Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

W 2 Show State Income Tax Withheld

2009 Federal Income Tax FormsFree H&r Block Tax Software 20112011 Form 1040H & R Free File1040x Online FileHr Block OnlineState Tax FormsIrs Free State FilingHow To Fill Out 1040x Step By StepEz State Tax FormFile Past Taxes OnlineCan I Still Do My 2012 TaxesH&r Block Free TaxTax ReturnMilitary ComEfile Tax Extension Free1040ez Printable Tax FormsHow Do I File 2012 Tax ReturnState Tax Filing OnlineMilitary Tax Free Zones1040ez Form PrintableIrs Addendum FormDid Not File 2011 TaxesHow To File An Amendment To 2011 TaxesForm 1040ez More:label_form_201040ez More:taxesIrs Form 1040ez 20121040 Form 2011Who Can Use 1040ez Form1040ez Tax FormFiling 1040ez1040 Ez FreeNew Tax1040ez 2011 Online2011 Ez Tax Form2012 Form 1040xH 7 R Block Free File1040a 2012Irs Free FileHow To Fill Out A 1040x Form For The Irs1040 Now

W 2 Show State Income Tax Withheld

W 2 show state income tax withheld 4. W 2 show state income tax withheld   Other Section 501(c) Organizations Table of Contents Introduction 501(c)(4) - Civic Leagues and Social Welfare OrganizationsSpecific Organizations 501(c)(5) - Labor, Agricultural and Horticultural OrganizationsLabor Organizations Agricultural and Horticultural Organizations 501(c)(6) - Business Leagues, etc. W 2 show state income tax withheld Line of business. W 2 show state income tax withheld Examples. W 2 show state income tax withheld Improvement of business conditions. W 2 show state income tax withheld Exception for local legislation. W 2 show state income tax withheld De minimis exception. W 2 show state income tax withheld Grass roots lobbying. W 2 show state income tax withheld 501(c)(7) - Social and Recreation ClubsLimited membership. W 2 show state income tax withheld Support. W 2 show state income tax withheld Facilities open to public. W 2 show state income tax withheld Gross receipts from nonmembership sources. W 2 show state income tax withheld Gross receipts. W 2 show state income tax withheld Nontraditional activities. W 2 show state income tax withheld 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal SocietiesFraternal Beneficiary Societies (501(c)(8)) Domestic Fraternal Societies (501(c)(10)) 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' AssociationsLocal Employees' Associations (501(c)(4)) Voluntary Employees' Beneficiary Associations (501(c)(9)) Supplemental Unemployment Benefit Trusts (501(c)(17)) 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like OrganizationsMembership. W 2 show state income tax withheld Losses and expenses. W 2 show state income tax withheld Distributions of proceeds. W 2 show state income tax withheld The 85% Requirement Local Life Insurance Associations Mutual or Cooperative Associations 501(c)(13) - Cemetery CompaniesBuying cemetery property. W 2 show state income tax withheld Perpetual care organization. W 2 show state income tax withheld Care of individual plots. W 2 show state income tax withheld 501(c)(14) - Credit Unions and Other Mutual Financial OrganizationsState-Chartered Credit Unions Other Mutual Financial Organizations 501(c)(19) - Veterans' Organizations 501(c)(20) - Group Legal Services Plan Organizations 501(c)(21) - Black Lung Benefit TrustsExcise taxes. W 2 show state income tax withheld 501(c)(2) - Title-Holding Corporations for Single Parent CorporationsExpenses. W 2 show state income tax withheld Waiver of payment of income. W 2 show state income tax withheld 501(c)(25) - Title-Holding Corporations or Trusts for Multiple Parent CorporationsUnrelated Business Income 501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations 501(c)(27) - Qualified State-Sponsored Workers' Compensation Organizations 501(c)(29) - CO-OP Health Insurance Issuers New Guidance for IRC 501(c)(29) Qualified Nonprofit Health Insurance Issuers General Requirements for Exemption under 501(c)(29) and Annual Filing Requirement Additional Guidance for Prospective 501(c)(29) Organizations Introduction This chapter contains specific information for certain organizations described in section 501(c), other than those organizations that are described in section 501(c)(3). W 2 show state income tax withheld Section 501(c)(3) organizations are covered in chapter 3 of this publication. W 2 show state income tax withheld The Table of Contents at the beginning of this publication, as well as the Organization Reference Chart, may help you locate at a glance the type of organization discussed in this chapter. W 2 show state income tax withheld 501(c)(4) - Civic Leagues and Social Welfare Organizations If your organization is not organized for profit and will be operated primarily to promote social welfare to benefit the community, you should file Form 1024 to apply for recognition of exemption from federal income tax under section 501(c)(4). W 2 show state income tax withheld The discussion that follows describes the information you must provide when applying. W 2 show state income tax withheld For application procedures, see chapter 1. W 2 show state income tax withheld To qualify for exemption under section 501(c)(4), the organization's net earnings must be devoted primarily to charitable, educational, or recreational purposes. W 2 show state income tax withheld In addition, no part of the organization's net earnings can inure to the benefit of any private shareholder or individual. W 2 show state income tax withheld If the organization provides an excess benefit to certain persons, an excise tax may be imposed. W 2 show state income tax withheld See Excise tax on excess benefit transactions , under Excess Benefit Transactions in chapter 5 for more information about this tax. W 2 show state income tax withheld Examples. W 2 show state income tax withheld   Types of organizations that are considered to be social welfare organizations are civic associations and volunteer fire companies. W 2 show state income tax withheld Nonprofit operation. W 2 show state income tax withheld   You must submit evidence that your organization is organized and will be operated on a nonprofit basis. W 2 show state income tax withheld However, such evidence, including the fact that your organization is organized under a state law relating to nonprofit corporations, will not in itself establish a social welfare purpose. W 2 show state income tax withheld Social welfare. W 2 show state income tax withheld   To establish that your organization is organized primarily to promote social welfare, you should submit evidence with your application showing that your organization will operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). W 2 show state income tax withheld   An organization that restricts the use of its facilities to employees of selected corporations and their guests is primarily benefiting a private group rather than the community. W 2 show state income tax withheld It therefore does not qualify as a section 501(c)(4) organization. W 2 show state income tax withheld Similarly, an organization formed to represent member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants in the community. W 2 show state income tax withheld However, an organization formed to promote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization. W 2 show state income tax withheld Political activity. W 2 show state income tax withheld   Promoting social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. W 2 show state income tax withheld However, if you submit proof that your organization is organized primarily to promote social welfare, it can obtain exemption even if it participates legally in some political activity on behalf of or in opposition to candidates for public office. W 2 show state income tax withheld See the discussion in chapter 2 under Political Organization Income Tax Return . W 2 show state income tax withheld Social or recreational activity. W 2 show state income tax withheld   If social activities will be the primary purpose of your organization, you should not file an application for exemption as a social welfare organization but should file for exemption as a social club described in section 501(c)(7). W 2 show state income tax withheld Retirement benefit program. W 2 show state income tax withheld   An organization established by its members that has as its primary activity providing supplemental retirement benefits to its members or death benefits to their beneficiaries does not qualify as an exempt social welfare organization. W 2 show state income tax withheld It may qualify under another paragraph of section 501(c) depending on all the facts. W 2 show state income tax withheld   However, a nonprofit association that is established, maintained, and funded by a local government to provide the only retirement benefits to a class of employees may qualify as a social welfare organization under section 501(c)(4). W 2 show state income tax withheld Tax treatment of donations. W 2 show state income tax withheld   Donations to volunteer fire companies are deductible on the donor's federal income tax return, but only if made for exclusively public purposes. W 2 show state income tax withheld Contributions to civic leagues or other section 501(c)(4) organizations generally are not deductible as charitable contributions for federal income tax purposes. W 2 show state income tax withheld They may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer's business. W 2 show state income tax withheld However, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. W 2 show state income tax withheld for more information. W 2 show state income tax withheld For more information on social welfare organizations, see Life Cycle of a Social Welfare Organization at IRS. W 2 show state income tax withheld gov. W 2 show state income tax withheld Specific Organizations The following information should be contained in the application form and accompanying statements of certain types of civic leagues or social welfare organizations. W 2 show state income tax withheld Volunteer fire companies. W 2 show state income tax withheld   If your organization wishes to obtain exemption as a volunteer fire company or similar organization, you should submit evidence that its members are actively engaged in fire fighting and similar disaster assistance, whether it actually owns the fire fighting equipment, and whether it provides any assistance for its members, such as death and medical benefits in case of injury to them. W 2 show state income tax withheld   If your organization does not have an independent social purpose, such as providing recreational facilities for members, it may be exempt under section 501(c)(3). W 2 show state income tax withheld In this event, your organization should file Form 1023. W 2 show state income tax withheld Homeowners' associations. W 2 show state income tax withheld   A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. W 2 show state income tax withheld The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. W 2 show state income tax withheld Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. W 2 show state income tax withheld Even if an area represented by an association is not a community, the association can still qualify for exemption if its activities benefit a community. W 2 show state income tax withheld   The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. W 2 show state income tax withheld It also must show that it does not engage in exterior maintenance of private homes. W 2 show state income tax withheld   A homeowners' association that is not exempt under section 501(c)(4) and that is a condominium management association, a residential real estate management association, or a timeshare association generally can elect under the provisions of section 528 to receive certain tax benefits that, in effect, permit it to exclude its exempt function income from its gross income. W 2 show state income tax withheld Other organizations. W 2 show state income tax withheld   Other nonprofit organizations that qualify as social welfare organizations include: An organization operating an airport that is on land owned by a local government, which supervises the airport's operation, and that serves the general public in an area with no other airport, A community association that works to improve public services, housing, and residential parking; publishes a free community newspaper; sponsors a community sports league, holiday programs, and meetings; and contracts with a private security service to patrol the community, A