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Taxslayer login page 2. Taxslayer login page   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Taxslayer login page Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Taxslayer login page Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Taxslayer login page You must do this to figure your net capital gain or loss. Taxslayer login page For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Taxslayer login page See Capital Gains Tax Rates in chapter 4. Taxslayer login page Your deduction for a net capital loss may be limited. Taxslayer login page See Treatment of Capital Losses in chapter 4. Taxslayer login page Capital gain or loss. Taxslayer login page   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Taxslayer login page You also may have a capital gain if your section 1231 transactions result in a net gain. Taxslayer login page Section 1231 transactions. Taxslayer login page   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Taxslayer login page They also include certain involuntary conversions of business or investment property, including capital assets. Taxslayer login page See Section 1231 Gains and Losses in chapter 3 for more information. Taxslayer login page Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Taxslayer login page Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Taxslayer login page For exceptions, see Noncapital Assets, later. Taxslayer login page The following items are examples of capital assets. Taxslayer login page Stocks and bonds. Taxslayer login page A home owned and occupied by you and your family. Taxslayer login page Timber grown on your home property or investment property, even if you make casual sales of the timber. Taxslayer login page Household furnishings. Taxslayer login page A car used for pleasure or commuting. Taxslayer login page Coin or stamp collections. Taxslayer login page Gems and jewelry. Taxslayer login page Gold, silver, and other metals. Taxslayer login page Personal-use property. Taxslayer login page   Generally, property held for personal use is a capital asset. Taxslayer login page Gain from a sale or exchange of that property is a capital gain. Taxslayer login page Loss from the sale or exchange of that property is not deductible. Taxslayer login page You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Taxslayer login page Investment property. Taxslayer login page   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Taxslayer login page This treatment does not apply to property used to produce rental income. Taxslayer login page See Business assets, later, under Noncapital Assets. Taxslayer login page Release of restriction on land. Taxslayer login page   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Taxslayer login page Noncapital Assets A noncapital asset is property that is not a capital asset. Taxslayer login page The following kinds of property are not capital assets. Taxslayer login page Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Taxslayer login page Inventories are discussed in Publication 538, Accounting Periods and Methods. Taxslayer login page But, see the Tip below. Taxslayer login page Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Taxslayer login page Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Taxslayer login page Sales of this type of property are discussed in chapter 3. Taxslayer login page Real property used in your trade or business or as rental property, even if the property is fully depreciated. Taxslayer login page A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Taxslayer login page But, see the Tip below. Taxslayer login page U. Taxslayer login page S. Taxslayer login page Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Taxslayer login page Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Taxslayer login page It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Taxslayer login page The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Taxslayer login page Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Taxslayer login page Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Taxslayer login page You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Taxslayer login page See chapter 4 of Publication 550 for details. Taxslayer login page Property held mainly for sale to customers. Taxslayer login page   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Taxslayer login page Inventories are discussed in Publication 538. Taxslayer login page Business assets. Taxslayer login page   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Taxslayer login page The sale or disposition of business property is discussed in chapter 3. Taxslayer login page Letters and memoranda. Taxslayer login page   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Taxslayer login page Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Taxslayer login page For this purpose, letters and memoranda addressed to you are considered prepared for you. Taxslayer login page If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Taxslayer login page Commodities derivative financial instrument. Taxslayer login page   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Taxslayer login page Commodities derivative dealer. Taxslayer login page   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Taxslayer login page Hedging transaction. Taxslayer login page   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Taxslayer login page Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Taxslayer login page Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Taxslayer login page Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Taxslayer login page If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Taxslayer login page See Transfers to Spouse in chapter 1 for rules that apply to spouses. Taxslayer login page Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Taxslayer login page It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Taxslayer login page Depreciable property transaction. Taxslayer login page   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Taxslayer login page A person and the person's controlled entity or entities. Taxslayer login page A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Taxslayer login page An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Taxslayer login page An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Taxslayer login page Controlled entity. Taxslayer login page   A person's controlled entity is either of the following. Taxslayer login page A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Taxslayer login page An entity whose relationship with that person is one of the following. Taxslayer login page A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Taxslayer login page Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Taxslayer login page Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxslayer login page Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxslayer login page Controlled partnership transaction. Taxslayer login page   A gain recognized in a controlled partnership transaction may be ordinary income. Taxslayer login page The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Taxslayer login page   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Taxslayer login page A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Taxslayer login page Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Taxslayer login page Determining ownership. Taxslayer login page   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Taxslayer login page Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Taxslayer login page (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Taxslayer login page ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Taxslayer login page Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Taxslayer login page For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Taxslayer login page But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Taxslayer login page Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Taxslayer login page This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Taxslayer login page For the list of related persons, see Related persons next. Taxslayer login page If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Taxslayer login page The gain on each item is taxable. Taxslayer login page The loss on any item is nondeductible. Taxslayer login page Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Taxslayer login page Related persons. Taxslayer login page   The following is a list of related persons. Taxslayer login page Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Taxslayer login page ), and lineal descendants (children, grandchildren, etc. Taxslayer login page ). Taxslayer login page An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Taxslayer login page Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Taxslayer login page A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Taxslayer login page A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Taxslayer login page Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Taxslayer login page A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Taxslayer login page A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Taxslayer login page Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxslayer login page Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxslayer login page An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Taxslayer login page Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Taxslayer login page A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Taxslayer login page Partnership interests. Taxslayer login page   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Taxslayer login page Controlled groups. Taxslayer login page   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Taxslayer login page   For more information, see section 267(f) of the Internal Revenue Code. Taxslayer login page Ownership of stock or partnership interests. Taxslayer login page   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Taxslayer login page Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Taxslayer login page (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Taxslayer login page ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Taxslayer login page Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Taxslayer login page An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Taxslayer login page For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Taxslayer login page But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Taxslayer login page Indirect transactions. Taxslayer login page   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Taxslayer login page This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Taxslayer login page Property received from a related person. Taxslayer login