduction, and Filing Information; or your tax return instructions to find out if you have to file a return.

Base amount.

 

Your base amount is:

• $25,000 if you are single, head of household, or qualifying widow(er);
• $25,000 if you are married filing separately and lived apart from your spouse for all of 2017;
• $32,000 if you are married filing jointly; or
• $-0- if you are married filing separately and lived with your spouse at any time during 2017.

 

Worksheet 11-1.

You can use Worksheet 11-1 to figure the amount of income to compare with your base amount. This is a quick way to check whether some of your benefits may be taxable.

Worksheet 11-1. A Quick Way To Check if Your Benefits May Be Taxable
Note. If you plan to file a joint income tax return, include your spouse’s amounts, if any, on lines A, C, and D.
A.	Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2017, for 2017 and earlier years. (If you received more than one form, combine the amounts from box 5 and enter the total.)	A.
Note.  If the amount on line A is zero or less, stop here; none of your benefits are taxable this year.
B.	Enter one-half of line A	B.
C.	Enter your total income that is taxable (excluding line A), such as pensions, wages, interest, ordinary dividends, and capital gain distributions. Don’t reduce your income by any deductions, exclusions(listed earlier), or exemptions	C.
D.	Enter any tax-exempt interest income such as interest on municipal bonds	D.
E.	Add lines B, C, and D	E.
Note.  Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable. You need to complete Worksheet 1 in Pub. 915 (or the Social Security Benefits Worksheet in your tax form instructions). If none of your benefits are taxable, but you otherwise must file a tax return, see Benefits not taxable , later, under How To Report Your Benefits.

 

Example.

You and your spouse (both over 65) are filing a joint return for 2017 and you both received social security benefits during the year. In January 2018, you received a Form SSA-1099 showing net benefits of $7,500 in box 5. Your spouse received a Form SSA-1099 showing net benefits of $3,500 in box 5. You also received a taxable pension of $25,800 and interest income of $500. You didn’t have any tax-exempt interest income. Your benefits aren’t taxable for 2017 because your income, as figured in Worksheet 11-1, isn’t more than your base amount ($32,000) for married filing jointly.

Even though none of your benefits are taxable, you must file a return for 2017 because your taxable gross income ($26,300) exceeds the minimum filing requirement amount for your filing status.

 

Filled-in Worksheet 11-1. A Quick Way To Check if Your Benefits May Be Taxable
Note. If you plan to file a joint income tax return, include your spouse’s amounts, if any, on lines A, C, and D.
A.	Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2017, for 2017 and earlier years. (If you received more than one form, combine the amounts from box 5 and enter the total.)	A.	$11,000
Note.  If the amount on line A is zero or less, stop here; none of your benefits are taxable this year.
B.	Enter one-half of line A	B.	5,500
C.	Enter your total income that is taxable (excluding line A), such as pensions, wages, interest, ordinary dividends, and capital gain distributions. Don’t reduce your income by any deductions, exclusions (listed earlier), or exemptions	C.	26,300
D.	Enter any tax-exempt interest income such as interest on municipal bonds	D.	-0-
E.	Add lines B, C, and D	E.	$31,800
Note.  Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable. You need to complete Worksheet 1 in Pub. 915 (or the Social Security Benefits Worksheet in your tax form instructions). If none of your benefits are taxable, but you otherwise must file a tax return, see Benefits not taxable , later, under How To Report Your Benefits.

 

Who is taxed.

 

Benefits are included in the taxable income (to the extent they are taxable) of the person who has the legal right to receive the benefits. For example, if you and your child receive benefits, but the check for your child is made out in your name, you must use only your part of the benefits to see whether any benefits are taxable to you. One-half of the part that belongs to your child must be added to your child’s other income to see whether any of those benefits are taxable to your child.

Repayment of benefits.

Any repayment of benefits you made during 2017 must be subtracted from the gross benefits you received in 2017. It doesn’t matter whether the repayment was for a benefit you received in 2017 or in an earlier year. If you repaid more than the gross benefits you received in 2017, see Repayments More Than Gross Benefits , later.

Your gross benefits are shown in box 3 of Form SSA-1099 or RRB-1099. Your repayments are shown in box 4. The amount in box 5 shows your net benefits for 2017 (box 3 minus box 4). Use the amount in box 5 to figure whether any of your benefits are taxable.

Tax withholding and estimated tax.

You can choose to have federal income tax withheld from your social security benefits and/or the SSEB portion of your tier 1 railroad retirement benefits. If you choose to do this, you must complete a Form W-4V.

If you don’t choose to have income tax withheld, you may have to request additional withholding from other income or pay estimated tax during the year. For details, see chapter 4, earlier; Pub. 505; or the instructions for Form 1040-ES.

 

How To Report Your Benefits

If part of your benefits are taxable, you must use Form 1040 or Form 1040A. You can’t use Form 1040EZ.

Reporting on Form 1040.

Report your net benefits (the total amount from box 5 of all your Forms SSA-1099 and Forms RRB-1099) on line 20a and the taxable part on line 20b. If you are married filing separately and you lived apart from your spouse for all of 2017, also enter “D” to the right of the word “benefits” on line 20a.

Reporting on Form 1040A.

Report your net benefits (the total amount from box 5 of all your Forms SSA-1099 and Forms RRB-1099) on line 14a and the taxable part on line 14b. If you are married filing separately and you lived apart from your spouse for all of 2017, also enter “D” to the right of the word “benefits” on line 14a.

Benefits not taxable.

If you are filing Form 1040EZ, don’t report any benefits on your tax return. If you are filing Form 1040 or Form 1040A, report your net benefits (the total amount from box 5 of all your Forms SSA-1099 and Forms RRB-1099) on Form 1040, line 20a; or Form 1040A, line 14a. Enter -0- on Form 1040, line 20b; or Form 1040A, line 14b. If you are married filing separately and you lived apart from your spouse for all of 2017, also enter “D” to the right of the word “benefits” on Form 1040, line 20a; or Form 1040A, line 14a.

 

How Much Is Taxable?

If part of your benefits are taxable, how much is taxable depends on the total amount of your benefits and other income. Generally, the higher that total amount, the greater the taxable part of your benefits.

Maximum taxable part.

 

Generally, up to 50% of your benefits will be taxable. However, up to 85% of your benefits can be taxable if either of the following situations applies to you.

• The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
• You are married filing separately and lived with your spouse at any time during 2017.

 

Which worksheet to use.

A worksheet you can use to figure your taxable benefits is in the instructions for your Form 1040 or Form 1040A. You can use either that worksheet or Worksheet 1 in Pub. 915, unless any of the following situations applies to you.

1. You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse is covered by a retirement plan at work. In this situation, you must use the special worksheets in Appendix B of Pub. 590-A to figure both your IRA deduction and your taxable benefits.
2. Situation 1 doesn’t apply and you take an exclusion for interest from qualified U.S. savings bonds (Form 8815), for adoption benefits (Form 8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or for income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. In this situation, you must use Worksheet 1 in Pub. 915 to figure your taxable benefits.
3. You received a lump-sum payment for an earlier year. In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Pub. 915. See Lump-sum election

 

Lump-sum election.

You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2017 in your 2017 income, even if the payment includes benefits for an earlier year.

 

This type of lump-sum benefit payment shouldn’t be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. No part of the lump-sum death benefit is subject to tax.

Generally, you use your 2017 income to figure the taxable part of the total benefits received in 2017. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.

Making the election.

 

If you received a lump-sum benefit payment in 2017 that includes benefits for one or more earlier years, follow the instructions in Pub. 915 under Lump-Sum Election to see whether making the election will lower your taxable benefits. That discussion also explains how to make the election.

 

Because the earlier year’s taxable benefits are included in your 2017 income, no adjustment is made to the earlier year’s return. Don’t file an amended return for the earlier year.