community association devoted to preserving the community's traditions, architecture, and appearance by representing it before the local legislature and administrative agencies in zoning, traffic, and parking matters, An organization that tries to encourage industrial development and relieve unemployment in an area by making loans to businesses so they will relocate to the area, and An organization that holds an annual festival of regional customs and traditions. W 2 show state income tax withheld 501(c)(5) - Labor, Agricultural and Horticultural Organizations If you are a member of an organization that wants to obtain recognition of exemption from federal income tax as a labor, agricultural, or horticultural organization, you should submit an application on Form 1024. W 2 show state income tax withheld You must indicate in your application for exemption and accompanying statements that no part of the organization's net earnings will inure to the benefit of any member. W 2 show state income tax withheld In addition, you should follow the procedure for obtaining recognition of exempt status described in chapter 1. W 2 show state income tax withheld Submit any additional information that may be required, as described in this section. W 2 show state income tax withheld Tax treatment of donations. W 2 show state income tax withheld   Contributions to labor, agricultural, and horticultural organizations are not deductible as charitable contributions on the donor's federal income tax return. W 2 show state income tax withheld However, such payments may be deductible as business expenses if they are ordinary and necessary in the conduct of the taxpayer's trade or business. W 2 show state income tax withheld For more information about certain limits affecting the deductibility of these business expenses, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. W 2 show state income tax withheld Labor Organizations A labor organization is an association of workers who have combined to protect and promote the interests of the members by bargaining collectively with their employers to secure better working conditions. W 2 show state income tax withheld To show that your organization has the purpose of a labor organization, you should include in the articles of organization or accompanying statements (submitted with your exemption application) information establishing that the organization is organized to better the conditions of workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations. W 2 show state income tax withheld In addition, no net earnings of the organization can inure to the benefit of any member. W 2 show state income tax withheld Composition of membership. W 2 show state income tax withheld   While a labor organization generally is composed of employees or representatives of the employees (in the form of collective bargaining agents) and similar employee groups, evidence that an organization's membership consists mainly of workers does not in itself indicate an exempt purpose. W 2 show state income tax withheld You must show in your application that your organization has the purposes described in the preceding paragraph. W 2 show state income tax withheld These purposes can be accomplished by a single labor organization acting alone or by several organizations acting together through a separate organization. W 2 show state income tax withheld Benefits to members. W 2 show state income tax withheld   The payment by a labor organization of death, sick, accident, and similar benefits to its individual members with funds contributed by its members, if made under a plan to better the conditions of the members, does not preclude exemption as a labor organization. W 2 show state income tax withheld However, an organization does not qualify for exemption as a labor organization if it has no authority to represent members in job-related matters, even if it provides weekly income to its members in the event of a lawful strike by the members' union, in return for an annual payment by the member. W 2 show state income tax withheld   For more information on labor organizations, see Life Cycle of a Labor Organization at IRS. W 2 show state income tax withheld gov. W 2 show state income tax withheld Agricultural and Horticultural Organizations Agricultural and horticultural organizations are connected with raising livestock, forestry, cultivating land, raising and harvesting crops or aquatic resources, cultivating useful or ornamental plants, and similar pursuits. W 2 show state income tax withheld For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. W 2 show state income tax withheld The term harvesting, in this case, includes fishing and related pursuits. W 2 show state income tax withheld Agricultural organizations can be quasi-public in character and are often designed to encourage the development of better agricultural and horticultural products through a system of awards, using income from entry fees, gate receipts, and donations to meet the necessary expenses of upkeep and operation. W 2 show state income tax withheld When the activities are directed toward the improvement of marketing or other business conditions in one or more lines of business, rather than the improvement of production techniques or the betterment of the conditions of persons engaged in agriculture, the organization must qualify for exemption as a business league, board of trade, or other organization, as discussed next in the section on 501(c)(6) organizations. W 2 show state income tax withheld The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products. W 2 show state income tax withheld The following list contains some examples of activities that show an agricultural or horticultural purpose. W 2 show state income tax withheld Promoting various cooperative agricultural, horticultural, and civic activities among rural residents by a state, farm, or home bureau. W 2 show state income tax withheld Exhibiting livestock, farm products, and other characteristic features of agriculture and horticulture. W 2 show state income tax withheld Testing soil for members and nonmembers of the farm bureau on a cost basis, the results of the tests and other recommendations being furnished to the community members to educate them in soil treatment. W 2 show state income tax withheld Guarding the purity of a specific breed of livestock. W 2 show state income tax withheld Encouraging improvements in the production of fish on privately owned fish farms. W 2 show state income tax withheld Negotiating with processors for the price to be paid to members for their crops. W 2 show state income tax withheld For more information on agricultural or horticultural organizations, see Life Cycle of an Agricultural or Horticultural Organization at IRS. W 2 show state income tax withheld gov. W 2 show state income tax withheld 501(c)(6) - Business Leagues, etc. W 2 show state income tax withheld If your association wants to apply for recognition of exemption from federal income tax as a nonprofit business league, chamber of commerce, real estate board, or board of trade, it should file Form 1024. W 2 show state income tax withheld For a discussion of the procedure to follow, see chapter 1. W 2 show state income tax withheld Your organization must indicate in its application form and attached statements that no part of its net earnings will inure to the benefit of any private shareholder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining). W 2 show state income tax withheld In addition, your organization must be primarily engaged in activities or functions that are the basis for its exemption. W 2 show state income tax withheld It must be primarily supported by membership dues and other income from activities substantially related to its exempt purpose. W 2 show state income tax withheld A business league, in general, is an association of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of a kind ordinarily carried on for profit. W 2 show state income tax withheld Trade associations and professional associations are considered business leagues. W 2 show state income tax withheld Chamber of commerce. W 2 show state income tax withheld   A chamber of commerce usually is composed of the merchants and traders of a city. W 2 show state income tax withheld Board of trade. W 2 show state income tax withheld   A board of trade often consists of persons engaged in similar lines of business. W 2 show state income tax withheld For example, a nonprofit organization formed to regulate the sale of a specified agricultural commodity to assure equal treatment of producers, warehouse workers, and buyers is a board of trade. W 2 show state income tax withheld   Chambers of commerce and boards of trade usually promote the common economic interests of all the commercial enterprises in a given trade community. W 2 show state income tax withheld Real estate board. W 2 show state income tax withheld   A real estate board consists of members interested in improving the business conditions in the real estate field. W 2 show state income tax withheld It is not organized for profit and no part of the net earnings inures to the benefit of any private shareholder or individual. W 2 show state income tax withheld Professional football leagues. W 2 show state income tax withheld   The Internal Revenue Code specifically defines professional football leagues as exempt organizations under section 501(c)(6). W 2 show state income tax withheld They are exempt whether or not they administer a pension fund for football players. W 2 show state income tax withheld General purpose. W 2 show state income tax withheld   You must indicate in the material submitted with your application that your organization will be devoted to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. W 2 show state income tax withheld It must be shown that the conditions of a particular trade or the interests of the community will be advanced. W 2 show state income tax withheld Merely indicating the name of the organization or the object of the local statute under which it is created is not enough to demonstrate the required general purpose. W 2 show state income tax withheld Line of business. W 2 show state income tax withheld   This term generally refers either to an entire industry or to all components of an industry within a geographic area. W 2 show state income tax withheld It does not include a group composed of businesses that market a particular brand within an industry. W 2 show state income tax withheld Common business interest. W 2 show state income tax withheld   A common business interest of all members of the organization must be established by the application documents. W 2 show state income tax withheld Examples. W 2 show state income tax withheld   Activities that would tend to illustrate a common business interest are: Promotion of higher business standards and better business methods and encouragement of uniformity and cooperation by a retail merchants association, Education of the public in the use of credit, Establishment of uniform casualty rates and compilation of statistical information by an insurance rating bureau operated by casualty insurance companies, Establishment and maintenance of the integrity of a local commercial market, Operation of a trade publication primarily intended to benefit an entire industry, and Encouragement of the use of goods and services of an entire industry (such as a lawyer referral service whose main purpose is to introduce individuals to the use of the legal profession in the hope that they will enter into lawyer-client relationships on a paying basis as a result). W 2 show state income tax withheld Improvement of business conditions. W 2 show state income tax withheld   Generally, this must be shown to be the purpose of the organization. W 2 show state income tax withheld This is not established by evidence of particular services that provide a convenience or economy to individual members in their businesses, such as advertising that carries the name of members, interest-free loans, assigning exclusive franchise areas, operation of a real estate multiple listing system, or operation of a credit reporting agency. W 2 show state income tax withheld Stock or commodity exchange. W 2 show state income tax withheld   A stock or commodity exchange is not a business league, chamber of commerce, real estate board, or board of trade and is not exempt under section 501(c)(6). W 2 show state income tax withheld Legislative activity. W 2 