page   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Taxslayer login page This rule applies only to the original transferee. Taxslayer login page Example 1. Taxslayer login page Your brother sold stock to you for $7,600. Taxslayer login page His cost basis was $10,000. Taxslayer login page His loss of $2,400 was not deductible. Taxslayer login page You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Taxslayer login page Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Taxslayer login page Example 2. Taxslayer login page Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Taxslayer login page Your recognized loss is only $700 ($7,600 − $6,900). Taxslayer login page You cannot deduct the loss not allowed to your brother. Taxslayer login page Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Taxslayer login page Sale of a Business The sale of a business usually is not a sale of one asset. Taxslayer login page Instead, all the assets of the business are sold. Taxslayer login page Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Taxslayer login page A business usually has many assets. Taxslayer login page When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Taxslayer login page The gain or loss on each asset is figured separately. Taxslayer login page The sale of capital assets results in capital gain or loss. Taxslayer login page The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Taxslayer login page The sale of inventory results in ordinary income or loss. Taxslayer login page Partnership interests. Taxslayer login page   An interest in a partnership or joint venture is treated as a capital asset when sold. Taxslayer login page The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Taxslayer login page For more information, see Disposition of Partner's Interest in Publication 541. Taxslayer login page Corporation interests. Taxslayer login page   Your interest in a corporation is represented by stock certificates. Taxslayer login page When you sell these certificates, you usually realize capital gain or loss. Taxslayer login page For information on the sale of stock, see chapter 4 in Publication 550. Taxslayer login page Corporate liquidations. Taxslayer login page   Corporate liquidations of property generally are treated as a sale or exchange. Taxslayer login page Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Taxslayer login page Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Taxslayer login page   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Taxslayer login page For more information, see section 332 of the Internal Revenue Code and the related regulations. Taxslayer login page Allocation of consideration paid for a business. Taxslayer login page   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Taxslayer login page Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Taxslayer login page This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Taxslayer login page It also determines the buyer's basis in the business assets. Taxslayer login page Consideration. Taxslayer login page   The buyer's consideration is the cost of the assets acquired. Taxslayer login page The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Taxslayer login page Residual method. Taxslayer login page   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Taxslayer login page This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Taxslayer login page Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Taxslayer login page   A group of assets constitutes a trade or business if either of the following applies. Taxslayer login page Goodwill or going concern value could, under any circumstances, attach to them. Taxslayer login page The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Taxslayer login page   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Taxslayer login page The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Taxslayer login page See Classes of assets next for the complete order. Taxslayer login page Classes of assets. Taxslayer login page   The following definitions are the classifications for deemed or actual asset acquisitions. Taxslayer login page Allocate the consideration among the assets in the following order. Taxslayer login page The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Taxslayer login page The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Taxslayer login page Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Taxslayer login page Class II assets are certificates of deposit, U. Taxslayer login page S. Taxslayer login page Government securities, foreign currency, and actively traded personal property, including stock and securities. Taxslayer login page Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Taxslayer login page However, see section 1. Taxslayer login page 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Taxslayer login page Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Taxslayer login page Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Taxslayer login page    Note. Taxslayer login page Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Taxslayer login page Class VI assets are section 197 intangibles (other than goodwill and going concern value). Taxslayer login page Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Taxslayer login page   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Taxslayer login page For example, if an asset is described in both Class II and Class IV, choose Class II. Taxslayer login page Example. Taxslayer login page The total paid in the sale of the assets of Company SKB is $21,000. Taxslayer login page No cash or deposit accounts or similar accounts were sold. Taxslayer login page The company's U. Taxslayer login page S. Taxslayer login page Government securities sold had a fair market value of $3,200. Taxslayer login page The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Taxslayer login page Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Taxslayer login page S. Taxslayer login page Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Taxslayer login page Agreement. Taxslayer login page   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Taxslayer login page This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Taxslayer login page Reporting requirement. Taxslayer login page   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Taxslayer login page Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Taxslayer login page Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Taxslayer login page See the Instructions for Form 8594. Taxslayer login page Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Taxslayer login page It includes such items as patents, copyrights, and the goodwill value of a business. Taxslayer login page Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Taxslayer login page The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Taxslayer login page See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Taxslayer login page Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Taxslayer login page The following discussions explain special rules that apply to certain dispositions of intangible property. Taxslayer login page Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Taxslayer login page They include the following assets. Taxslayer login page Goodwill. Taxslayer login page Going concern value. Taxslayer login page Workforce in place. Taxslayer login page Business books and records, operating systems, and other information bases. Taxslayer login page Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Taxslayer login page Customer-based intangibles. Taxslayer login page Supplier-based intangibles. Taxslayer login page Licenses, permits, and other rights granted by a governmental unit. Taxslayer login page Covenants not to compete entered into in connection with the acquisition of a business. Taxslayer login page Franchises, trademarks, and trade names. Taxslayer login page See chapter 8 of Publication 535 for a description of each intangible. Taxslayer login page Dispositions. Taxslayer login page   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Taxslayer login page Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Taxslayer login page If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Taxslayer login page Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Taxslayer login page   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Taxslayer login page For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Taxslayer login page Covenant not to compete. Taxslayer login page   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Taxslayer login page Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Taxslayer login page Anti-churning rules. Taxslayer login page   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Taxslayer login page However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Taxslayer login page Recognize gain on the transfer of the property. Taxslayer login page Pay income tax on the gain at the highest tax rate. Taxslayer login page   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Taxslayer login page But each partner or shareholder must pay the tax on his or her share of gain. Taxslayer login page   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Taxslayer login page You must file the tax return by the due date (including extensions). Taxslayer login page You must also notify the transferee of the election in writing by the due date of the return. Taxslayer login page   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Taxslayer login page Attach the statement to the amended return and write “Filed pursuant to section 301. Taxslayer login page 9100-2” at the top of the statement. Taxslayer login page File the amended return at the same address the original return was filed. Taxslayer login page For more information about making the election, see Regulations section 1. Taxslayer login page 197-2(h)(9). Taxslayer login page For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Taxslayer login page Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Taxslayer login page This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Taxslayer login page For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Taxslayer login page This treatment applies to your transfer of a patent if you meet all the following conditions. Taxslayer login page You are the holder of the patent. Taxslayer login page You transfer the patent other than by gift, inheritance, or devise. Taxslayer login page You transfer all substantial rights to the patent or an undivided interest in all such rights. Taxslayer login page You do not transfer the patent to a related person. Taxslayer login page Holder. Taxslayer login page   You are the holder of a patent if you are either of the following. Taxslayer login page The individual whose effort created the patent property and who qualifies as the