 

Examples

The following are a few examples you can use as a guide to figure the taxable part of your benefits.

Example 1.

George White is single and files Form 1040 for 2017. He received the following income in 2017.

Fully taxable pension	$18,600
Wages from part-time job	9,400
Taxable interest income	990
Total	$28,990

 

George also received social security benefits during 2017. The Form SSA-1099 he received in January 2018 shows $5,980 in box 5. To figure his taxable benefits, George completes the worksheet shown here.

Filled-in Worksheet 1. Figuring Your Taxable Benefits

1.	Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. Also enter this amount on Form 1040, line 20a; or Form 1040A, line 14a	$5,980
2.	Enter one-half of line 1		2,990
3.	Combine the amounts from:
	Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21.
	Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13		28,990
4.	Enter the amount, if any, from Form 1040 or 1040A, line 8b		-0-
5.	Enter the total of any exclusions/adjustments for: ·                     Adoption benefits (Form 8839, line 28), ·                     Foreign earned income or housing (Form 2555, lines 45 and 50; or Form 2555-EZ, line 18), and ·                     Certain income of bona fide residents of American Samoa (Form 4563, line 15) or Puerto Rico		-0-
6.	Combine lines 2, 3, 4, and 5		31,980
7.	Form 1040 filers: Enter the amounts from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36.
	Form 1040A filers: Enter the amounts from Form 1040A, lines 16 and 17		-0-
8.	Is the amount on line 7 less than the amount on line 6?
	No.   None of your social security benefits are taxable. Enter -0- on Form 1040, line 20b; or Form 1040A, line 14b.
	Yes. Subtract line 7 from line 6		31,980
9.	If you are: ·                     Married filing jointly, enter $32,000 ·                     Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2017, enter $25,000		25,000
	Note.  If you are married filing separately and you lived with your spouse at any time in 2017, skip lines 9 through 16; multiply line 8 by 85% (0.85) and enter the result on line 17. Then go to line 18.
10.	Is the amount on line 9 less than the amount on line 8?
	No.   None of your benefits are taxable. Enter -0- on Form 1040, line 20b; or on Form 1040A, line 14b. If you are married filing separately and you lived apart from your spouse for all of 2017, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a; or on Form 1040A, line 14a.
	Yes. Subtract line 9 from line 8		6,980
11.	Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2017		9,000
12.	Subtract line 11 from line 10. If zero or less, enter -0-		-0-
13.	Enter the smaller of line 10 or line 11		6,980
14.	Enter one-half of line 13		3,490
15.	Enter the smaller of line 2 or line 14		2,990
16.	Multiply line 12 by 85% (0.85). If line 12 is zero, enter -0-		-0-
17.	Add lines 15 and 16		2,990
18.	Multiply line 1 by 85% (0.85)		5,083
19.	Taxable benefits.  Enter the smaller of line 17 or line 18. Also enter this amount on Form 1040, line 20b; or Form 1040A, line 14b		$2,990

 

The amount on line 19 of George’s worksheet shows that $2,990 of his social security benefits is taxable. On line 20a of his Form 1040, George enters his net benefits of $5,980. On line 20b, he enters his taxable benefits of $2,990.

Example 2.

Ray and Alice Hopkins file a joint return on Form 1040A for 2017. Ray is retired and received a fully taxable pension of $15,500. He also received social security benefits, and his Form SSA-1099 for 2017 shows net benefits of $5,600 in box 5. Alice worked during the year and had wages of $14,000. She made a deductible payment to her IRA account of $1,000 and isn’t covered by a retirement plan at work. Ray and Alice have two savings accounts with a total of $250 in taxable interest income. They complete Worksheet 1, entering $29,750 ($15,500 + $14,000 + $250) on line 3. They find none of Ray’s social security benefits are taxable. On Form 1040A, they enter $5,600 on line 14a and -0- on line 14b.

Filled-in Worksheet 1. Figuring Your Taxable Benefits

1.	Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. Also enter this amount on Form 1040, line 20a; or Form 1040A, line 14a	$5,600
2.	Enter one-half of line 1		2,800
3.	Combine the amounts from:
	Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21.
	Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13		29,750
4.	Enter the amount, if any, from Form 1040 or 1040A, line 8b		-0-
5.	Enter the total of any exclusions/adjustments for: ·                     Adoption benefits (Form 8839, line 28), ·                     Foreign earned income or housing (Form 2555, lines 45 and 50; or Form 2555-EZ, line 18), and ·                     Certain income of bona fide residents of American Samoa (Form 4563, line 15) or Puerto Rico		-0-
6.	Combine lines 2, 3, 4, and 5		32,550
7.	Form 1040 filers: Enter the amounts from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36.
	Form 1040A filers: Enter the amounts from Form 1040A, lines 16 and 17		1,000
8.	Is the amount on line 7 less than the amount on line 6?
	No.   None of your social security benefits are taxable. Enter -0- on Form 1040, line 20b; or Form 1040A, line 14b.
	Yes. Subtract line 7 from line 6		31,550
9.	If you are: ·                     Married filing jointly, enter $32,000 ·                     Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2017, enter $25,000		32,000
	Note.  If you are married filing separately and you lived with your spouse at any time in 2017, skip lines 9 through 16; multiply line 8 by 85% (0.85) and enter the result on line 17. Then go to line 18.
10.	Is the amount on line 9 less than the amount on line 8?
	No.   None of your benefits are taxable. Enter -0- on Form 1040, line 20b; or on Form 1040A, line 14b. If you are married filing separately and you lived apart from your spouse for all of 2017, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a; or on Form 1040A, line 14a.
	Yes. Subtract line 9 from line 8
11.	Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2017
12.	Subtract line 11 from line 10. If zero or less, enter -0-
13.	Enter the smaller of line 10 or line 11
14.	Enter one-half of line 13
15.	Enter the smaller of line 2 or line 14
16.	Multiply line 12 by 85% (0.85). If line 12 is zero, enter -0-
17.	Add lines 15 and 16
18.	Multiply line 1 by 85% (0.85)
19.	Taxable benefits.  Enter the smaller of line 17 or line 18. Also enter this amount on Form 1040, line 20b; or Form 1040A, line 14b

 

Example 3.

Joe and Betty Johnson file a joint return on Form 1040 for 2017. Joe is a retired railroad worker and in 2017 received the SSEB portion of tier 1 railroad retirement benefits. Joe’s Form RRB-1099 shows $10,000 in box 5. Betty is a retired government worker and received a fully taxable pension of $38,000. They had $2,300 in taxable interest income plus interest of $200 on a qualified U.S. savings bond. The savings bond interest qualified for the exclusion. They figure their taxable benefits by completing Worksheet 1. Because they have qualified U.S. savings bond interest, they follow the note at the beginning of the worksheet and use the amount from line 2 of their Schedule B (Form 1040A or 1040) on line 3 of the worksheet instead of the amount from line 8a of their Form 1040. On line 3 of the worksheet, they enter $40,500 ($38,000 + $2,500).