show state income tax withheld   An organization that is exempt under section 501(c)(6) can work for the enactment of laws to advance the common business interests of the organization's members. W 2 show state income tax withheld Deduction not allowed for dues used for political or legislative activities. W 2 show state income tax withheld   A taxpayer cannot deduct the part of dues or other payments to a business league, trade association, labor union, or similar organization that is reported to the taxpayer by the organization as having been used for any of the following activities. W 2 show state income tax withheld Influencing legislation. W 2 show state income tax withheld Participating or intervening in a political campaign for, or against, any candidate for public office. W 2 show state income tax withheld Trying to influence the general public, or part of the general public, with respect to elections, legislative matters, or referendums (also known as grass roots lobbying). W 2 show state income tax withheld Communicating directly with certain executive branch officials to try to influence their official actions or positions. W 2 show state income tax withheld See Dues Used for Lobbying or Political Activities under Required Disclosures in chapter 2 for more information. W 2 show state income tax withheld Exception for local legislation. W 2 show state income tax withheld   Members can deduct dues (or assessments) to an organization that are for expenses of: Appearing before, submitting statements to, or sending communications to members of a local council or similar governing body with respect to legislation or proposed legislation of direct interest to the member, or Communicating information between the member and the organization with respect to local legislation or proposed legislation of direct interest to the organization or the member. W 2 show state income tax withheld Legislation or proposed legislation is of direct interest to a taxpayer if it will, or can reasonably be expected to, affect the taxpayer's trade or business. W 2 show state income tax withheld De minimis exception. W 2 show state income tax withheld   In-house expenditures of $2,000 or less for the year for activities (1) – (4) listed earlier will not prevent a deduction for dues if the dues meet all other tests to be deductible as a business expense. W 2 show state income tax withheld Grass roots lobbying. W 2 show state income tax withheld   A tax-exempt trade association, labor union, or similar organization is considered to be engaging in grass roots lobbying if it contacts prospective members or calls upon its own members to contact their employees and customers for the purpose of urging such persons to communicate with their elected state or Congressional representatives to support the promotion, defeat, or repeal of legislation that is of direct interest to the organization. W 2 show state income tax withheld Any dues or assessments directly related to such activities are not deductible by the taxpayer, since the individuals being contacted, who are not members of the organization, are a segment of the general public. W 2 show state income tax withheld Tax treatment of donations. W 2 show state income tax withheld   Contributions to organizations described in this section are not deductible as charitable contributions on the donor's federal income tax return. W 2 show state income tax withheld They may be deductible as trade or business expenses if ordinary and necessary in the conduct of the taxpayer's business. W 2 show state income tax withheld   For more information on business leagues, see Life Cycle of a Business League (Trade Association) on IRS. W 2 show state income tax withheld gov. W 2 show state income tax withheld 501(c)(7) - Social and Recreation Clubs If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax. W 2 show state income tax withheld In applying for recognition of exemption, you should submit the information described in this section. W 2 show state income tax withheld Also see chapter 1 for the procedures to follow. W 2 show state income tax withheld Typical organizations that should file for recognition of exemption as social clubs include: College alumni associations that are not described in chapter 3 under Alumni association , College fraternities or sororities operating chapter houses for students, Country clubs, Amateur hunting, fishing, tennis, swimming, and other sport clubs, Dinner clubs that provide a meeting place, library, and dining room for members, Hobby clubs, Garden clubs, and Variety clubs. W 2 show state income tax withheld Discrimination prohibited. W 2 show state income tax withheld   Your organization will not be recognized as tax exempt if its charter, bylaws, or other governing instrument, or any written policy statement provides for discrimination against any person on the basis of race, color, or religion. W 2 show state income tax withheld   However, a club that in good faith limits its membership to the members of a particular religion to further the teachings or principles of that religion and not to exclude individuals of a particular race or color will not be considered as discriminating on the basis of religion. W 2 show state income tax withheld Also, the restriction on religious discrimination does not apply to a club that is an auxiliary of a fraternal beneficiary society (discussed later) if that society is described in section 501(c)(8) and exempt from tax under section 501(a) and limits its membership to the members of a particular religion. W 2 show state income tax withheld Private benefit prohibited. W 2 show state income tax withheld   No part of the organization's net earnings can inure to the benefit of any person having a personal and private interest in the activities of the organization. W 2 show state income tax withheld For purposes of this requirement, it is not necessary that net earnings be actually distributed. W 2 show state income tax withheld Even undistributed earnings can benefit members. W 2 show state income tax withheld Examples of this include a decrease in membership dues or an increase in the services the club provides to its members without a corresponding increase in dues or other fees paid for club support. W 2 show state income tax withheld However, fixed-fee payments to members who bring new members into the club are not an inurement of the club's net earnings, if the payments are reasonable compensation for performance of a necessary administrative service. W 2 show state income tax withheld Purposes. W 2 show state income tax withheld   To show that your organization possesses the characteristics of a club within the meaning of the exemption law, you should submit evidence with your application that personal contact, commingling, and fellowship exist among members. W 2 show state income tax withheld You must show that members are bound together by a common objective of pleasure, recreation, and other nonprofitable purposes. W 2 show state income tax withheld   Fellowship need not be present between each member and every other member of a club if it is a material part in the life of the organization. W 2 show state income tax withheld A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group. W 2 show state income tax withheld   The term other nonprofitable purposes means other purposes similar to pleasure and recreation. W 2 show state income tax withheld For example, a club that, in addition to its social activities, has a plan for the payment of sick and death benefits is not operating exclusively for pleasure, recreation, and other nonprofitable purposes. W 2 show state income tax withheld Limited membership. W 2 show state income tax withheld   The membership in a social club must be limited. W 2 show state income tax withheld To show that your organization has a purpose that would characterize it as a club, you should submit evidence with your application that there are limits on admission to membership consistent with the character of the club. W 2 show state income tax withheld   A social club that issues corporate membership is dealing with the general public in the form of the corporation's employees. W 2 show state income tax withheld Corporate members of a club are not the kind of members contemplated by the law. W 2 show state income tax withheld Gross receipts from these members would be a factor in determining whether the club qualifies as a social club. W 2 show state income tax withheld See Gross receipts from nonmembership sources , later. W 2 show state income tax withheld Bona fide individual memberships paid for by a corporation would not have an effect on the gross receipts source. W 2 show state income tax withheld   The fact that a social club may have an associate (nonvoting) class of membership will not be, in and of itself, a cause for nonrecognition of exemption. W 2 show state income tax withheld However, if one membership class pays substantially lower dues and fees than another membership class, although both classes enjoy the same rights and privileges in using the club facilities, there may be an inurement of income to the benefited class, resulting in a denial of the club's exemption. W 2 show state income tax withheld Support. W 2 show state income tax withheld   In general, your club should be supported solely by membership fees, dues, and assessments. W 2 show state income tax withheld However, if otherwise entitled to exemption, your club will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities. W 2 show state income tax withheld Business activities. W 2 show state income tax withheld   If your club will engage in business, such as selling real estate, timber, or other products or services, it generally will be denied exemption. W 2 show state income tax withheld However, evidence submitted with your application form that your organization will provide meals, refreshments, or services related to its exempt purposes only to its own members or their dependents or guests will not cause denial of exemption. W 2 show state income tax withheld Facilities open to public. W 2 show state income tax withheld   Evidence that your club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. W 2 show state income tax withheld This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption. W 2 show state income tax withheld Gross receipts from nonmembership sources. W 2 show state income tax withheld   A section 501(c)(7) organization can receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. W 2 show state income tax withheld Income from nontraditional business activity with members is not exempt function income, and thus is included as income from sources outside of the membership. W 2 show state income tax withheld Of the 35% gross receipts listed above, up to 15% of the gross receipts can be derived from the use of the club's facilities or services by the general public. W 2 show state income tax withheld If an organization has outside income that is more than these limits, all the facts and circumstances will be taken into account in determining whether the organization qualifies for exempt status. W 2 show state income tax withheld Gross receipts. W 2 show state income tax withheld   Gross receipts, for this purpose, are receipts from the normal and usual (traditionally conducted) activities of the club. W 2 show state income tax withheld These receipts include charges, admissions, membership fees, dues, assessments, investment income, and normal recurring capital gains on investments. W 2 show state income tax withheld Receipts do not include initiation fees and capital contributions. W 2 show state income tax withheld Unusual amounts of income, such as from the sale of a clubhouse or similar facility, are not included in gross receipts or in figuring the percentage limits. W 2 show state income tax withheld Nontraditional activities. W 2 show state income tax withheld   Activities conducted by a social club need to further its exempt purposes. W 2 show state income tax withheld Traditional business activities are those that further a social club's exempt purposes. W 2 show state income tax withheld Nontraditional business activities do not further the exempt purposes of a social club even if conducted solely on a membership basis. W 2 show state income tax withheld Nontraditional business activities are prohibited (subject to an insubstantial, trivial, and nonrecurrent test) for businesses conducted with both members and nonmembers. W 2 show state