original and first inventor. Taxslayer login page The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Taxslayer login page All substantial rights. Taxslayer login page   All substantial rights to patent property are all rights that have value when they are transferred. Taxslayer login page A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Taxslayer login page   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Taxslayer login page The rights are limited geographically within a country. Taxslayer login page The rights are limited to a period less than the remaining life of the patent. Taxslayer login page The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Taxslayer login page The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Taxslayer login page Related persons. Taxslayer login page   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Taxslayer login page Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Taxslayer login page Substitute “25% or more” ownership for “more than 50%. Taxslayer login page ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Taxslayer login page For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Taxslayer login page The brother-sister exception does not apply because the trust relationship is independent of family status. Taxslayer login page Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Taxslayer login page A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Taxslayer login page Significant power, right, or continuing interest. Taxslayer login page   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Taxslayer login page   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Taxslayer login page A right to disapprove any assignment of the interest, or any part of it. Taxslayer login page A right to end the agreement at will. Taxslayer login page A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Taxslayer login page A right to make the recipient sell or advertise only your products or services. Taxslayer login page A right to make the recipient buy most supplies and equipment from you. Taxslayer login page A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Taxslayer login page Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Taxslayer login page However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Taxslayer login page See section 1237 of the Internal Revenue Code. Taxslayer login page Timber Standing timber held as investment property is a capital asset. Taxslayer login page Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Taxslayer login page If you held the timber primarily for sale to customers, it is not a capital asset. Taxslayer login page Gain or loss on its sale is ordinary business income or loss. Taxslayer login page It is reported in the gross receipts or sales and cost of goods sold items of your return. Taxslayer login page Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Taxslayer login page These sales constitute a very minor part of their farm businesses. Taxslayer login page In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Taxslayer login page , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Taxslayer login page Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Taxslayer login page Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Taxslayer login page This is true whether the timber is cut under contract or whether you cut it yourself. Taxslayer login page Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Taxslayer login page See chapter 3. Taxslayer login page Gain or loss is reported on Form 4797. Taxslayer login page Christmas trees. Taxslayer login page   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Taxslayer login page They qualify for both rules discussed below. Taxslayer login page Election to treat cutting as a sale or exchange. Taxslayer login page   Under the general rule, the cutting of timber results in no gain or loss. Taxslayer login page It is not until a sale or exchange occurs that gain or loss is realized. Taxslayer login page But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Taxslayer login page Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Taxslayer login page Any later sale results in ordinary business income or loss. Taxslayer login page See Example, later. Taxslayer login page   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Taxslayer login page Making the election. Taxslayer login page   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Taxslayer login page You do not have to make the election in the first year you cut timber. Taxslayer login page You can make it in any year to which the election would apply. Taxslayer login page If the timber is partnership property, the election is made on the partnership return. Taxslayer login page This election cannot be made on an amended return. Taxslayer login page   Once you have made the election, it remains in effect for all later years unless you cancel it. Taxslayer login page   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Taxslayer login page The prior election (and revocation) is disregarded for purposes of making a subsequent election. Taxslayer login page See Form T (Timber), Forest Activities Schedule, for more information. Taxslayer login page Gain or loss. Taxslayer login page   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Taxslayer login page   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Taxslayer login page Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Taxslayer login page   Timber depletion is discussed in chapter 9 of Publication 535. Taxslayer login page Example. Taxslayer login page In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Taxslayer login page It had an adjusted basis for depletion of $40 per MBF. Taxslayer login page You are a calendar year taxpayer. Taxslayer login page On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Taxslayer login page It was cut in April for sale. Taxslayer login page On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Taxslayer login page You report the difference between the fair market value and your adjusted basis for depletion as a gain. Taxslayer login page This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Taxslayer login page You figure your gain as follows. Taxslayer login page FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Taxslayer login page Outright sales of timber. Taxslayer login page   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Taxslayer login page However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Taxslayer login page Cutting contract. Taxslayer login page   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Taxslayer login page You are the owner of the timber. Taxslayer login page You held the timber longer than 1 year before its disposal. Taxslayer login page You kept an economic interest in the timber. Taxslayer login page   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Taxslayer login page   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Taxslayer login page Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Taxslayer login page Date of disposal. Taxslayer login page   The date of disposal is the date the timber is cut. Taxslayer login page However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Taxslayer login page   This election applies only to figure the holding period of the timber. Taxslayer login page It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Taxslayer login page   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Taxslayer login page The statement must identify the advance payments subject to the election and the contract under which they were made. Taxslayer login page   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Taxslayer login page Attach the statement to the amended return and write “Filed pursuant to section 301. Taxslayer login page 9100-2” at the top of the statement. Taxslayer login page File the amended return at the same address the original return was filed. Taxslayer login page Owner. Taxslayer login page   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Taxslayer login page You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Taxslayer login page Tree stumps. Taxslayer login page   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Taxslayer login page Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Taxslayer login page However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Taxslayer login page Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Taxslayer login page   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Taxslayer login page Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Taxslayer login page , are capital assets except when they are held for sale by a dealer. Taxslayer login page Any gain or loss from their sale or exchange generally is a capital gain or loss. Taxslayer login page If you are a dealer, the amount received from the sale is ordinary business income. Taxslayer login page Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Taxslayer login page You owned the coal or iron ore longer than 1 year before its disposal. Taxslayer login page You kept an economic interest in the coal or iron ore. Taxslayer login page For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Taxslayer login page Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Taxslayer login page This amount is included on Form 4797 along with your other section 1231 gains and losses. Taxslayer login page You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Taxslayer login page If you own only an option to buy the coal in place, you do not qualify as an owner. Taxslayer login page In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Taxslayer login page The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Taxslayer login page Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Taxslayer login page If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Taxslayer login page Special rule. Taxslayer login page   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Taxslayer login page A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Taxslayer login page An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Taxslayer login page Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Taxslayer login page This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Taxslayer login page An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Taxslayer login page A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Taxslayer login page Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Taxslayer login page For more information, see chapter 4 of Publication 550. Taxslayer login page Prev  Up  Next   Home   More Online Publications