Filled-in Worksheet 1. Figuring Your Taxable Benefits

Before you begin:
•	If you are married filing separately and you lived apart from your spouse for all of 2017, enter “D” to the right of the word “benefits” on Form 1040, line 20a; or Form 1040A, line 14a.
•	Don’t use this worksheet if you repaid benefits in 2017 and your total repayments (box 4 of Forms SSA-1099 and RRB-1099) were more than your gross benefits for 2017 (box 3 of Forms SSA-1099 and RRB-1099). None of your benefits are taxable for 2017. For more information, see Repayments More Than Gross Benefits , later.
•	If you are filing Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, don’t include the amount from line 8a of Form 1040 or Form 1040A on line 3 of this worksheet. Instead, include the amount from Schedule B (Form 1040A or 1040), line 2.
1.	Enter the total amount from box 5 of ALL your Forms SSA-1099 and RRB-1099. Also enter this amount on Form 1040, line 20a; or Form 1040A, line 14a	$10,000
2.	Enter one-half of line 1		5,000
3.	Combine the amounts from:
	Form 1040: Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17 through 19, and 21.
	Form 1040A: Lines 7, 8a, 9a, 10, 11b, 12b, and 13		40,500
4.	Enter the amount, if any, from Form 1040 or 1040A, line 8b		-0-
5.	Enter the total of any exclusions/adjustments for: ·                     Adoption benefits (Form 8839, line 28), ·                     Foreign earned income or housing (Form 2555, lines 45 and 50; or Form 2555-EZ, line 18), and ·                     Certain income of bona fide residents of American Samoa (Form 4563, line 15) or Puerto Rico		-0-
6.	Combine lines 2, 3, 4, and 5		45,500
7.	Form 1040 filers: Enter the amounts from Form 1040, lines 23 through 32, and any write-in adjustments you entered on the dotted line next to line 36.
	Form 1040A filers: Enter the amounts from Form 1040A, lines 16 and 17		-0-
8.	Is the amount on line 7 less than the amount on line 6?
	No.   None of your social security benefits are taxable. Enter -0- on Form 1040, line 20b; or Form 1040A, line 14b.
	Yes. Subtract line 7 from line 6		45,500
9.	If you are: ·                     Married filing jointly, enter $32,000 ·                     Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2017, enter $25,000		32,000
	Note.  If you are married filing separately and you lived with your spouse at any time in 2017, skip lines 9 through 16; multiply line 8 by 85% (0.85) and enter the result on line 17. Then go to line 18.
10.	Is the amount on line 9 less than the amount on line 8?
	No.   None of your benefits are taxable. Enter -0- on Form 1040, line 20b; or on Form 1040A, line 14b. If you are married filing separately and you lived apart from your spouse for all of 2017, be sure you entered “D” to the right of the word “benefits” on Form 1040, line 20a; or on Form 1040A, line 14a.
	Yes. Subtract line 9 from line 8		13,500
11.	Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2017		12,000
12.	Subtract line 11 from line 10. If zero or less, enter -0-		1,500
13.	Enter the smaller of line 10 or line 11		12,000
14.	Enter one-half of line 13		6,000
15.	Enter the smaller of line 2 or line 14		5,000
16.	Multiply line 12 by 85% (0.85). If line 12 is zero, enter -0-		1,275
17.	Add lines 15 and 16		6,275
18.	Multiply line 1 by 85% (0.85)		8,500
19.	Taxable benefits.  Enter the smaller of line 17 or line 18. Also enter this amount on Form 1040, line 20b; or Form 1040A, line 14b		$6,275

 

More than 50% of Joe’s net benefits are taxable because the income on line 8 of the worksheet ($45,500) is more than $44,000. Joe and Betty enter $10,000 on Form 1040, line 20a; and $6,275 on Form 1040, line 20b.

 

Deductions Related to Your Benefits

You may be entitled to deduct certain amounts related to the benefits you receive.

Disability payments.

You may have received disability payments from your employer or an insurance company that you included as income on your tax return in an earlier year. If you received a lump-sum payment from the SSA or RRB, and you had to repay the employer or insurance company for the disability payments, you can take an itemized deduction for the part of the payments you included in gross income in the earlier year. If the amount you repay is more than $3,000, you may be able to claim a tax credit instead. Claim the deduction or credit in the same way explained under Repayments More Than Gross Benefits , later.

Legal expenses.

You can usually deduct legal expenses that you pay or incur to produce or collect taxable income or in connection with the determination, collection, or refund of any tax.

Legal expenses for collecting the taxable part of your benefits are deductible as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23.

 

Repayments More Than Gross Benefits

In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Don’t use a worksheet in this case. If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year.

If you have any questions about this negative figure, contact your local SSA office or your local RRB field office.

Joint return.

If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5, but your spouse’s doesn’t, subtract the amount in box 5 of your form from the amount in box 5 of your spouse’s form. You do this to get your net benefits when figuring if your combined benefits are taxable.

Example.

John and Mary file a joint return for 2017. John received Form SSA-1099 showing $3,000 in box 5. Mary also received Form SSA-1099 and the amount in box 5 was ($500). John and Mary will use $2,500 ($3,000 minus $500) as the amount of their net benefits when figuring if any of their combined benefits are taxable.

Repayment of benefits received in an earlier year.

 

If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year.

Deduction $3,000 or less.

 

If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Claim it on Schedule A (Form 1040), line 23.

Deduction more than $3,000.

 

If this deduction is more than $3,000, you should figure your tax two ways.

1. Figure your tax for 2017 with the itemized deduction included on Schedule A, line 28.
2. Figure your tax for 2017 in the following steps.
   28. Figure the tax without the itemized deduction included on Schedule A, line 28.
   29. For each year after 1983 for which part of the negative figure represents a repayment of benefits, refigure your taxable benefits as if your total benefits for the year were reduced by that part of the negative figure. Then refigure the tax for that year.
   30. Subtract the total of the refigured tax amounts in (b) from the total of your actual tax amounts.
   31. Subtract the result in (c) from the result in (a).

Compare the tax figured in methods 1 and 2. Your tax for 2017 is the smaller of the two amounts. If method 1 results in less tax, take the itemized deduction on Schedule A (Form 1040), line 28. If method 2 results in less tax, claim a credit for the amount from step 2c above on Form 1040, line 73. Check box d and enter “I.R.C. 1341” in the space next to that box. If both methods produce the same tax, deduct the repayment on Schedule A (Form 1040), line 28.

12. Other Income

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Reminder

Automatic 6-month extension. If you receive your Form 1099 and/or Schedule K-1, reporting your other income, late and you need more time to file your tax return, you can request a 6-month extension of time to file. See Automatic Extension in chapter 1.

 

Introduction

You must include on your return all items of income you receive in the form of money, property, and services unless the tax law states that you don’t include them. Some items, however, are only partly excluded from income. This chapter discusses many kinds of income and explains whether they’re taxable or nontaxable.

• Income that’s taxable must be reported on your tax return and is subject to tax.
• Income that’s nontaxable may have to be shown on your tax return but isn’t taxable.

 

This chapter begins with discussions of the following income items.

• Canceled debts.
• Sales parties at which you’re the host or hostess.
• Life insurance proceeds.
• Partnership income.
• S corporation income.
• Recoveries (including state income tax refunds).
• Rents from personal property.
• Unemployment benefits.
• Welfare and other public assistance benefits.

These discussions are followed by brief discussions of other income items.

 

Useful Items – You may want to see:

Publication

• 525Taxable and Nontaxable Income
• 544Sales and Other Dispositions of Assets
• 4681Canceled Debts, Foreclosures, Repossessions, and Abandonments

 

 

Bartering

Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise.

Generally, you report this income on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. However, if the barter involves an exchange of something other than services, such as in Example 3 below, you may have to use another form or schedule instead.

Example 1.

You’re a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of the shares in your income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) in the year you receive them.

Example 2.

You’re self-employed and a member of a barter club. The club uses “credit units” as a means of exchange. It adds credit units to your account for goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. The club subtracts credit units from your account when you receive goods or services from other members. You must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year.

Example 3.

You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. You must report as rental income on Schedule E (Form 1040), Supplemental Income and Loss, the fair market value of the artwork, and the artist must report as income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) the fair rental value of the apartment.

Form 1099-B from barter exchange.

If you exchanged property or services through a barter exchange, Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a similar statement from the barter exchange should be sent to you by February 15, 2018. It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2017. The IRS also will receive a copy of Form 1099-B.