income tax withheld Examples of nontraditional business activities include sale of package liquor, take-out food, and long-term room rental. W 2 show state income tax withheld Fraternity foundations. W 2 show state income tax withheld   If your organization is a foundation formed for the exclusive purpose of acquiring and leasing a chapter house to a local fraternity chapter or sorority chapter maintained at an educational institution and does not engage in any social or recreational activities, it may be a title holding corporation (discussed later under section 501(c)(2) organizations and under section 501(c)(25) organizations) rather than a social club. W 2 show state income tax withheld Tax treatment of donations. W 2 show state income tax withheld   Donations to exempt social and recreation clubs are not deductible as charitable contributions on the donor's federal income tax return. W 2 show state income tax withheld 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal Societies This section describes the information to be provided upon application for recognition of exemption by two types of fraternal societies: beneficiary and domestic. W 2 show state income tax withheld The major distinction is that fraternal beneficiary societies provide for the payment of life, sick, accident, or other benefits to their members or their dependents, while domestic fraternal societies do not provide these benefits but rather devote their earnings to fraternal, religious, charitable, etc. W 2 show state income tax withheld , purposes. W 2 show state income tax withheld The procedures to follow in applying for recognition of exemption are described in chapter 1. W 2 show state income tax withheld If your organization is controlled by a central organization, you should check with your controlling organization to determine whether your unit has been included in a group exemption letter or can be added. W 2 show state income tax withheld If so, your organization need not apply for individual recognition of exemption. W 2 show state income tax withheld For more information, see Group Exemption Letter in chapter 1 of this publication. W 2 show state income tax withheld Tax treatment of donations. W 2 show state income tax withheld   Donations by an individual to a domestic fraternal beneficiary society or a domestic fraternal society operating under the lodge system are deductible as charitable contributions only if used exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. W 2 show state income tax withheld Fraternal Beneficiary Societies (501(c)(8)) A fraternal beneficiary society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. W 2 show state income tax withheld The application and accompanying statements should establish that the organization: Is a fraternal organization, Operates under the lodge system or for the exclusive benefit of the members of a fraternal organization itself operating under the lodge system, and Provides for the payment of life, sick, accident, or other benefits to the members of the society, order, or association or their dependents. W 2 show state income tax withheld Lodge system. W 2 show state income tax withheld   Operating under the lodge system means carrying on activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. W 2 show state income tax withheld Payment of benefits. W 2 show state income tax withheld   It is not essential that every member be covered by the society's program of sick, accident, or death benefits. W 2 show state income tax withheld An organization can qualify for exemption if most of its members are eligible for benefits, and the benefits are paid from contributions or dues paid by those members. W 2 show state income tax withheld   The benefits must be limited to members and their dependents. W 2 show state income tax withheld If members will have the ability to confer benefits to other than themselves and their dependents, exemption will not be recognized. W 2 show state income tax withheld Whole-life insurance. W 2 show state income tax withheld   Whole-life insurance constitutes a life benefit under section 501(c)(8) even though the policy may contain investment features such as a cash surrender value or a policy loan. W 2 show state income tax withheld Reinsurance pool. W 2 show state income tax withheld   Payments by a fraternal beneficiary society into a state-sponsored reinsurance pool that protects participating insurers against excessive losses on major medical health and accident insurance will not preclude exemption as a fraternal beneficiary society. W 2 show state income tax withheld Domestic Fraternal Societies (501(c)(10)) A domestic fraternal society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. W 2 show state income tax withheld The application and accompanying statements should establish that the organization: Is a domestic fraternal organization organized in the U. W 2 show state income tax withheld S. W 2 show state income tax withheld , Operates under the lodge system, Devotes its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and Does not provide for the payment of life, sick, accident, or other benefits to its members. W 2 show state income tax withheld The organization can arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status. W 2 show state income tax withheld 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' Associations This section describes the information to be provided upon application for recognition of exemption by the following types of employees' associations: A voluntary employees' beneficiary association (including federal employees' associations) organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries, if no part of the net earnings of the association inures to the benefit of any private shareholder or individual, and A supplemental unemployment benefit trust whose primary purpose is providing for payment of supplemental unemployment benefits. W 2 show state income tax withheld Both the application form to file and the information to provide are discussed later under the section that describes your employee association. W 2 show state income tax withheld Chapter 1 describes the procedures to follow in applying for exemption. W 2 show state income tax withheld Tax treatment of donations. W 2 show state income tax withheld   Donations to these organizations are not deductible as charitable contributions on the donor's federal income tax return. W 2 show state income tax withheld Local Employees' Associations (501(c)(4)) A local association of employees whose membership is limited to employees of a designated person or persons in a particular municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes. W 2 show state income tax withheld A local employees' association must apply for recognition of exemption by filing Form 1024. W 2 show state income tax withheld The organization must submit evidence that: It is of a purely local character, Its membership is limited to employees of a designated person or persons in a particular locality, and Its net earnings will be devoted exclusively to charitable, educational, or recreational purposes. W 2 show state income tax withheld A local association of employees that has established a system of paying retirement or death benefits, or both, to its members will not qualify for exemption since the payment of these benefits is not considered as being for charitable, educational, or recreational purposes. W 2 show state income tax withheld Similarly, a local association of employees that is operated primarily as a cooperative buying service for its members in order to obtain discount prices on merchandise, services, and activities does not qualify for exemption. W 2 show state income tax withheld Voluntary Employees' Beneficiary Associations (501(c)(9)) An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024. W 2 show state income tax withheld The material submitted with the application must show that your organization: Is a voluntary association of employees, Will provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose, and Will not allow any of its net earnings to inure to the benefit of any private individual or shareholder except in the form of scheduled benefit payments. W 2 show state income tax withheld To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. W 2 show state income tax withheld Note. W 2 show state income tax withheld Under section 4976, the reversion of funds from a section 501(c)(9) organization to the employer who created the beneficiary association may subject the employer to a 100% penalty excise tax on the amount of the reversion. W 2 show state income tax withheld Notice requirement. W 2 show state income tax withheld   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. W 2 show state income tax withheld The organization gives notice by filing Form 1024. W 2 show state income tax withheld If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before notice is given. W 2 show state income tax withheld An extension of time for filing the notice can be granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . W 2 show state income tax withheld Membership. W 2 show state income tax withheld   Membership of a section 501(c)(9) organization must consist of individuals who are employees and have an employment-related common bond. W 2 show state income tax withheld This common bond can be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. W 2 show state income tax withheld   The membership of an association can include some individuals who are not employees, provided they have an employment-related bond with the employee-members. W 2 show state income tax withheld For example, the owner of a business whose employees are members of the association can be a member. W 2 show state income tax withheld An association will be considered composed of employees if 90% of its total membership on one day of each quarter of its tax year consists of employees. W 2 show state income tax withheld Employees. W 2 show state income tax withheld   Employees include individuals who became entitled to membership because they are or were employees. W 2 show state income tax withheld For example, an individual will qualify as an employee even though the individual is on a leave of absence or has been terminated due to retirement, disability, or layoff. W 2 show state income tax withheld   Generally, membership is voluntary if an affirmative act is required on the part of an employee to become a member. W 2 show state income tax withheld Conversely, membership is involuntary if the designation as a member is due to employee status. W 2 show state income tax withheld However, an association will be considered voluntary if employees are required to be members of the organization as a condition of their employment and they do not incur a detriment (such as a payroll deduction) as a result of their membership. W 2 show state income tax withheld An employer has not imposed involuntary membership on the employee if membership is required as the result of a collective bargaining agreement or as an incident of membership in a labor organization. W 2 show state income tax withheld Payment of benefits. W 2 show state income tax withheld   The information submitted with your application must show that your organization will pay life, sick, accident, supplemental unemployment, or other similar benefits. W 2 show state income tax withheld The benefits can be provided directly by your association or indirectly by your association through the payments of premiums to an insurance company (or fees to a medical clinic). W 2 show state income tax withheld Benefits can be in the form of medical, clinical, or hospital services, transportation furnished for medical care, or money payments. W 2 show state income tax withheld Nondiscrimination requirements. W 2 show state income tax withheld   An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. W 2 show state income tax withheld However, if the organization is part of a plan that is a collective bargaining agreement that was the subject of good faith bargaining between employee organizations and employers, the plan need not meet these requirements for the organization to qualify as tax exempt. W 2 show state income tax withheld   A plan meets the nondiscrimination requirements only if both of the following statements are true. W 2 show state income tax withheld Each class of benefits under the plan is provided under a classification of employees that is set forth in