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Taxslayer login page 2. Taxslayer login page   Taxable and Nontaxable Income Table of Contents Compensation for Services Retirement Plan DistributionsIndividual Retirement Arrangements (IRAs) Pensions and Annuities Social Security and Equivalent Railroad Retirement BenefitsAre Any of Your Benefits Taxable? How Much Is Taxable? How To Report Your Benefits Lump-Sum Election Repayments More Than Gross Benefits Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Life Insurance ProceedsInstallments for life. Taxslayer login page Surviving spouse. Taxslayer login page Endowment Contract Proceeds Accelerated Death Benefits Sale of HomeMaximum Amount of Exclusion Ownership and Use Tests Married Persons Business Use or Rental of Home Reporting the Sale Reverse Mortgages Other ItemsWelfare benefits. Taxslayer login page Payments from a state fund for victims of crime. Taxslayer login page Home Affordable Modification Program (HAMP). Taxslayer login page Mortgage assistance payments. Taxslayer login page Payments to reduce cost of winter energy use. Taxslayer login page Nutrition Program for the Elderly. Taxslayer login page Reemployment Trade Adjustment Assistance (RTAA). Taxslayer login page Generally, income is taxable unless it is specifically exempt (not taxed) by law. Taxslayer login page Your taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income of all kinds. Taxslayer login page Under special provisions of the law, certain items are partially or fully exempt from tax. Taxslayer login page Provisions that are of special interest to older taxpayers are discussed in this chapter. Taxslayer login page Compensation for Services Generally, you must include in gross income everything you receive in payment for personal services. Taxslayer login page In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Taxslayer login page You need not receive the compensation in cash for it to be taxable. Taxslayer login page Payments you receive in the form of goods or services generally must be included in gross income at their fair market value. Taxslayer login page Volunteer work. Taxslayer login page   Do not include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket expenses under any of the following volunteer programs. Taxslayer login page Retired Senior Volunteer Program (RSVP). Taxslayer login page Foster Grandparent Program. Taxslayer login page Senior Companion Program. Taxslayer login page Service Corps of Retired Executives (SCORE). Taxslayer login page Unemployment compensation. Taxslayer login page   You must include in income all unemployment compensation you or your spouse (if married filing jointly) received. Taxslayer login page More information. Taxslayer login page   See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income. Taxslayer login page Retirement Plan Distributions This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements (IRA), employee pensions or annuities, and disability pensions or annuities. Taxslayer login page A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. Taxslayer login page A Roth IRA is an individual retirement plan that can be either an account or an annuity and features nondeductible contributions and tax-free distributions. Taxslayer login page A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Taxslayer login page More detailed information can be found in Publication 590, Individual Retirement Arrangements (IRAs), and Publication 575, Pension and Annuity Income. Taxslayer login page Individual Retirement Arrangements (IRAs) In general, distributions from a traditional IRA are taxable in the year you receive them. Taxslayer login page Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. Taxslayer login page These are discussed in Publication 590. Taxslayer login page If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. Taxslayer login page If you do not file Form 8606 with your return, you may have to pay a $50 penalty. Taxslayer login page Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Taxslayer login page Early distributions. Taxslayer login page   Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age  59½. Taxslayer login page You must include early distributions of taxable amounts in your gross income. Taxslayer login page These taxable amounts are also subject to an additional 10% tax unless the distribution qualifies for an exception. Taxslayer login page For purposes of the additional 10% tax, an IRA is a qualified retirement plan. Taxslayer login page For more information about this tax, see Tax on Early Distributions under Pensions and Annuities, later. Taxslayer login page After age 59½ and before age 70½. Taxslayer login page   After you reach age 59½, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. Taxslayer login page Even though you can receive distributions after you reach age 59½, distributions are not required until you reach  age 70½. Taxslayer login page Required distributions. Taxslayer login page   If you are the owner of a traditional IRA, you generally must receive the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 70½. Taxslayer login page See When Must You Withdraw Assets? (Required Minimum Distributions) in Publication 590. Taxslayer login page If distributions from your traditional IRA(s) are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. Taxslayer login page For purposes of the 50% excise tax, an IRA is a qualified retirement plan. Taxslayer login page For more information about this tax, see Tax on Excess Accumulation under Pensions and Annuities, later. Taxslayer login page See also Excess Accumulations (Insufficient Distributions) in Publication 590. Taxslayer login page Pensions and Annuities Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. Taxslayer login page However, see Insurance Premiums for Retired Public Safety Officers , later. Taxslayer login page If you paid part of the cost of your pension or annuity plan (see Cost , later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract). Taxslayer login page This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. Taxslayer login page The rest of each payment is taxable. Taxslayer login page However, see Insurance Premiums for Retired Public Safety Officers , later. Taxslayer login page You figure the tax-free part of the payment using one of the following methods. Taxslayer login page Simplified Method. Taxslayer login page You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). Taxslayer login page You cannot use this method if your annuity is paid under a nonqualified plan. Taxslayer login page General Rule. Taxslayer login page You must use this method if your annuity is paid under a nonqualified plan. Taxslayer login page You generally cannot use this method if your annuity is paid under a qualified plan. Taxslayer login page Contact your employer or plan administrator to find out if your pension or annuity is paid under a qualified or nonqualified plan. Taxslayer login page You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Taxslayer login page Exclusion limit. Taxslayer login page   If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost cannot exceed your total cost. Taxslayer login page 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. Taxslayer login page This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Taxslayer login page   If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Taxslayer login page 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. Taxslayer login page The total exclusion may be more than your cost. Taxslayer login page Cost. Taxslayer login page   Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost in the plan (your investment in the contract). Taxslayer login page Your total cost in the plan includes everything that you paid. Taxslayer login page It also includes amounts your employer contributed that were taxable to you when paid. Taxslayer login page However, see Foreign employment contributions , later. Taxslayer login page   From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts you received by the later of the annuity starting date or the date on which you received your first payment. Taxslayer login page   The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the plan's obligations became fixed. Taxslayer login page    The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Taxslayer login page , that you receive. Taxslayer login page Foreign employment contributions. Taxslayer login page   If you worked abroad, certain amounts your employer paid into your retirement plan that were not includible in your gross income may be considered part of your cost. Taxslayer login page For details, see Foreign employment contributions in Publication 575. Taxslayer login page Withholding. Taxslayer login page   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to you. Taxslayer login page However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. Taxslayer login page (These are distributions that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. Taxslayer login page ) See Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information. Taxslayer login page   For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form W-4P, Withholding Certificate for Pension or Annuity Payments. Taxslayer login page Simplified Method. Taxslayer login page   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. Taxslayer login page For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Taxslayer login page For any other annuity, this number is the number of monthly annuity payments under the contract. Taxslayer login page Who must use the Simplified Method. Taxslayer login page   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your pension or annuity payments from a qualified plan or annuity, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments (defined next). Taxslayer login page   In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use the Simplified Method for payments from a qualified plan, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments. Taxslayer login page If you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. Taxslayer login page Guaranteed payments. Taxslayer login page   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Taxslayer login page 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. Taxslayer login page Who cannot use the Simplified Method. Taxslayer login page   You cannot use the Simplified Method and 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 you are entitled to at least 5 years of guaranteed payments (defined above). Taxslayer login page   In addition, you had to use the General Rule for either circumstance described above if your annuity starting date is after July 1, 1986, and before November 19, 1996. Taxslayer login page If you did not have to use the General Rule, you could have chosen to use it. Taxslayer login page You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July 2, 1986, and you did not qualify to use the Three-Year Rule. Taxslayer login page   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. Taxslayer login page   Unless your