 

Canceled Debts

In most cases, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it’s intended as a gift to you. A debt includes any indebtedness for which you’re liable or which attaches to property you hold.

If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it’s a business debt, report the amount on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you‘re a farmer).

Form 1099-C.

If a federal government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2.

Interest included in canceled debt.

If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible when you paid it. See Deductible debt under Exceptions, later.

If the interest wouldn’t be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).

Discounted mortgage loan.

If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must include the canceled amount in your income.

Mortgage relief upon sale or other disposition.

If you’re personally liable for a mortgage (recourse debt), and you’re relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the fair market value of the property. Also, to the extent the mortgage discharge exceeds the fair market value of the property, it’s income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt , later. Report any income from discharge of indebtedness on nonbusiness debt that doesn’t qualify for exclusion as other income on Form 1040, line 21.

If you aren’t personally liable for a mortgage (nonrecourse debt), and you’re relieved of the mortgage when you dispose of the property (such as through foreclosure), that relief is included in the amount you realize. You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness property as a capital gain.

See Pub. 4681 for more information.

Stockholder debt.

If you’re a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that’s generally dividend income to you. For more information, see Pub. 542, Corporations.

If you’re a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally don’t realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.

Repayment of canceled debt.

 

If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. The statute of limitations generally doesn’t end until 3 years after the due date of your original return.

 

Exceptions

There are several exceptions to the inclusion of canceled debt in income. These are explained next.

Student loans.

Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers.

You don’t have income if your student loan is canceled after you agreed to this provision and then performed the services required. To qualify, the loan must have been made by:

1. The federal government, a state or local government, or an instrumentality, agency, or subdivision thereof;
2. A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law; or
3. An educational institution:
   1. Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or
   2. As part of a program of the institution designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt organization described in section 501(c)(3).

 

A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a qualified tax-exempt organization under its program designed as described in (3b) above.

Education loan repayment assistance.

 

Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program), a state education loan repayment program eligible for funds under the Public Health Service Act, or any other state loan repayment or loan forgiveness program that’s intended to provide for the increased availability of health services in underserved or health professional shortage areas aren’t taxable.

Deductible debt.

 

You don’t have income from the cancellation of a debt if your payment of the debt would be deductible. This exception applies only if you use the cash method of accounting. For more information, see chapter 5 of Pub. 334, Tax Guide for Small Business.

Price reduced after purchase.

In most cases, if the seller reduces the amount of debt you owe for property you purchased, you don’t have income from the reduction. The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property.

Excluded debt.

Don’t include a canceled debt in your gross income in the following situations.

• The debt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Pub. 908, Bankruptcy Tax Guide.
• The debt is canceled when you’re insolvent. However, you can’t exclude any amount of canceled debt that’s more than the amount by which you’re insolvent. See Pub. 908.
• The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Pub. 225, Farmer’s Tax Guide.
• The debt is qualified real property business debt. See chapter 5 of Pub. 334.
• The cancellation is intended as a gift.

 

 

At the time this publication was prepared for printing, Congress was considering legislation to extend the exclusion of qualified principal residence indebtedness from income that had expired at the end of 2016. To see if the legislation was enacted, go to Recent Developments at IRS.gov/Pub17.

 

Host or Hostess

If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. You must report this item as income at its fair market value.

Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party.

For more information about the 50% limit for meal and entertainment expenses, see chapter 26.

 

Life Insurance Proceeds

Life insurance proceeds paid to you because of the death of the insured person aren’t taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.

Proceeds not received in installments.

 

If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person’s death. If the benefit payable at death isn’t specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death.

Proceeds received in installments.

 

If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.

To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.

Surviving spouse.

If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. If you remarry, you can continue to take the exclusion.

Surrender of policy for cash.

If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In most cases, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that weren’t included in your income.

You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A.

More information.

 

For more information, see Life Insurance Proceeds in Pub. 525.

 

Endowment Contract Proceeds

An endowment contract is a policy under which you’re paid a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Include the part of the lump-sum payment that’s more than your cost in your income.

 

Accelerated Death Benefits

Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured’s death are excluded from income if the insured is terminally or chronically ill.

Viatical settlement.

This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code.

Exclusion for terminal illness.

 

Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.

Exclusion for chronic illness.

If the insured is a chronically ill individual who’s not terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. This limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits in Pub. 525.

Exception.

 

The exclusion doesn’t apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured:

• Is a director, officer, or employee of the person; or
• Has a financial interest in the person’s business.

 

Form 8853.

To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. You don’t have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.

 

Public Safety Officer Killed or Injured in the Line of Duty

A spouse, former spouse, and child of a public safety officer killed in the line of duty can exclude from gross income survivor benefits received from a governmental section 401(a) plan attributable to the officer’s service. See section 101(h).

A public safety officer who’s permanently and totally disabled or killed in the line of duty and a surviving spouse or child can exclude from income death or disability benefits received from the federal Bureau of Justice Assistance or death benefits paid by a state program. See section 104(a)(6).

For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. For more information, see Pub. 559, Survivors, Executors, and Administrators.

 

Partnership Income

A partnership generally isn’t a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner’s distributive share of these items.

Schedule K-1 (Form 1065).

Although a partnership generally pays no tax, it must file an information return on Form 1065, U.S. Return of Partnership Income, and send Schedule K-1 (Form 1065) to each partner. In addition, the partnership will send each partner a copy of the Partner’s Instructions for Schedule K-1 (Form 1065) to help each partner report his or her share of the partnership’s income, deductions, credits, and tax preference items.

 

Keep Schedule K-1 (Form 1065) for your records. Don’t attach it to your Form 1040, unless you’re specifically required to do so.

For more information on partnerships, see Pub. 541, Partnerships.

Qualified joint venture.

 

If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. For further information on how to make the election and which schedule(s) to file, see the instructions for your individual tax return.

 

S Corporation Income

In most cases, an S corporation doesn’t pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder’s pro rata share.

Schedule K-1 (Form 1120S).

An S corporation must file a return on Form 1120S, U.S. Income Tax Return for an S Corporation, and send Schedule K-1 (Form 1120S) to each shareholder. In addition, the S corporation will send each shareholder a copy of the Shareholder’s Instructions for Schedule K-1 (Form 1120S) to help each shareholder report his or her share of the S corporation’s income, losses, credits, and deductions.

 

Keep Schedule K-1 (Form 1120S) for your records. Don’t attach it to your Form 1040, unless you’re specifically required to do so.

For more information on S corporations and their shareholders, see the Instructions for Form 1120S.

 

Recoveries

A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds, reimbursements, and rebates of deductions itemized on Schedule A (Form 1040). You also may have recoveries of non-itemized deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a tax credit.

Tax benefit rule.

 

You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year. For more information, see Pub. 525.

Federal income tax refund.

Refunds of federal income taxes aren’t included in your income because they’re never allowed as a deduction from income.

State tax refund.

If you received a state or local income tax refund (or credit or offset) in 2017, you generally must include it in income if you deducted the tax in an earlier year. The payer should send Form 1099-G, Certain Government Payments, to you by January 31, 2018. The IRS also will receive a copy of the Form 1099-G. If you file Form 1040, use the State and Local Income Tax Refund Worksheet in the 2017 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income. See Pub. 525 for when you must use another worksheet.

If you could choose to deduct for a tax year either:

• State and local income taxes, or
• State and local general sales taxes, then

the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you didn’t choose to deduct for that year. For examples, see Pub. 525.

Mortgage interest refund.

If you received a refund or credit in 2017 of mortgage interest paid in an earlier year, the amount should be shown in box 4 of your Form 1098, Mortgage Interest Statement. Don’t subtract the refund amount from the interest you paid in 2017. You may have to include it in your income under the rules explained in the following discussions.