the plan and does not discriminate in favor of employees who are highly compensated individuals. W 2 show state income tax withheld The benefits provided under each class of benefits do not discriminate in favor of highly compensated individuals. W 2 show state income tax withheld A life insurance, disability, severance pay, or supplemental unemployment compensation benefit does not discriminate in favor of highly compensated individuals merely because the benefits available bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees covered by the plan. W 2 show state income tax withheld   For purposes of determining whether a plan meets the nondiscrimination requirements, the employer can elect to exclude all disability or severance payments payable to individuals who are in pay status as of January 1, 1985. W 2 show state income tax withheld This will not apply to any increase in such payment by any plan amendment adopted after June 22, 1984. W 2 show state income tax withheld   If a plan provides a benefit for which there is a nondiscrimination provision provided under Chapter 1 of the Internal Revenue Code as a condition of that benefit being excluded from gross income, these nondiscrimination requirements do not apply. W 2 show state income tax withheld The benefit will be considered nondiscriminatory only if it meets the nondiscrimination provision of the applicable Code section. W 2 show state income tax withheld For example, benefits provided under a medical reimbursement plan would meet the nondiscrimination requirements for an association, if the benefits meet the nondiscrimination requirements of section 105(h)(3) and 105(h)(4). W 2 show state income tax withheld Excluded employees. W 2 show state income tax withheld   Certain employees who are not covered by a plan can be excluded from consideration in applying these requirements. W 2 show state income tax withheld These include employees: Who have not completed 3 years of service, Who have not attained age 21, Who are seasonal or less than half-time employees, Who are not in the plan and who are included in a unit of employees covered by a collective bargaining agreement if the class of benefits involved was the subject of good faith bargaining, or Who are nonresident aliens and who receive no earned income from the employer that has United States source income. W 2 show state income tax withheld Highly compensated individual. W 2 show state income tax withheld   A highly compensated individual is one who: Owned 5 percent or more of the employer at any time during the current year or the preceding year, Received more than $115,000 in compensation from the employer for the preceding year (the amount is annualized for inflation. W 2 show state income tax withheld Go to IRS. W 2 show state income tax withheld gov, and search “Pension Plan Limitation” for the year), and Was among the top 20% of employees by compensation for the preceding year. W 2 show state income tax withheld However, the employer can choose not to have (3) apply. W 2 show state income tax withheld Aggregation rules. W 2 show state income tax withheld   The employer can choose to treat two or more plans as one plan for purposes of meeting the nondiscrimination requirements. W 2 show state income tax withheld Employees of controlled groups of corporations, trades, or businesses under common control, or members of an affiliated service group, are treated as employees of a single employer. W 2 show state income tax withheld Leased employees are treated as employees of the recipient. W 2 show state income tax withheld One employee. W 2 show state income tax withheld   A trust created to provide benefits to one employee will not qualify as a voluntary employees' beneficiary association under section 501(c)(9). W 2 show state income tax withheld Supplemental Unemployment Benefit Trusts (501(c)(17)) A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form 1024. W 2 show state income tax withheld The trust must be a valid, existing trust under local law and must be evidenced by an executed document. W 2 show state income tax withheld A conformed copy of the plan of which the trust is a part should be attached to the application. W 2 show state income tax withheld To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. W 2 show state income tax withheld Note. W 2 show state income tax withheld Under section 4976, the reversion of funds from a section 501(c)(17) organization to the employer who created the supplemental unemployment benefit trust may subject the employer to a 100% penalty excise tax on the amount of the reversion. W 2 show state income tax withheld Notice requirement. W 2 show state income tax withheld   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. W 2 show state income tax withheld The organization gives notice by filing Form 1024. W 2 show state income tax withheld If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before such notice is given. W 2 show state income tax withheld An extension of time for filing the notice is granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . W 2 show state income tax withheld Types of payments. W 2 show state income tax withheld   You must show that the supplemental unemployment compensation benefits will be benefits paid to an employee because of the employee's involuntary separation from employment (whether or not the separation is temporary) resulting directly from a reduction-in-force, discontinuance of a plant or operation, or other similar conditions. W 2 show state income tax withheld In addition, sickness and accident benefits (but not vacation, retirement, or death benefits) may be included in the plan if these are subordinate to the unemployment compensation benefits. W 2 show state income tax withheld Diversion of funds. W 2 show state income tax withheld   It must be impossible under the plan (at any time before the satisfaction of all liabilities with respect to employees under the plan) to use or to divert any of the corpus or income of the trust to any purpose other than the payment of supplemental unemployment compensation benefits (or sickness or accident benefits to the extent just explained). W 2 show state income tax withheld Discrimination in benefits. W 2 show state income tax withheld   Neither the terms of the plan nor the actual payment of benefits can be discriminatory in favor of the company's officers, stockholders, supervisors, or highly paid employees. W 2 show state income tax withheld However, a plan is not discriminatory merely because benefits bear a uniform relationship to compensation or the rate of compensation. W 2 show state income tax withheld Prohibited transactions and exemption. W 2 show state income tax withheld   If your organization is a supplemental unemployment benefit trust and has received a denial of exemption because it engaged in a prohibited transaction, as defined by section 503(b), it can file a claim for exemption in any tax year following the tax year in which the notice of denial was issued. W 2 show state income tax withheld It must file the claim on Form 1024. W 2 show state income tax withheld The organization must include a written declaration that it will not knowingly again engage in a prohibited transaction. W 2 show state income tax withheld An authorized principal officer of your organization must make this declaration under the penalties of perjury. W 2 show state income tax withheld   If your organization has satisfied all requirements as a supplemental unemployment benefit trust described in section 501(c)(17), it will be notified in writing that it has been recognized as exempt. W 2 show state income tax withheld However, the organization will be exempt only for those tax years after the tax year in which the claim for exemption (Form 1024) is filed. W 2 show state income tax withheld Tax year in this case means the established annual accounting period of the organization or, if the organization has not established an annual accounting period, the calendar year. W 2 show state income tax withheld For more information about the requirements for reestablishing an exemption previously denied, contact the IRS. W 2 show state income tax withheld 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like Organizations Each of the following organizations apply for recognition of exemption from federal income tax by filing Form 1024. W 2 show state income tax withheld Benevolent life insurance associations of a purely local character and like organizations. W 2 show state income tax withheld Mutual ditch or irrigation companies and like organizations. W 2 show state income tax withheld Mutual or cooperative telephone companies and like organizations. W 2 show state income tax withheld A like organization is an organization that performs a service comparable to that performed by any one of the above organizations. W 2 show state income tax withheld The information to be provided upon application by each of these organizations is described in this section. W 2 show state income tax withheld For information as to the procedures to follow in applying for exemption, see chapter 1. W 2 show state income tax withheld General requirements. W 2 show state income tax withheld   These organizations must use their income solely to cover losses and expenses, with any excess being returned to members or retained to cover future losses and expenses. W 2 show state income tax withheld They must collect at least 85% of their income from members for the sole purpose of meeting losses and expenses. W 2 show state income tax withheld Mutual character. W 2 show state income tax withheld   These organizations, other than benevolent life insurance associations, must be organized and operated on a mutual or cooperative basis. W 2 show state income tax withheld They are associations of persons or organizations, or both, banded together to provide themselves a mutually desirable service approximately at cost and on a mutual basis. W 2 show state income tax withheld To maintain the mutual characteristic of democratic ownership and control, they must be so organized and operated that their members have the right to choose the management, to receive services at cost, to receive a return of any excess of payments over losses and expenses, and to share in any assets upon dissolution. W 2 show state income tax withheld   The rights and interests of members in the annual savings of the organization must be determined in proportion to their business with the organization. W 2 show state income tax withheld Upon dissolution, gains from the sale of appreciated assets must be distributed to all persons who were members during the period the assets were owned by the organization in proportion to the amount of business done during that period. W 2 show state income tax withheld The bylaws must not provide for forfeiture of a member's rights and interest upon withdrawal or termination. W 2 show state income tax withheld Membership. W 2 show state income tax withheld   Membership of a mutual organization consists of those who join the organization to obtain its services, and have a voice in its management. W 2 show state income tax withheld In a stock company, the stockholders are members. W 2 show state income tax withheld However, a mutual life insurance organization cannot have policyholders other than its members. W 2 show state income tax withheld Losses and expenses. W 2 show state income tax withheld   In furnishing services substantially at cost, an organization must use its income solely for paying losses and expenses. W 2 show state income tax withheld Any excess income not retained in reasonable reserves for future losses and expenses belongs to members in proportion to their patronage or business done with the organization. W 2 show state income tax withheld If such patronage refunds are retained in reasonable amounts for purposes of expanding and improving facilities, retiring capital indebtedness, acquiring other assets, and unexpected expenses, the organization must maintain records sufficient to reflect the equity of each member in the assets acquired with the funds. W 2 show state income tax withheld Distributions of proceeds. W 2 show state income tax withheld   The cooperative may distribute the unexpended balance of collections or assessments remaining on hand at the end of the year to members or patrons prorated on the basis of their patronage or business done with the cooperative. W 2 show state income tax withheld Such distribution