annuity starting date was before 1987, once you have recovered all of your non-taxable investment, all of each remaining payment you receive is fully taxable. Taxslayer login page Once your remaining payments are fully taxable, there is no longer a concern with the General Rule or Simplified Method. Taxslayer login page   Complete information on the General Rule, including the actuarial tables you need, is contained in Publication 939, General Rule for Pensions and Annuities. Taxslayer login page How to use the Simplified Method. Taxslayer login page   Complete the Simplified Method Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions or in Publication 575 to figure your taxable annuity for 2013. Taxslayer login page Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. Taxslayer login page   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. Taxslayer login page How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. Taxslayer login page For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. Taxslayer login page    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Taxslayer login page Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Taxslayer login page Single-life annuity. Taxslayer login page   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. Taxslayer login page Enter on line 3 the number shown for your age on your annuity starting date. Taxslayer login page This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Taxslayer login page Multiple-lives annuity. Taxslayer login page   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. Taxslayer login page Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. Taxslayer login page For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. Taxslayer login page For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Taxslayer login page Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. Taxslayer login page   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Taxslayer login page Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Taxslayer login page This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Taxslayer login page Fixed-period annuities. Taxslayer login page   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Taxslayer login page Line 6. Taxslayer login page   The amount on line 6 should include all amounts that could have been recovered in prior years. Taxslayer login page If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. Taxslayer login page    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years. Taxslayer login page Example. Taxslayer login page Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Taxslayer login page Bill's annuity starting date is January 1, 2013. Taxslayer login page The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Taxslayer login page Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Taxslayer login page 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. Taxslayer login page 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. Taxslayer login page See the illustrated Worksheet 2-A, Simplified Method Worksheet, later. Taxslayer login page You can find a blank version of this worksheet in Publication 575. Taxslayer login page (The references in the illustrated worksheet are to sections in Publication 575). Taxslayer login page His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65), and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet and finds the line 3 amount to be 310. Taxslayer login page Bill's tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet). Taxslayer login page Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Taxslayer login page The full amount of any annuity payments received after 310 payments are paid must generally be included in gross income. Taxslayer login page 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. Taxslayer login page This deduction is not subject to the 2%-of-adjusted-gross-income limit. Taxslayer login page Worksheet 2-A. Taxslayer login page Simplified Method Worksheet—Illustrated 1. Taxslayer login page Enter the total pension or annuity payments received this year. Taxslayer login page Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Taxslayer login page $ 14,400 2. Taxslayer login page 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. Taxslayer login page 31,000   Note. Taxslayer login page 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). Taxslayer login page Otherwise, go to line 3. Taxslayer login page     3. Taxslayer login page Enter the appropriate number from Table 1 below. Taxslayer login page 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. Taxslayer login page 310 4. Taxslayer login page Divide line 2 by the number on line 3 4. Taxslayer login page 100 5. Taxslayer login page Multiply line 4 by the number of months for which this year's payments were made. Taxslayer login page If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Taxslayer login page Otherwise, go to line 6 5. Taxslayer login page 1,200 6. Taxslayer login page Enter any amount previously recovered tax free in years after 1986. Taxslayer login page This is the amount shown on line 10 of your worksheet for last year 6. Taxslayer login page 0 7. Taxslayer login page Subtract line 6 from line 2 7. Taxslayer login page 31,000 8. Taxslayer login page Enter the smaller of line 5 or line 7 8. Taxslayer login page 1,200 9. Taxslayer login page Taxable amount for year. Taxslayer login page Subtract line 8 from line 1. Taxslayer login page Enter the result, but not less than zero. Taxslayer login page Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Taxslayer login page Note. Taxslayer login page If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Taxslayer login page If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers, earlier, before entering an amount on your tax return. Taxslayer login page 9. Taxslayer login page $ 13,200 10. Taxslayer login page Was your annuity starting date before 1987? □ Yes. Taxslayer login page STOP. Taxslayer login page Do not complete the rest of this worksheet. Taxslayer login page  ☑ No. Taxslayer login page Add lines 6 and 8. Taxslayer login page This is the amount you have recovered tax free through 2013. Taxslayer login page You will need this number if you need to fill out this worksheet next year. Taxslayer login page 10. Taxslayer login page 1,200 11. Taxslayer login page Balance of cost to be recovered. Taxslayer login page Subtract line 10 from line 2. Taxslayer login page If zero, you will not have to complete this worksheet next year. Taxslayer login page The payments you receive next year will generally be fully taxable 11. Taxslayer login page $ 29,800 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Taxslayer login page   Table 1 for Line 3 Above       AND your annuity starting date was—   IF your age on your annuity starting date was . Taxslayer login page . Taxslayer login page . Taxslayer login page   BEFORE November 19, 1996, enter on line 3 . Taxslayer login page . Taxslayer login page . Taxslayer login page AFTER November 18, 1996, enter on line 3 . Taxslayer login page . Taxslayer login page . Taxslayer login page   55 or under 300 360   56-60 260 310   61-65 240 260   66-70 170 210   71 or over 120 160 Table 2 for Line 3 Above   IF the annuitants' combined ages on your annuity starting date were . Taxslayer login page . Taxslayer login page . Taxslayer login page   THEN enter on line 3 . Taxslayer login page . Taxslayer login page . Taxslayer login page         110 or under   410         111-120   360         121-130   310         131-140   260         141 or over   210       Survivors of retirees. Taxslayer login page   Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the same way the retiree would have included them in gross income. Taxslayer login page   If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in your income. Taxslayer login page The retiree's cost has already been recovered tax free. Taxslayer login page   If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your initial payment called for in the contract. Taxslayer login page The resulting tax-free amount will then remain fixed. Taxslayer login page Any increases in the survivor annuity are fully taxable. Taxslayer login page   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. Taxslayer login page See Simplified Method , earlier. Taxslayer login page How to report. Taxslayer login page   If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. Taxslayer login page If your pension or annuity is fully taxable, enter it on line 16b. Taxslayer login page Do not make an entry on line 16a. Taxslayer login page   If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. Taxslayer login page If your pension or annuity is fully taxable, enter it on line 12b. Taxslayer login page Do not make an entry on line 12a. Taxslayer login page   If you file Form 1040NR, report your total annuity on line 17a, and the taxable part on line 17b. Taxslayer login page If your pension or annuity is fully taxable, enter it on line 17b. Taxslayer login page Do not make an entry on line 17a. Taxslayer login page Example. Taxslayer login page You are a Form 1040 filer and you received monthly payments totaling $1,200 (12 months x $100) during 2013 from a pension plan that was completely financed by your employer. Taxslayer login page You had paid no tax on the payments that your employer made to the plan, and the payments were not used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers ). Taxslayer login page The entire $1,200 is taxable. Taxslayer login page You include $1,200 only on Form 1040, line 16b. Taxslayer login page Joint return. Taxslayer login page   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 line 16a of Form 1040, line 12a of Form 1040A, or line 17a of Form 1040NR. Taxslayer login page Report the total of the taxable parts on line 16b of Form 1040, line 12b of Form 1040A, or line 17b of Form 1040NR. Taxslayer login page Form 1099-R. Taxslayer login page   You should receive a Form 1099-R for your pension or annuity. Taxslayer login page Form 1099-R shows your pension or annuity for the year and any income tax withheld. Taxslayer login page You should receive a Form W-2 if you receive distributions from certain nonqualified plans. Taxslayer login page You must attach Forms 1099-R or Forms W-2 to your 2013 tax return if federal income tax was withheld. Taxslayer login page Generally, you should be sent these forms by January 31, 2014. Taxslayer login page Nonperiodic Distributions If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. Taxslayer login page Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends) on your investment, and certain loans. Taxslayer login page For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575. Taxslayer login page The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. Taxslayer login page See Tax on Early