Interest on recovery.

Interest on any of the amounts you recover must be reported as interest income in the year received. For example, report any interest you received on state or local income tax refunds on Form 1040, line 8a.

Recovery and expense in same year.

 

If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and isn’t reported as income.

Recovery for 2 or more years.

If you receive a refund or other recovery that’s for amounts you paid in 2 or more separate years, you must allocate, on a pro rata basis, the recovered amount between the years in which you paid it. This allocation is necessary to determine the amount of recovery from any earlier years and to determine the amount, if any, of your allowable deduction for this item for the current year. For information on how to figure the allocation, see Recoveries in Pub. 525.

 

Itemized Deduction Recoveries

If you recover any amount that you deducted in an earlier year on Schedule A (Form 1040), you generally must include the full amount of the recovery in your income in the year you receive it.

Where to report.

Enter your state or local income tax refund on Form 1040, line 10, and the total of all other recoveries as other income on Form 1040, line 21. You can’t use Form 1040A or Form 1040EZ.

Standard deduction limit.

 

You generally are allowed to claim the standard deduction if you don’t itemize your deductions. Only your itemized deductions that are more than your standard deduction are subject to the recovery rule (unless you’re required to itemize your deductions). If your total deductions on the earlier year return weren’t more than your income for that year, include in your income this year the lesser of:

• Your recoveries, or
• The amount by which your itemized deductions exceeded the standard deduction.

 

Example.

For 2016, you filed a joint return. Your taxable income was $60,000 and you weren’t entitled to any tax credits. Your standard deduction was $12,600, and you had itemized deductions of $14,200. In 2017, you received the following recoveries for amounts deducted on your 2016 return.

Medical expenses	$200
State and local income tax refund	400
Refund of mortgage interest	325
Total recoveries	$925

None of the recoveries were more than the deductions taken for 2016. The difference between the state and local income tax you deducted and your local general sales tax was more than $400.

Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($14,200 − 12,600 = $1,600), so you must include your total recoveries in your income for 2017. Report the state and local income tax refund of $400 on Form 1040, line 10, and the balance of your recoveries, $525, on Form 1040, line 21.

Standard deduction for earlier years.

 

To determine if amounts recovered in 2017 must be included in your income, you must know the standard deduction for your filing status for the year the deduction was claimed. Look in the instructions for your tax return from prior years to locate the standard deduction for the filing status for that prior year.

Example.

You filed a joint return on Form 1040 for 2016 with taxable income of $45,000. Your itemized deductions were $12,850. The standard deduction that you could have claimed was $12,600. In 2017, you recovered $2,100 of your 2016 itemized deductions. None of the recoveries were more than the actual deductions for 2016. Include $250 of the recoveries in your 2017 income. This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($12,850 − $12,600 = $250).

Recovery limited to deduction.

 

You don’t include in your income any amount of your recovery that’s more than the amount you deducted in the earlier year. The amount you include in your income is limited to the smaller of:

• The amount deducted on Schedule A (Form 1040), or
• The amount recovered.

 

Example.

During 2016, you paid $1,700 for medical expenses. Of this amount, you deducted $200 on your 2016 Schedule A. In 2017, you received a $500 reimbursement from your medical insurance for your 2016 expenses. The only amount of the $500 reimbursement that must be included in your income for 2017 is $200—the amount actually deducted.

Other recoveries.

 

See Recoveries in Pub. 525 if:

• You have recoveries of items other than itemized deductions, or
• You received a recovery for an item for which you claimed a tax credit (other than investment credit or foreign tax credit) in a prior year.

 

 

Rents From Personal Property

If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is in most cases determined by:

• Whether or not the rental activity is a business, and
• Whether or not the rental activity is conducted for profit.

In most cases, if your primary purpose is income or profit and you’re involved in the rental activity with continuity and regularity, your rental activity is a business. See Pub. 535, Business Expenses, for details on deducting expenses for both business and not-for-profit activities.

Reporting business income and expenses.

 

If you’re in the business of renting personal property, report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). The form instructions have information on how to complete them.

Reporting nonbusiness income.

 

If you aren’t in the business of renting personal property, report your rental income on Form 1040, line 21. List the type and amount of the income on the dotted line next to line 21.

Reporting nonbusiness expenses.

 

If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040, line 36, and see the instructions there.

If you don’t rent personal property for profit, your deductions are limited and you can’t report a loss to offset other income. See Activity not for profit under Other Income, later.

 

Repayments

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

Type of deduction.

 

The type of deduction you’re allowed in the year of repayment depends on the type of income you included in the earlier year. You generally deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).

Repaid social security benefits.

If you repaid social security benefits or equivalent railroad retirement benefits, see Repayment of benefits in chapter 11.

Repayment of $3,000 or less.

 

If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 23.

Repayment over $3,000.

 

If the amount you repaid was more than $3,000, you can deduct the repayment (as explained under Type of deduction , earlier). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

 

When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Each instance of repayment isn’t considered separately.

Method 1.

 

Figure your tax for 2017 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28.

Method 2.

 

Figure your tax for 2017 claiming a credit for the repaid amount. Follow these steps.

1. Figure your tax for 2017 without deducting the repaid amount.
2. Refigure your tax from the earlier year without including in income the amount you repaid in 2017.
3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
4. Subtract the answer in (3) from the tax for 2017 figured without the deduction (Step 1).

 

If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 73, by adding the amount of the credit to any other credits on this line, and see the instructions there.

An example of this computation can be found in Pub. 525.

Repaid wages subject to social security and Medicare taxes.

 

If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. If the employer refuses to refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. File a claim for refund using Form 843, Claim for Refund and Request for Abatement.

Repaid wages subject to Additional Medicare Tax.

 

Employers can’t make an adjustment or file a claim for refund for Additional Medicare Tax withholding when there is a repayment of wages received by an employee in a prior year because the employee determines liability for Additional Medicare Tax on the employee’s income tax return for the prior year. If you had to repay an amount that you included in your wages or compensation in an earlier year, and on which Additional Medicare Tax was paid, you may be able to recover the Additional Medicare Tax paid on the amount. To recover Additional Medicare Tax on the repaid wages or compensation, you must file Form 1040X, Amended U.S. Individual Income Tax Return, for the prior year in which the wages or compensation was originally received. See Instructions for Form 1040X.

 

Royalties

Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income.

In most cases, you report royalties in Part I of Schedule E (Form 1040). However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ (Form 1040).

Copyrights and patents.

Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions, are amounts paid to you for the right to use your work over a specified period of time. Royalties generally are based on the number of units sold, such as the number of books, tickets to a performance, or machines sold.

Oil, gas, and minerals.

Royalty income from oil, gas, and mineral properties is the amount you receive when natural resources are extracted from your property. The royalties are based on units, such as barrels, tons, etc., and are paid to you by a person or company that leases the property from you.

Depletion.

If you’re the owner of an economic interest in mineral deposits or oil and gas wells, you can recover your investment through the depletion allowance. For information on this subject, see chapter 9 of Pub. 535.

Coal and iron ore.

Under certain circumstances, you can treat amounts you receive from the disposal of coal and iron ore as payments from the sale of a capital asset, rather than as royalty income. For information about gain or loss from the sale of coal and iron ore, see Pub. 544, chapter 2.

Sale of property interest.

If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of property used in a trade or business under section 1231, not royalty income. Under certain circumstances, the sale is subject to capital gain or loss treatment as explained in the Instructions for Schedule D (Form 1040). For more information on selling section 1231 property, see chapter 3 of Pub. 544.

If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the property, you have made a lease or a sublease, and any cash you receive for the assignment of other interests in the property is ordinary income subject to a depletion allowance.

Part of future production sold.