represents a refund in the costs of services rendered to the member. W 2 show state income tax withheld The 85% Requirement All of the organizations listed above must submit evidence with their application that they receive 85% or more of their gross income from their members for the sole purpose of meeting losses and expenses. W 2 show state income tax withheld Nevertheless, certain items of income are excluded from the computation of the 85% requirement if the organization is a mutual or cooperative telephone or electric company. W 2 show state income tax withheld Mutual or cooperative telephone company. W 2 show state income tax withheld   A mutual or cooperative telephone company will exclude from the computation of the 85% requirement any income received or accrued from: A nonmember telephone company for the performance of communication services involving the completion of long distance calls to, from, or between members of the mutual or cooperative telephone company, Qualified pole rentals, The sale of display listings in a directory furnished to its members, or The prepayment of a loan created in 1987, 1988, or 1989, under section 306A, 306B, or 311 of the Rural Electrification Act of 1936. W 2 show state income tax withheld Mutual or cooperative electric company. W 2 show state income tax withheld   A mutual or cooperative electric company will exclude from the computation of the 85% requirement any income received or accrued from: Qualified pole rentals, Any provision or sale of electric energy transmission services or ancillary service if the services are provided on a nondiscriminatory open access basis under an open access transmission tariff approved or accepted by the Federal Energy Regulatory Commission (FERC) or under an independent transmission provider agreement approved or accepted by FERC (other than income received or accrued directly or indirectly from a member), The provision or sale of electric energy distribution services or ancillary services if the services are provided on a nondiscriminatory open-access basis to distribute electric energy not owned by the mutual or electric cooperative company: To end-users who are served by distribution facilities not owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), or Generated by a generation facility not owned or leased by the company or any of its members and which is directly connected to distribution facilities owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), Any nuclear decommissioning transaction, or Any asset exchange or conversion transaction. W 2 show state income tax withheld   An electric cooperative's sale of excess fuel at cost in the year of purchase is not income for purposes of determining compliance with the 85% requirement. W 2 show state income tax withheld Qualified pole rental. W 2 show state income tax withheld   The term qualified pole rental means any rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that are used by the company in providing telephone or electric services to its members, and Pursuant to the rental to support one or more wires (in addition to wires described in (1)) for use in connection with the transmission by wire of electricity or of telephone or other communications. W 2 show state income tax withheld   The term rental, for this purpose, includes any sale of the right to use the pole (or other structure). W 2 show state income tax withheld The 85% requirement is applied on the basis of an annual accounting period. W 2 show state income tax withheld Failure of an organization to meet the requirement in a particular year precludes exemption for that year, but has no effect upon exemption for years in which the 85% requirement is met. W 2 show state income tax withheld Gain from the sale or conversion of the organization's property is not considered an amount received from members in determining whether the organization's income consists of amounts collected from members. W 2 show state income tax withheld Because the 85% income test is based on gross income, capital losses cannot be used to reduce capital gains for purposes of this test. W 2 show state income tax withheld Example. W 2 show state income tax withheld   The books of an organization reflect the following for the calendar year. W 2 show state income tax withheld Collections from members $2,400 Short-term capital gains 600 Short-term capital losses 400 Other income None Gross income ($2,400 + $600 =$3000) 100% Collected from members ($2,400) 80%   Since amounts collected from members do not constitute at least 85% of gross income, the organization is not entitled to exemption from federal income tax for the year. W 2 show state income tax withheld   Voluntary contributions in the nature of gifts are not taken into account for purposes of the 85% computation. W 2 show state income tax withheld   Other tax-exempt income besides gifts is considered as income received from other than members in applying the 85% test. W 2 show state income tax withheld   If the 85% test is not met, your organization, if classifiable under this section, will not qualify for exemption as any other type of organization described in this publication. W 2 show state income tax withheld Tax treatment of donations. W 2 show state income tax withheld   Donations to an organization described in this section are not deductible as charitable contributions on the donor's federal income tax return. W 2 show state income tax withheld Local Life Insurance Associations A benevolent life insurance association or an organization seeking recognition of exemption on grounds of similarity to a benevolent life insurance association must submit evidence upon applying for recognition of exemption that it will be of a purely local character, that its excess funds will be refunded to members or retained in reasonable reserves to meet future losses and expenses, and that it meets the 85% income requirement. W 2 show state income tax withheld If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which more than 15% of its income is derived, it will not be entitled to exemption. W 2 show state income tax withheld To establish that your organization is of a purely local character, it should show that its activities will be confined to a particular community, place, or district irrespective of political subdivisions. W 2 show state income tax withheld If the activities of an organization are limited only by the borders of a state, it cannot be purely local in character. W 2 show state income tax withheld A benevolent life insurance association that does not terminate membership when a member moves from the local area in which the association operates will qualify for exemption if it meets the other requirements. W 2 show state income tax withheld A copy of each type of policy issued by your organization should be included with the application for recognition of exemption. W 2 show state income tax withheld Organizations similar to local benevolent life insurance companies. W 2 show state income tax withheld   These organizations include those that in addition to paying death benefits also provide for the payment of sick, accident, or health benefits. W 2 show state income tax withheld However, an organization that pays only sick, accident, or health benefits, but not life insurance benefits, is not an organization similar to a benevolent life insurance association and should not apply for recognition of exemption as described in this section. W 2 show state income tax withheld Burial and funeral benefit insurance organization. W 2 show state income tax withheld   This type of organization can apply for recognition of exemption as an organization similar to a benevolent life insurance company if it establishes that the benefits are paid in cash and if it is not engaged directly in the manufacture of funeral supplies or the performance of funeral services. W 2 show state income tax withheld An organization that provides its benefits in the form of supplies and service is not a life insurance company. W 2 show state income tax withheld Such an organization can seek recognition of exemption from federal income tax, however, as a mutual insurance company other than life. W 2 show state income tax withheld Mutual or Cooperative Associations Mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations need not establish that they are of a purely local character. W 2 show state income tax withheld They can serve noncontiguous areas. W 2 show state income tax withheld Like organization. W 2 show state income tax withheld   A like organization is a cooperative or mutual organization that performs a service similar to mutual ditch, irrigation, telephone, or electric companies. W 2 show state income tax withheld Examples include the following: cooperatives that provide protection of river banks to prevent erosion, water and sewer services, cable television, satellite, television, cellular phone services, two-way radio service, or natural gas services. W 2 show state income tax withheld 501(c)(13) - Cemetery Companies If your organization wishes to obtain recognition of exemption from federal income tax as a cemetery company or a corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, it must file an application on Form 1024. W 2 show state income tax withheld For the procedure to follow to file an application, see Application, Approval, and Appeal Procedures in chapter 1. W 2 show state income tax withheld A nonprofit mutual cemetery company that seeks recognition of exemption should submit evidence with its application that it is owned and operated exclusively for the benefit of its lot owners who hold lots for bona fide burial purposes and not for purposes of resale. W 2 show state income tax withheld A mutual cemetery company that also engages in charitable activities, such as the burial of paupers, will be regarded as operating within this standard. W 2 show state income tax withheld The fact that a mutual cemetery company limits its membership to a particular class of individuals, such as members of a family, will not affect its status as mutual so long as all the other requirements of section 501(c)(13) are met. W 2 show state income tax withheld If your organization is a nonprofit corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, you should show that it is not permitted by its charter to engage in any business not necessarily incident to that purpose. W 2 show state income tax withheld Operating a mortuary is not permitted. W 2 show state income tax withheld However, selling monuments, markers, vaults, and flowers solely for use in the cemetery is permitted if the profits from these sales are used to maintain the cemetery as a whole. W 2 show state income tax withheld How income can be used. W 2 show state income tax withheld   You should show that your organization's earnings are or will be used only in one or more of the following ways. W 2 show state income tax withheld To pay the ordinary and necessary expenses of operating, maintaining, and improving the cemetery or crematorium. W 2 show state income tax withheld To buy cemetery property. W 2 show state income tax withheld To create a fund that will provide a source of income for the perpetual care of the cemetery or a reasonable reserve for any ordinary or necessary purpose. W 2 show state income tax withheld No part of the net earnings of your organization can inure to the benefit of any private shareholder or individual. W 2 show state income tax withheld Ordinary and necessary expenses in connection with the operation, management, maintenance, and improvement of the cemetery are permitted, as are reasonable fees for the services of a manager. W 2 show state income tax withheld Buying cemetery property. W 2 show state income tax withheld   Payments can be made to amortize debt incurred to buy land, but cannot be in the nature of profit distributions. W 2 show state income tax withheld You must show the method used to finance the purchase of the cemetery property and that the purchase price of the land at the time of its sale to the cemetery was not unreasonable. W 2 show state income tax withheld   Except for holders of preferred stock (discussed later), no person can have any interest in the net earnings of a tax-exempt cemetery company or crematorium. W 2 show state income tax withheld Therefore, if property is transferred to the organization in exchange for an interest in the organization's net earnings, the organization will not
Print - Click this link to Print this page