Distributions, later. Taxslayer login page Lump-sum distributions. Taxslayer login page   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. Taxslayer login page The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Taxslayer login page The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Taxslayer login page You may be able to use the 10-year tax option to figure tax on the ordinary income part. Taxslayer login page Form 1099-R. Taxslayer login page   If you receive a total distribution from a plan, you should receive a Form 1099-R. Taxslayer login page If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain part of the distribution. Taxslayer login page The amount in box 2a, Taxable amount, minus the amount in box 3, Capital gain, is the ordinary income part. Taxslayer login page More information. Taxslayer login page   For more detailed information on lump-sum distributions, see Publication 575 or Form 4972, Tax on Lump-Sum Distributions. Taxslayer login page Tax on Early Distributions Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age 59½ are subject to an additional tax of 10%. Taxslayer login page The tax applies to the taxable part of the distribution. Taxslayer login page For this purpose, a qualified retirement plan is: A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)), A qualified employee annuity plan, A tax-sheltered annuity plan (403(b) 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). Taxslayer login page  An IRA is also a qualified retirement plan for purposes of this tax. Taxslayer login page General exceptions to tax. Taxslayer login page   The early distribution tax does not apply to any 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 separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Taxslayer login page Additional exceptions. Taxslayer login page   There are additional exceptions to the early distribution tax for certain distributions from qualified retirement plans and nonqualified annuity contracts. Taxslayer login page See Publication 575 for details. Taxslayer login page Reporting tax. Taxslayer login page   If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is correctly shown in Form 1099-R, box 7, multiply the taxable part of the early distribution by 10% (. Taxslayer login page 10) and enter the result on Form 1040, line 58, or Form 1040NR, line 56. Taxslayer login page See the instructions for line 58 of Form 1040 or line 56 of Form 1040NR for more information about reporting the early distribution tax. Taxslayer login page 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. Taxslayer login page Unless the rule for 5% owners applies, this is generally 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. Taxslayer login page However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you reach 70½, even if you have not retired. Taxslayer login page 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). Taxslayer login page  An IRA is also a qualified retirement plan for purposes of this tax. Taxslayer login page An excess accumulation is the undistributed remainder of the required minimum distribution that was left in your qualified retirement plan. Taxslayer login page 5% owners. Taxslayer login page   If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions from the plan by April 1 of the year after the calendar year in which you reach age 70½. Taxslayer login page See Publication 575 for more information. Taxslayer login page Amount of tax. Taxslayer login page   If you do not receive the required minimum distribution, you are subject to an additional tax. Taxslayer login page The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. Taxslayer login page You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall. Taxslayer login page Form 5329. Taxslayer login page   You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan. Taxslayer login page Additional information. Taxslayer login page   For more detailed information on the tax on excess accumulation, see Publication 575. Taxslayer login page Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. Taxslayer login page The premiums can be for coverage for you, your spouse, or dependent(s). Taxslayer login page The distribution must be made directly from the plan to the insurance provider. Taxslayer login page You can exclude from income the smaller of the amount of the insurance premiums or $3,000. Taxslayer login page You can only make this election for amounts that would otherwise be included in your income. Taxslayer login page The amount excluded from your income cannot be used to claim a medical expense deduction. Taxslayer login page An eligible retirement plan is a governmental plan that is a: Qualified trust, Section 403(a) plan, Section 403(b) annuity, or Section 457(b) plan. Taxslayer login page If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. Taxslayer login page The taxable amount shown in box 2a of any Form 1099-R that you receive does not reflect the exclusion. Taxslayer login page Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Taxslayer login page Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Taxslayer login page Enter “PSO” next to the appropriate line on which you report the taxable amount. Taxslayer login page Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. Taxslayer login page These categories are treated differently for income tax purposes. Taxslayer login page Social security equivalent benefits. Taxslayer login page   The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. Taxslayer login page This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated for tax purposes like social security benefits. Taxslayer login page (See Social Security and Equivalent Railroad Retirement Benefits , later. Taxslayer login page ) Non-social security equivalent benefits. Taxslayer login page   The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB). Taxslayer login page It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Taxslayer login page This category of benefits is treated as an amount received from a qualified employee plan. Taxslayer login page This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Taxslayer login page Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. Taxslayer login page More information. Taxslayer login page   For more information about railroad retirement benefits, see Publication 575. Taxslayer login page Military Retirement Pay Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, lines 16a and 16b; on Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. Taxslayer login page But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. Taxslayer login page For more information, including information about veterans' benefits and insurance, see Publication 525. Taxslayer login page Social Security and Equivalent Railroad Retirement Benefits This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. Taxslayer login page Social security benefits include monthly retirement, survivor, and disability benefits. Taxslayer login page They do not include supplemental security income (SSI) payments, which are not taxable. Taxslayer login page 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. Taxslayer login page They commonly are called the social security equivalent benefit (SSEB) portion of tier 1 benefits. Taxslayer login page If you received these benefits during 2013, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are a nonresident alien), showing the amount of the benefits. Taxslayer login page Are Any of Your Benefits Taxable? Note. Taxslayer login page When the term “benefits” is used in this section, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits. Taxslayer login page  To find out whether any of your benefits may be taxable, compare the base amount for your filing status (explained later) with the total of: One-half of your benefits, plus All your other income, including tax-exempt interest. Taxslayer login page When making this comparison, do not reduce your other income by any exclusions for: Interest from qualified U. Taxslayer login page S. Taxslayer login page savings bonds, Employer-provided adoption benefits, Foreign earned income or foreign housing, or Income earned in American Samoa or Puerto Rico by bona fide residents. Taxslayer login page Figuring total income. Taxslayer login page   To figure the total of one-half of your benefits plus your other income, use Worksheet 2-B. Taxslayer login page If that total amount is more than your base amount, part of your benefits may be taxable. Taxslayer login page If you are married and file a joint return for 2013, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Taxslayer login page Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable. Taxslayer login page If the only income you received during 2013 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. Taxslayer login page If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. Taxslayer login page Worksheet 2-B. Taxslayer login page A Quick Way To Check if Your Benefits May Be Taxable A. Taxslayer login page Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Taxslayer login page Include  the full amount of any lump-sum benefit payments received in 2013, for 2013 and  earlier years. Taxslayer login page (If you received more than one form, combine the amounts from box 5  and enter the total. Taxslayer login page ) A. Taxslayer login page     Note. Taxslayer login page If the amount on line A is zero or less, stop here; none of your benefits are  taxable this year. Taxslayer login page     B. Taxslayer login page Enter one-half of the amount on line A B. Taxslayer login page   C. Taxslayer login page Enter your taxable pensions, wages, interest, dividends, and other taxable income C. Taxslayer login page   D. Taxslayer login page Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income for: •Interest from qualified U. Taxslayer login page S. Taxslayer login page savings bonds, •Employer-provided adoption benefits, •Foreign earned income or foreign housing, or •Income earned in American Samoa or Puerto Rico by bona fide residents D. Taxslayer login page   E. Taxslayer login page Add lines B, C, and D and enter the total E. Taxslayer login page   F. Taxslayer login page 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 2013, enter $25,000 •Married filing separately and you lived with your spouse at any time during 2013,  enter -0- F. Taxslayer login page   G. Taxslayer login page Is the amount on line F less than or equal to the amount on line E? □ No. Taxslayer login page None of your benefits are taxable this year. Taxslayer login page  □ Yes. Taxslayer login page Some of your benefits may be taxable. Taxslayer login page To figure how much of your benefits  are taxable, see Which worksheet to use under How Much Is Taxable. Taxslayer login page     Base Amount Your base amount is: $25,000 if you are single, head of household, or qualifying widow(er) with