If you own mineral property but sell part of the future production, in most cases you treat the money you receive from the buyer at the time of the sale as a loan from the buyer. Don’t include it in your income or take depletion based on it.

When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct depletion from that amount to arrive at your taxable income from the property.

 

Unemployment Benefits

The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.

Unemployment compensation.

You must include in income all unemployment compensation you receive. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you. In most cases, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.

Types of unemployment compensation.

 

Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It includes the following benefits.

• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund.
• State unemployment insurance benefits.
• Railroad unemployment compensation benefits.
• Disability payments from a government program paid as a substitute for unemployment compensation. (Amounts received as workers’ compensation for injuries or illness aren’t unemployment compensation. See chapter 5 for more information.)
• Trade readjustment allowances under the Trade Act of 1974.

 

• Unemployment assistance under the Disaster Relief and Emergency Assistance Act.
• Unemployment assistance under the Airline Deregulation Act of 1978 Program.

Governmental program.

 

If you contribute to a governmental unemployment compensation program and your contributions aren’t deductible, amounts you receive under the program aren’t included as unemployment compensation until you recover your contributions. If you deducted all of your contributions to the program, the entire amount you receive under the program is included in your income.

Repayment of unemployment compensation.

If you repaid in 2017 unemployment compensation you received in 2017, subtract the amount you repaid from the total amount you received and enter the difference on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. On the dotted line next to your entry, enter “Repaid” and the amount you repaid. If you repaid unemployment compensation in 2017 that you included in income in an earlier year, you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. If the amount is more than $3,000, see Repayments , earlier.

Tax withholding.

You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10% of your payment.

 

If you don’t choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. If you don’t pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. For more information on estimated tax, see chapter 4.

Supplemental unemployment benefits.

Benefits received from an employer-financed fund (to which the employees didn’t contribute) aren’t unemployment compensation. They are taxable as wages. For more information, see Supplemental Unemployment Benefits in section 5 of Pub. 15-A, Employer’s Supplemental Tax Guide. Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.

Repayment of benefits.

You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. If you repay the benefits in a later year, you must include the full amount of the benefits received in your income for the year you received them.

Deduct the repayment in the later year as an adjustment to gross income on Form 1040. (You can’t use Form 1040A or Form 1040EZ.) Include the repayment on Form 1040, line 36, and see the instructions there. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. For more information on this, see Repayments , earlier.

Private unemployment fund.

Unemployment benefit payments from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. Report the taxable amount on Form 1040, line 21.

Payments by a union.

Benefits paid to you as an unemployed member of a union from regular union dues are included in your income on Form 1040, line 21. However, if you contribute to a special union fund and your payments to the fund aren’t deductible, the unemployment benefits you receive from the fund are includible in your income only to the extent they’re more than your contributions.

Guaranteed annual wage.

 

Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are taxable as wages. Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.

State employees.

Payments similar to a state’s unemployment compensation may be made by the state to its employees who aren’t covered by the state’s unemployment compensation law. Although the payments are fully taxable, don’t report them as unemployment compensation. Report these payments on Form 1040, line 21.

 

Welfare and Other Public Assistance Benefits

Don’t include in your income governmental benefit payments from a public welfare fund based upon need, such as payments to blind individuals under a state public assistance law. Payments from a state fund for the victims of crime shouldn’t be included in the victims’ incomes if they’re in the nature of welfare payments. Don’t deduct medical expenses that are reimbursed by such a fund. You must include in your income any welfare payments that are compensation for services or that are obtained fraudulently.

Reemployment Trade Adjustment Assistance (RTAA) payments.

 

RTAA payments received from a state must be included in your income. The state must send you Form 1099-G to advise you of the amount you should include in income. The amount should be reported on Form 1040, line 21.

Persons with disabilities.

If you have a disability, you must include in income compensation you receive for services you perform unless the compensation is otherwise excluded. However, you don’t include in income the value of goods, services, and cash that you receive, not in return for your services, but for your training and rehabilitation because you have a disability. Excludable amounts include payments for transportation and attendant care, such as interpreter services for the deaf, reader services for the blind, and services to help individuals with an intellectual disability do their work.

Disaster relief grants.

 

Don’t include post-disaster grants received under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, child care, or funeral expenses. Don’t deduct casualty losses or medical expenses that are specifically reimbursed by these disaster relief grants. If you have deducted a casualty loss for the loss of your personal residence and you later receive a disaster relief grant for the loss of the same residence, you may have to include part or all of the grant in your taxable income. See Recoveries , earlier. Unemployment assistance payments under the Act are taxable unemployment compensation. See Unemployment compensation under Unemployment Benefits, earlier.

Disaster relief payments.

You can exclude from income any amount you receive that’s a qualified disaster relief payment. A qualified disaster relief payment is an amount paid to you:

1. To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster;
2. To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it’s due to a qualified disaster;
3. By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries incurred as a result of a qualified disaster; or
4. By a federal, state, or local government, or agency, or instrumentality in connection with a qualified disaster in order to promote the general welfare.

You can exclude this amount only to the extent any expense it pays for isn’t paid for by insurance or otherwise. The exclusion doesn’t apply if you were a participant or conspirator in a terrorist action or a representative of one.

A qualified disaster is:

• A disaster which results from a terrorist or military action;
• A federally declared disaster; or
• A disaster which results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic by the Secretary of the Treasury or his or her delegate.

 

For amounts paid under item (4), a disaster is qualified if it’s determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.

Disaster mitigation payments.

 

You can exclude from income any amount you receive that’s a qualified disaster mitigation payment. Qualified disaster mitigation payments are most commonly paid to you in the period immediately following damage to property as a result of a natural disaster. However, disaster mitigation payments are used to mitigate (reduce the severity of) potential damage from future natural disasters. They’re paid to you through state and local governments based on the provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act.

You can’t increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments.

Home Affordable Modification Program (HAMP).

If you benefit from Pay-for-Performance Success Payments under HAMP, the payments aren’t taxable.

Mortgage assistance payments under section 235 of the National Housing Act.

Payments made under section 235 of the National Housing Act for mortgage assistance aren’t included in the homeowner’s income. Interest paid for the homeowner under the mortgage assistance program can’t be deducted.

Medicare.

Medicare benefits received under title XVIII of the Social Security Act aren’t includible in the gross income of the individuals for whom they’re paid. This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary (part B (Supplementary Medical Insurance Benefits for the Aged)).

Social Security Benefits (including lump-sum payments attributable to prior years), Supplemental Security Income Benefits, and Lump-Sum Death Benefits.

The Social Security Administration (SSA) provides benefits such as old-age benefits, benefits to disabled workers, and benefits to spouses and dependents. These benefits may be subject to federal income tax depending on your filing status and other income. See chapter 11, Social Security and Equivalent Railroad Retirement, in this publication and Pub. 915, Social Security and Equivalent Railroad Retirement Benefits, for more information. An individual originally denied benefits, but later approved, may receive a lump-sum payment for the period when benefits were denied (which may be prior years). See Pub. 915 for information on how to make a lump-sum election, which may reduce your tax liability. There are also other types of benefits paid by the SSA. However, Supplemental Security Income (SSI) benefits and lump-sum death benefits (one-time payment to spouse and children of deceased) aren’t subject to federal income tax. For more information on these benefits, go to SSA.gov.

Nutrition Program for the Elderly.

Food benefits you receive under the Nutrition Program for the Elderly aren’t taxable. If you prepare and serve free meals for the program, include in your income as wages the cash pay you receive, even if you’re also eligible for food benefits.

Payments to reduce cost of winter energy.

Payments made by a state to qualified people to reduce their cost of winter energy use aren’t taxable.

 

Other Income

The following brief discussions are arranged in alphabetical order. Other income items briefly discussed below are referenced to publications which provide more topical information.

Activity not for profit.