Understanding Your CP210/CP220 Notice

We made change(s) for the tax year specified on the notice.


What you need to do

  • Read your notice carefully - it explains the changes we made to your tax account.
  • If you agree, make your payment (if you have a balance) by your due date. Go to the payments page to find out more about your payment options.
  • If you disagree, contact us at the toll-free number on the top right corner of your notice.
  • Correct the copy of your tax return that you kept for your records.

You may want to


Answers to Common Questions

Q. The notice says "Based on the information you provided, we changed your 200X Form XXXX to correct your...", but I don't remember sending any change to IRS. How can I find out what IRS received to initiate this change?

A. Please contact us at the number listed on the top right corner of your notice for specific information about your tax return. 

Q. What do I say when I call the IRS?

A. Mention that you received a CP210 or CP 220 notice and you need to review your account with a customer service representative. Be sure to have a copy of your notice and your tax return before you call. 

Q. What should I do if I disagree with the changes you made?

A. If you disagree, contact us at the toll-free number listed on the top right corner of your notice. 

Q. What happens if I can't pay the full amount I owe?

A. See if you may be able to set up a payment plan through our Online Payment Agreement Application

Q. Am I charged interest on the money I owe?

A. If you don't full pay the amount you owe by the date on your notice, interest will accrue on the unpaid balance after that date. 