dependent child, $25,000 if you are married filing separately and lived apart from your spouse for all of 2013, $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 2013. Taxslayer login page Repayment of Benefits Any repayment of benefits you made during 2013 must be subtracted from the gross benefits you received in 2013. Taxslayer login page It does not matter whether the repayment was for a benefit you received in 2013 or in an earlier year. Taxslayer login page If you repaid more than the gross benefits you received in 2013, see Repayments More Than Gross Benefits , later. Taxslayer login page Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Taxslayer login page Your repayments are shown in box 4. Taxslayer login page The amount in box 5 shows your net benefits for 2013 (box 3 minus box 4). Taxslayer login page Use the amount in box 5 to figure whether any of your benefits are taxable. Taxslayer login page Tax Withholding and Estimated Tax You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits. Taxslayer login page If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. Taxslayer login page If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the year. Taxslayer login page For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals. Taxslayer login page How Much Is Taxable? If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. Taxslayer login page Generally, the higher that total amount, the greater the taxable part of your benefits. Taxslayer login page Maximum taxable part. Taxslayer login page   The taxable part of your benefits usually cannot be more than 50%. Taxslayer login page However, up to 85% of your benefits can be taxable if either of the following situations applies to you. Taxslayer login page 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). Taxslayer login page You are married filing separately and lived with your spouse at any time during 2013. Taxslayer login page   If you are a nonresident alien, 85% of your benefits are taxable. Taxslayer login page However, this income is exempt under some tax treaties. Taxslayer login page Which worksheet to use. Taxslayer login page   A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. Taxslayer login page However, you will need to use a different worksheet(s) if any of the following situations applies to you. Taxslayer login page You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement plan at work. Taxslayer login page In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits. Taxslayer login page Situation (1) does not apply and you take one or more of the following exclusions. Taxslayer login page Interest from qualified U. Taxslayer login page S. Taxslayer login page savings bonds (Form 8815). Taxslayer login page Employer-provided adoption benefits (Form 8839). Taxslayer login page Foreign earned income or housing (Form 2555 or Form 2555-EZ). Taxslayer login page Income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. Taxslayer login page In these situations, you must use Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure your taxable benefits. Taxslayer login page You received a lump-sum payment for an earlier year. Taxslayer login page In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. Taxslayer login page See Lump-Sum Election , later. Taxslayer login page How To Report Your Benefits If part of your benefits are taxable, you must use Form 1040, Form 1040A, or Form 1040NR. Taxslayer login page You cannot use Form 1040EZ. Taxslayer login page Reporting on Form 1040. Taxslayer login page   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. Taxslayer login page If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 20a. Taxslayer login page Reporting on Form 1040A. Taxslayer login page   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. Taxslayer login page If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 14a. Taxslayer login page Reporting on Form 1040NR. Taxslayer login page   Report 85% of the total amount of your benefits (box 5 of your Form SSA-1042S or Form RRB-1042S) in the appropriate column of Form 1040NR, Schedule NEC, line 8. Taxslayer login page Benefits not taxable. Taxslayer login page   If you are filing Form 1040EZ, do not report any benefits on your tax return. Taxslayer login page If you are filing Form 1040 or Form 1040A, report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on Form 1040, line 20a, or Form 1040A, line 14a. Taxslayer login page Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. Taxslayer login page If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. Taxslayer login page Lump-Sum Election You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2013 in your 2013 income, even if the payment includes benefits for an earlier year. Taxslayer login page This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. Taxslayer login page No part of the lump-sum death benefit is subject to tax. Taxslayer login page For more information about the lump-sum death benefit, visit the Social Security Administration website at www. Taxslayer login page SSA. Taxslayer login page gov, and use keyword: death benefit. Taxslayer login page Generally, you use your 2013 income to figure the taxable part of the total benefits received in 2013. Taxslayer login page 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. Taxslayer login page You can elect this method if it lowers your taxable benefits. Taxslayer login page See Publication 915 for more information. Taxslayer login page 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. Taxslayer login page 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. Taxslayer login page 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. Taxslayer login page If you have any questions about this negative figure, contact your local Social Security Administration office or your local U. Taxslayer login page S. Taxslayer login page Railroad Retirement Board field office. Taxslayer login page Joint return. Taxslayer login page   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 does not, subtract the box 5 amount on your form from the box 5 amount on your spouse's form. Taxslayer login page You do this to get your net benefits when figuring if your combined benefits are taxable. Taxslayer login page Repayment of benefits received in an earlier year. Taxslayer login page   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. Taxslayer login page   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. Taxslayer login page Claim it on Schedule A (Form 1040), line 23. Taxslayer login page   If this deduction is more than $3,000, you have to follow some special instructions. Taxslayer login page See Publication 915 for those instructions. Taxslayer login page Sickness and Injury Benefits Generally, 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. Taxslayer login page 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. Taxslayer login page However, certain payments may not be taxable to you. Taxslayer login page Some of these payments are discussed later in this section. Taxslayer login page Also, see Military and Government Disability Pensions and Other Sickness and Injury Benefits in Publication 525. Taxslayer login page Cost paid by you. Taxslayer login page   If you pay the entire cost of an accident or health plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. Taxslayer login page 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. Taxslayer login page 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. Taxslayer login page You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Taxslayer login page Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Taxslayer login page If you were 65 or older by the end of 2013 or you were retired on permanent and total disability and received taxable disability income, you may be able to claim the credit for the elderly or the disabled. Taxslayer login page See Credit for the Elderly or the Disabled, later. Taxslayer login page For more information on this credit, see Publication 524, Credit for the Elderly or the Disabled. Taxslayer login page Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Taxslayer login page Report the payments on lines 16a and 16b of Form 1040, on lines 12a and 12b of Form 1040A, or on lines 17a and 17b of Form 1040NR. Taxslayer login page For more information on pensions and annuities, see Publication 575. Taxslayer login page Retirement and profit-sharing plans. Taxslayer login page   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. Taxslayer login page The payments must be reported as a pension or annuity. Taxslayer login page Accrued leave payment. Taxslayer login page   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. Taxslayer login page The payment is not a disability payment. Taxslayer login page Include it in your income in the tax year you receive it. Taxslayer login page Long-Term Care Insurance Contracts In most cases, long-term care insurance contracts generally are treated as accident and health insurance contracts. Taxslayer login page Amounts you receive from them (other than policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal injury or sickness. Taxslayer login page However, the amount you can exclude may be limited. Taxslayer login page Long-term care insurance contracts are discussed in more detail in Publication 525. Taxslayer login page Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. Taxslayer login page The exemption also applies to your survivors. Taxslayer login page The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. Taxslayer login page If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Taxslayer login page For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Taxslayer login page Return to work. Taxslayer login page   If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. Taxslayer login page Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. Taxslayer login page Federal Employees' Compensation Act (FECA). Taxslayer login page   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. Taxslayer login page However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Taxslayer login page Report this income on Form 1040, line 7; Form 1040A, line 7; on Form 1040EZ, line 1; or Form 1040NR, line 8. Taxslayer login page Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. Taxslayer login page    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Taxslayer login page For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Taxslayer login page Other compensation. Taxslayer login page   Many other amounts you receive as compensation for sickness or injury are not taxable. Taxslayer login page These include the following amounts. Taxslayer login page 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. Taxslayer login page Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. Taxslayer login page Compensation you receive for permanent loss or loss of