You must include on your return income from an activity from which you don’t expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. Enter this income on Form 1040, line 21. Deductions for expenses related to the activity are limited. They can’t total more than the income you report and can be taken only if you itemize deductions on Schedule A (Form 1040). See Not-for-Profit Activities in Pub. 535, chapter 1, for information on whether an activity is considered carried on for a profit.

Alaska Permanent Fund dividend.

If you received a payment from Alaska’s mineral income fund (Alaska Permanent Fund dividend), report it as income on line 21 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. The state of Alaska sends each recipient a document that shows the amount of the payment with the check. The amount also is reported to IRS.

Alimony.

Include in your income on Form 1040, line 11, any alimony payments you receive. Amounts you receive for child support aren’t income to you. Alimony and child support payments are discussed in chapter 18.

Bribes.

If you receive a bribe, include it in your income.

Campaign contributions.

These contributions aren’t income to a candidate unless they’re diverted to his or her personal use. To be nontaxable, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. However, interest earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities are taxable and must be reported on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations. Excess campaign funds transferred to an office account must be included in the officeholder’s income on Form 1040, line 21, in the year transferred.

Car pools.

Don’t include in your income amounts you receive from the passengers for driving a car in a car pool to and from work. These amounts are considered reimbursement for your expenses. However, this rule doesn’t apply if you have developed car pool arrangements into a profit-making business of transporting workers for hire.

Cash rebates.

A cash rebate you receive from a dealer or manufacturer of an item you buy isn’t income, but you must reduce your basis by the amount of the rebate.

Example.

You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. The $2,000 isn’t income to you. Your basis in the car is $22,000. This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business.

Casualty insurance and other reimbursements.

You generally shouldn’t report these reimbursements on your return unless you’re figuring gain or loss from the casualty or theft. See chapter 25 for more information.

Child support payments.

You shouldn’t report these payments on your return. See chapter 18 for more information.

Court awards and damages.

To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.

1. Interest on any award.
2. Compensation for lost wages or lost profits in most cases.
3. Punitive damages, in most cases. It doesn’t matter if they relate to a physical injury or physical sickness.
4. Amounts received in settlement of pension rights (if you didn’t contribute to the plan).
5. Damages for:
   1. Patent or copyright infringement,
   2. Breach of contract, or
   3. Interference with business operations.
6. Back pay and damages for emotional distress received to satisfy a claim under title VII of the Civil Rights Act of 1964.
7. Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.

 

Don’t include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Emotional distress.

Emotional distress itself isn’t a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Don’t include them in your income.

If the emotional distress is due to a personal injury that isn’t due to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages that aren’t more than amounts paid for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.

Credit card insurance.

In most cases, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. These plans make the minimum monthly payment on your credit card account if you can’t make the payment due to injury, illness, disability, or unemployment. Report on Form 1040, line 21, the amount of benefits you received during the year that’s more than the amount of the premiums you paid during the year.

Down payment assistance.

If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance isn’t included in your income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. If the corporation doesn’t qualify, the assistance is treated as a rebate or reduction of the purchase price and isn’t included in your basis.

Employment agency fees.

If you get a job through an employment agency, and the fee is paid by your employer, the fee isn’t includible in your income if you aren’t liable for it. However, if you pay it and your employer reimburses you for it, it’s includible in your income.

Energy conservation subsidies.

You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit.

Energy conservation measure.

This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.

Dwelling unit.

 

This includes a house, apartment, condominium, mobile home, boat, or similar property. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.

Estate and trust income.

 

An estate or trust, unlike a partnership, may have to pay federal income tax. If you’re a beneficiary of an estate or trust, you may be taxed on your share of its income distributed or required to be distributed to you. However, there is never a double tax. Estates and trusts file their returns on Form 1041, U.S. Income Tax Return for Estates and Trusts, and your share of the income is reported to you on Schedule K-1 (Form 1041).

Current income required to be distributed.

If you’re the beneficiary of an estate or trust that must distribute all of its current income, you must report your share of the distributable net income, whether or not you actually received it.

Current income not required to be distributed.

 

If you’re the beneficiary of an estate or trust and the fiduciary has the choice of whether to distribute all or part of the current income, you must report:

• All income that’s required to be distributed to you, whether or not it’s actually distributed, plus
• All other amounts actually paid or credited to you,

up to the amount of your share of distributable net income.

How to report.

 

Treat each item of income the same way that the estate or trust would treat it. For example, if a trust’s dividend income is distributed to you, you report the distribution as dividend income on your return. The same rule applies to distributions of tax-exempt interest and capital gains.

The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you’re allowed on your individual income tax return.

Losses.

Losses of estates and trusts generally aren’t deductible by the beneficiaries.

Grantor trust.

Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. (The grantor is the one who transferred property to the trust.) This rule applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor’s spouse.

Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of the transferred property.

Expenses paid by another.

If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment isn’t includible in your income.

Fees for services.

Include all fees for your services in your income. Examples of these fees are amounts you receive for services you perform as:

• A corporate director;
• An executor, administrator, or personal representative of an estate;
• A manager of a trade or business you operated before declaring Chapter 11 bankruptcy;
• A notary public; or
• An election precinct official.

 

Nonemployee compensation.

If you aren’t an employee and the fees for your services from a single payer in the course of the payer’s trade or business total $600 or more for the year, the payer should send you a Form 1099-MISC. You may need to report your fees as self-employment income. See Self-Employed Persons , in chapter 1, for a discussion of when you’re considered self-employed.

Corporate director.

Corporate director fees are self-employment income. Report these payments on Schedule C or Schedule C-EZ (Form 1040).

Personal representatives.

All personal representatives must include in their gross income fees paid to them from an estate. If you aren’t in the trade or business of being an executor (for instance, you’re the executor of a friend’s or relative’s estate), report these fees on Form 1040, line 21. If you’re in the trade or business of being an executor, report these fees as self-employment income on Schedule C or Schedule C-EZ (Form 1040). The fee isn’t includible in income if it’s waived.

Manager of trade or business for bankruptcy estate.

 

Include in your income all payments received from your bankruptcy estate for managing or operating a trade or business that you operated before you filed for bankruptcy. Report this income on Form 1040, line 21.

Notary public.

Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). These payments aren’t subject to self-employment tax. See the separate Instructions for Schedule SE (Form 1040) for details.

Election precinct official.

You should receive a Form W-2 showing payments for services performed as an election official or election worker. Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.

Foster care providers.

Generally, payment you receive from a state, political subdivision, or a qualified foster care placement agency for caring for a qualified foster individual in your home is excluded from your income. However, you must include in your income payment to the extent it’s received for the care of more than five qualified foster individuals age 19 years or older.

A qualified foster individual is a person who:

1. Is living in a foster family home; and
2. Was placed there by:
   1. An agency of a state or one of its political subdivisions; or
   2. A qualified foster care placement agency.

 

Difficulty-of-care payments.

These are payments that are designated by the payer as compensation for providing the additional care that’s required for physically, mentally, or emotionally handicapped qualified foster individuals. A state must determine that this compensation is needed, and the care for which the payments are made must be provided in the foster care provider’s home in which the qualified foster individual was placed.

Certain Medicaid waiver payments are treated as difficulty-of-care payments when received by an individual care provider for caring for an eligible individual (whether related or unrelated) living in the provider’s home. See Notice 2014-7, available at IRS.gov/irb/2014-4_IRB/ar06.html, and related questions and answers, available at IRS.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income, for more information.

You must include in your income difficulty-of-care payments to the extent they’re received for more than:

• 10 qualified foster individuals under age 19, or
• Five qualified foster individuals age 19 or older.

 

Maintaining space in home.

If you’re paid to maintain space in your home for emergency foster care, you must include the payment in your income.

Reporting taxable payments.

 

If you receive payments that you must include in your income and you’re in business as a foster care provider, report the payments on Schedule C or Schedule C-EZ (Form 1040). See Pub. 587, Business Use of Your Home, to help you determine the amount you can deduct for the use of your home.

Found property.

If you find and keep property that doesn’t belong to you that has been lost or abandoned (treasure trove), it’s taxable to you at its fair market value in the first year it’s your undisputed possession.

Free tour.

If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. Report the fair market value of the tour on Form 1040, line 21, if you aren’t in the trade or business of organizing tours. You can’t deduct your expenses in serving as the voluntary leader of the group at the group’s request. If you organize tours as a trade or business, report the tour’s value on Schedule C or Schedule C-EZ (Form 1040).

Gambling winnings.

You must include your gambling winnings in income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings. If you’re in the trade or business of gambling, use Schedule C.

Lotteries and raffles.

Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes.

 

If you win a state lottery prize payable in installments, see Pub. 525 for more information.

Form W-2G.

You may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any tax taken out of them. Include the amount from box 1 on Form 1040, line 21. Include the amount shown in box 4 on Form 1040, line 64, as federal income tax withheld.

Reporting winnings and recordkeeping.

 

For more information on reporting gambling winnings and recordkeeping, see Gambling Losses up to the Amount of Gambling Winnings in chapter 28.

Gifts and inheritances.

In most cases, property you receive as a gift, bequest, or inheritance isn’t included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.

Inherited pension or IRA.

If you inherited a pension or an individual retirement arrangement (IRA), you may have to include part of the inherited amount in your income. See Survivors and Beneficiaries in Pub. 575, if you inherited a pension. See What if You Inherit an IRA? in Pubs. 590-A and 590-B, if you inherited an IRA.

Hobby losses.

Losses from a hobby aren’t deductible from other income. A hobby is an activity from which you don’t expect to make a profit. See Activity not for profit , earlier.

 

If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain. (See chapter 16.) However, if you sell items from your collection at a loss, you can’t deduct the loss.

Illegal activities.

Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.

Indian fishing rights.

If you’re a member of a qualified Indian tribe that has fishing rights secured by treaty, executive order, or an Act of Congress as of March 17, 1988, don’t include in your income amounts you receive from activities related to those fishing rights. The income isn’t subject to income tax, self-employment tax, or employment taxes.

Interest on frozen deposits.

In general, you exclude from your income the amount of interest earned on a frozen deposit. See Interest income on frozen deposits in chapter 7.

Interest on qualified savings bonds.

You may be able to exclude from income the interest from qualified U.S. savings bonds you redeem if you pay qualified higher education expenses in the same year. For more information on this exclusion, see Education Savings Bond Program under U.S. Savings Bonds in chapter 7.

Job interview expenses.

If a prospective employer asks you to appear for an interview and either pays you an allowance or reimburses you for your transportation and other travel expenses, the amount you receive is generally not taxable. You include in income only the amount you receive that’s more than your actual expenses.

Jury duty.

 

Jury duty pay you receive must be included in your income on Form 1040, line 21. If you gave any of your jury duty pay to your employer because your employer continued to pay you while you served jury duty, include the amount you gave your employer as an income adjustment on Form 1040, line 36, and see the instructions there.

Kickbacks.

You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040), if from your self-employment activity.

Example.

You sell cars and help arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you for referring customers to them. You must include the kickbacks in your income.

Medical savings accounts (Archer MSAs and Medicare Advantage MSAs).

 

In most cases, you don’t include in income amounts you withdraw from your Archer MSA or Medicare Advantage MSA if you use the money to pay for qualified medical expenses. Generally, qualified medical expenses are those you can deduct on Schedule A (Form 1040), Itemized Deductions. For more information about qualified medical expenses, see chapter 21. For more information about Archer MSAs or Medicare Advantage MSAs, see Pub. 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Prizes and awards.

If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040, line 21. If you refuse to accept a prize, don’t include its value in your income.

Prizes and awards in goods or services must be included in your income at their fair market value.

Employee awards or bonuses.

Cash awards or bonuses given to you by your employer for good work or suggestions generally must be included in your income as wages. However, certain noncash employee achievement awards can be excluded from income. See Bonuses and awards in chapter 5.

Pulitzer, Nobel, and similar prizes.

If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, you generally must include the value of the prize in your income. However, you don’t include this prize in your income if you meet all of the following requirements.

• You were selected without any action on your part to enter the contest or proceeding.
• You aren’t required to perform substantial future services as a condition to receiving the prize or award.
• The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you.

See Pub. 525 for more information about the conditions that apply to the transfer.

Qualified tuition programs (QTPs).

A QTP (also known as a 529 program) is a program set up to allow you to either prepay or contribute to an account established for paying a student’s qualified higher education expenses at an eligible educational institution. A program can be established and maintained by a state, an agency or instrumentality of a state, or an eligible educational institution.

The part of a distribution representing the amount paid or contributed to a QTP isn’t included in income. This is a return of the investment in the program.

In most cases, the beneficiary doesn’t include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified higher education expenses. See Pub. 970 for more information.

Railroad retirement annuities.

The following types of payments are treated as pension or annuity income and are taxable under the rules explained in Pub. 575, Pension and Annuity Income.

• Tier 1 railroad retirement benefits that are more than the social security equivalent benefit.

 

• Tier 2 benefits.
• Vested dual benefits.

 

Rewards.

If you receive a reward for providing information, include it in your income.

Sale of home.

You may be able to exclude from income all or part of any gain from the sale or exchange of your main home. See chapter 15.

Sale of personal items.

If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it as explained in the Instructions for Schedule D (Form 1040). You can’t deduct a loss.

However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital gain and any loss is deductible as a capital loss.

Example.

You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report your gain as a capital gain as explained in the Instructions for Schedule D (Form 1040).

Scholarships and fellowships.

A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount you receive that’s for:

• Tuition and fees to enroll at or attend an educational institution; or
• Fees, books, supplies, and equipment required for courses at the educational institution.

Amounts used for room and board don’t qualify for the exclusion. See Pub. 970 for more information on qualified scholarships and fellowship grants.

Payment for services.

 

In most cases, you must include in income the part of any scholarship or fellowship that represents payment for past, present, or future teaching, research, or other services. This applies even if all candidates for a degree must perform the services to receive the degree.

For information about the rules that apply to a tax-free qualified tuition reduction provided to employees and their families by an educational institution, see Pub. 970.

VA payments.

Allowances paid by the Department of Veterans Affairs aren’t included in your income. These allowances aren’t considered scholarship or fellowship grants.

Prizes.

Scholarship prizes won in a contest aren’t scholarships or fellowships if you don’t have to use the prizes for educational purposes. You must include these amounts in your income on Form 1040, line 21, whether or not you use the amounts for educational purposes.

Stolen property.

If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner.

Transporting school children.

Don’t include in your income a school board mileage allowance for taking children to and from school if you aren’t in the business of taking children to school. You can’t deduct expenses for providing this transportation.

Union benefits and dues.

Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union can’t be excluded from your income.

You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2%-of-AGI limit if they’re related to your job and if you itemize deductions on Schedule A (Form 1040). For more information, see Union Dues and Expenses in chapter 28.

Strike and lockout benefits.

Benefits paid to you by a union as strike or lockout benefits, including both cash and the fair market value of other property, are usually included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show that the union intended them as gifts to you.

Utility rebates.

If you’re a customer of an electric utility company and you participate in the utility’s energy conservation program, you may receive on your monthly electric bill either:

• A reduction in the purchase price of electricity furnished to you (rate reduction), or
• A nonrefundable credit against the purchase price of the electricity.

 

The amount of the rate reduction or nonrefundable credit isn’t included in your income.