use of a part or function of your body, for your permanent disfigurement, or for such loss or disfigurement suffered by your spouse or dependent(s). Taxslayer login page This compensation must be based only on the injury and not on the period of your absence from work. Taxslayer login page These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. Taxslayer login page Life Insurance Proceeds Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. Taxslayer login page This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. Taxslayer login page Proceeds not received in installments. Taxslayer login page   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. Taxslayer login page If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death. Taxslayer login page Proceeds received in installments. Taxslayer login page   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. Taxslayer login page   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. Taxslayer login page Include anything over this excluded part in your income as interest. Taxslayer login page Installments for life. Taxslayer login page   If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. Taxslayer login page If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee. Taxslayer login page Surviving spouse. Taxslayer login page   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, in any year, up to $1,000 of the interest included in the installments. Taxslayer login page If you remarry, you can continue to take the exclusion. Taxslayer login page Surrender of policy for cash. Taxslayer login page   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. Taxslayer login page In general, 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 were not included in your income. Taxslayer login page You should receive a Form 1099-R showing the total proceeds and the taxable part. Taxslayer login page Report these amounts on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or Form 1040NR, lines 17a and 17b. Taxslayer login page Endowment Contract Proceeds An endowment contract is a policy that pays over to you 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. Taxslayer login page 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. Taxslayer login page To determine your cost, subtract from the total premiums (or other consideration) paid for the contract any amount that you previously received under the contract and excluded from your income. Taxslayer login page Include in your income the part of the lump-sum payment that is more than your cost. Taxslayer login page Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity. Taxslayer login page The tax treatment of an annuity is explained in Publication 575. Taxslayer login page For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. Taxslayer login page This election must be made within 60 days after the lump-sum payment first becomes payable to you. Taxslayer login page Accelerated Death Benefits Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are generally excluded from income if the insured is terminally or chronically ill. Taxslayer login page However, see Exception , later. Taxslayer login page For a chronically ill individual, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Taxslayer login page Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit. Taxslayer login page In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. Taxslayer login page Generally, a viatical settlement provider is one 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. Taxslayer login page To report taxable 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. Taxslayer login page Terminally or chronically ill defined. Taxslayer login page   A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months from the date of the certification. Taxslayer login page A chronically ill person is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions. Taxslayer login page The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity. Taxslayer login page The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment. Taxslayer login page Exception. Taxslayer login page   The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of the insured because the insured: Is a director, officer, or employee of the other person, or Has a financial interest in the business of the other person. Taxslayer login page Sale of Home You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. Taxslayer login page Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return. Taxslayer login page You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Taxslayer login page Main home. Taxslayer login page   Usually, your main home is the home you live in most of the time and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Taxslayer login page Repaying the first-time homebuyer credit because you sold your home. Taxslayer login page   If you claimed a first-time homebuyer credit for your main home and you sell it, you may have to repay the credit. Taxslayer login page For a home purchased in 2008 and used as your main home until sold in 2013, you must file Form 5405 and repay the balance of the unpaid credit on your 2013 tax return. Taxslayer login page   For a home purchased after 2008, you generally must repay the entire credit if the home was sold (or otherwise ceased to be your main home) within 36 months of the purchase date. Taxslayer login page If you purchased your home in 2009 and used it as your main home until sold in 2013, you do not have to repay the credit or file Form 5405. Taxslayer login page If you purchased your home in 2010 and used it as your main home until sold in 2013, you may have to file Form 5405 and repay the entire credit on your 2013 tax return. Taxslayer login page   See the Instructions for Form 5405 for more information about repaying the credit and exceptions to repayment that may apply to you. Taxslayer login page Maximum Amount of Exclusion You can generally exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Taxslayer login page You meet the ownership test. Taxslayer login page You meet the use test. Taxslayer login page During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Taxslayer login page You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Taxslayer login page Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Taxslayer login page This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Taxslayer login page Exception to ownership and use tests. Taxslayer login page   If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in some cases. Taxslayer login page Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances. Taxslayer login page The maximum amount you can exclude will be reduced. Taxslayer login page See Publication 523, Selling Your Home, for more information. Taxslayer login page Exception to use test for individuals with a disability. Taxslayer login page   There is an exception to the use test if, during the 5-year period before the sale of your home: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year. Taxslayer login page Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition. Taxslayer login page   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Taxslayer login page Exception to ownership test for property acquired in a like-kind exchange. Taxslayer login page   You must have owned your main home for at least 5 years to qualify for the exclusion if you acquired your main home in a like-kind exchange. Taxslayer login page This special 5-year ownership rule continues to apply to a home you acquired in a like-kind exchange and gave to another person. Taxslayer login page A like-kind exchange is an exchange of property held for productive use in a trade or business or for investment. Taxslayer login page See Publication 523 for more information. Taxslayer login page Period of nonqualified use. Taxslayer login page   Generally, the gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gain is allocated to periods of nonqualified use. Taxslayer login page Nonqualified use is any period after December 31, 2008, during which the property is not used as the main home. Taxslayer login page See Publication 523 for more information. Taxslayer login page Married Persons In the special situations discussed below, if you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of gain. Taxslayer login page However, see Special rules for joint returns , next. Taxslayer login page Special rules for joint returns. Taxslayer login page   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Taxslayer login page You are married and file a joint return for the year. Taxslayer login page Either you or your spouse meets the ownership test. Taxslayer login page Both you and your spouse meet the use test. Taxslayer login page During the 2-year period ending on the date of the sale, neither you nor your spouse exclude gain from the sale of another home. Taxslayer login page Sale of home by surviving spouse. Taxslayer login page   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Taxslayer login page   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home in 2013. Taxslayer login page The sale or exchange took place no more than 2 years after the date of death of your spouse. Taxslayer login page You have not remarried. Taxslayer login page You and your spouse met the use test at the time of your spouse's death. Taxslayer login page You or your spouse met the ownership test at the time of your spouse's death. Taxslayer login page Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Taxslayer login page Home transferred from spouse. Taxslayer login page   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Taxslayer login page Use of home after divorce. Taxslayer login page   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Taxslayer login page Business Use or Rental of Home You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. Taxslayer login page However, you must meet the ownership and use tests. Taxslayer login page See Publication 523 for more information. Taxslayer login page Depreciation after May 6, 1997. Taxslayer login page   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Taxslayer login page See Publication 523 for more information. Taxslayer login page Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and you do not qualify to exclude all of it, You have a gain and you choose not to exclude it, or You received Form 1099-S. Taxslayer login page If you have a gain that you cannot or choose not to exclude, if you received a Form 1099-S, or if you have a deductible loss, report the sale on your tax return. Taxslayer login page Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. Taxslayer login page If you used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property, to report the sale of the business or rental part. Taxslayer login page See Publication 523 for more information. Taxslayer login page Reverse Mortgages A revers