Q. Will I receive a penalty if I can't pay the full amount?

A. Yes, you'll receive a late payment penalty if you did not pay the tax in full. You can contact us at the number listed on your notice if you’re unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty. 

Q. What if I'm due a refund and haven't received it within 2-3 weeks?

A. If you don't owe other taxes or debts we're required to collect, such as child support, and 3 weeks have lapsed, call us at the toll-free number listed on the top right corner of your notice. 

Q. Will I receive information about the interest that I need to report on my next tax return?

A. If you were paid $10 or more in interest, you'll receive a Form 1099-INT from IRS by January 31st of next year. Please note, even if the interest amount paid to you is less than $10, you must report this amount on your tax return. 

Q. What if I need to make another correction to my account?

A. You'll need to file an amended return. 

Q. What if I have tried to get answers and after contacting IRS several times have not been successful?

A. Call Taxpayer Advocate at 1-877-777-4778 or for TTY/TDD 1-800-829-4059. 

Q. What if I think I’m a victim of identity theft?

A. Please contact us at the number listed on the top right corner of your notice. Refer to the IRS Identity Theft resource page for more information.


Tips for next year

  • Consider filing your taxes electronically in the future if you did not file this return electronically. Filing online can help you avoid mistakes. Learn more about e-file.

 

 

Page Last Reviewed or Updated: 27-Jan-2014

Printable samples of this notice (PDF)

 

 

How to get help

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

The W 2 Show State Income Tax Withheld

W 2 show state income tax withheld 3. W 2 show state income tax withheld   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. W 2 show state income tax withheld Other income (nonpassive income). W 2 show state income tax withheld Expenses. W 2 show state income tax withheld Additional information. W 2 show state income tax withheld Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. W 2 show state income tax withheld Basis. W 2 show state income tax withheld How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. W 2 show state income tax withheld Including mutual fund or REMIC expenses in income. W 2 show state income tax withheld Nondeductible ExpensesUsed as collateral. W 2 show state income tax withheld Short-sale expenses. W 2 show state income tax withheld Expenses for both tax-exempt and taxable income. W 2 show state income tax withheld State income taxes. W 2 show state income tax withheld Nondeductible amount. W 2 show state income tax withheld Basis adjustment. W 2 show state income tax withheld How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . W 2 show state income tax withheld Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. W 2 show state income tax withheld Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. W 2 show state income tax withheld The at-risk rules and passive activity rules are explained briefly in this section. W 2 show state income tax withheld The limit on investment interest is explained later in this chapter under Interest Expenses . W 2 show state income tax withheld The 2% limit is explained later in this chapter under Expenses of Producing Income . W 2 show state income tax withheld At-risk rules. W 2 show state income tax withheld   Special at-risk rules apply to most income-producing activities. W 2 show state income tax withheld These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. W 2 show state income tax withheld Generally, this is the cash and the adjusted basis of property you contribute to the activity. W 2 show state income tax withheld It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. W 2 show state income tax withheld For more information, see Publication 925. W 2 show state income tax withheld Passive activity losses and credits. W 2 show state income tax withheld   The amount of losses and tax credits you can claim from passive activities is limited. W 2 show state income tax withheld Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. W 2 show state income tax withheld Also, you can use credits from passive activities only against tax on the income from passive activities. W 2 show state income tax withheld There are exceptions for certain activities, such as rental real estate activities. W 2 show state income tax withheld Passive activity. W 2 show state income tax withheld   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. W 2 show state income tax withheld However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. W 2 show state income tax withheld More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. W 2 show state income tax withheld You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. W 2 show state income tax withheld  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. W 2 show state income tax withheld However, it does not include rental activities or certain activities treated as incidental to holding property for investment. W 2 show state income tax withheld   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. W 2 show state income tax withheld Other income (nonpassive income). W 2 show state income tax withheld    Generally, you can use losses from passive activities only to offset income from passive activities. W 2 show state income tax withheld You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. W 2 show state income tax withheld Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. W 2 show state income tax withheld It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. W 2 show state income tax withheld This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. W 2 show state income tax withheld   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. W 2 show state income tax withheld Expenses. W 2 show state income tax withheld   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. W 2 show state income tax withheld However, this interest and other expenses may be subject to other limits. W 2 show state income tax withheld These limits are explained in the rest of this chapter. W 2 show state income tax withheld Additional information. W 2 show state income tax withheld   For more information about determining and reporting income and losses from passive activities, see Publication 925. W 2 show state income tax withheld Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. W 2 show state income tax withheld For information on business interest, see chapter 4 of Publication 535. W 2 show state income tax withheld You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. W 2 show state income tax withheld Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. W 2 show state income tax withheld You can deduct investment interest subject to the limit discussed later. W 2 show state income tax withheld However, you cannot deduct interest you incurred to produce tax-exempt income. W 2 show state income tax withheld See Tax-exempt income under Nondeductible Expenses, later. W 2 show state income tax withheld You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. W 2 show state income tax withheld Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. W 2 show state income tax withheld Investment property. W 2 show state income tax withheld   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. W 2 show state income tax withheld It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). W 2 show state income tax withheld Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). W 2 show state income tax withheld Partners, shareholders, and beneficiaries. W 2 show state income tax withheld   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. W 2 show state income tax withheld Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. W 2 show state income tax withheld Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. W 2 show state income tax withheld The allocation is not affected by the use of property that secures the debt. W 2 show state income tax withheld Example 1. W 2 show state income tax withheld You borrow $10,000 and use $8,000 to buy stock. W 2 show state income tax withheld You use the other $2,000 to buy items for your home. W 2 show state income tax withheld Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. W 2 show state income tax withheld The other 20% is nondeductible personal interest. W 2 show state income tax withheld Debt proceeds received in cash. W 2 show state income tax withheld   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. W 2 show state income tax withheld Debt proceeds deposited in account. W 2 show state income tax withheld   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. W 2 show state income tax withheld But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. W 2 show state income tax withheld Example 2. W 2 show state income tax withheld Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. W 2 show state income tax withheld You did not buy the household items until June 1. W 2 show state income tax withheld You had deposited the $2,000 in the bank. W 2 show state income tax withheld You had no other transactions on the bank account until June. W 2 show state income tax withheld You did not sell the stock, and you made no principal payments on the debt. W 2 show state income tax withheld You paid interest from another account. W 2 show state income tax withheld The $8,000 is treated as being used for an investment purpose. W 2 show state income tax withheld The $2,000 is treated as being used for an investment purpose for the 3-month period. W 2 show state income tax withheld Your total interest expense for 3 months on this debt is investment interest. W 2 show state income tax withheld In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. W 2 show state income tax withheld Amounts paid within 30 days. W 2 show state income tax withheld   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. W 2 show state income tax withheld This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. W 2 show state income tax withheld   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. W 2 show state income tax withheld Payments on debt may require new allocation. W 2 show state income tax withheld   As you repay a debt used for more than one purpose, you must reallocate the balance. W 2 show state income tax withheld You must first reduce the amount allocated to personal purposes by the repayment. W 2 show state income tax withheld You then reallocate the rest of the debt to find what part is for investment purposes. W 2 show state income tax withheld Example 3. W 2 show state income tax withheld If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. W 2 show state income tax withheld The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. W 2 show state income tax withheld Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. W 2 show state income tax withheld Pass-through entities. W 2 show state income tax withheld   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. W 2 show state income tax withheld If you contribute to the capital of the entity, you can make the allocation using any reasonable method. W 2 show state income tax withheld Additional allocation rules. W 2 show state income tax withheld   For more information about allocating interest expense, see chapter 4 of Publication 535. W 2 show state income tax withheld When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. W 2 show state income tax withheld If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. W 2 show state income tax withheld For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. W 2 show state income tax withheld Example. W 2 show state income tax withheld You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. W 2 show state income tax withheld On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. W 2 show state income tax withheld If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. W 2 show state income tax withheld If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. W 2 show state income tax withheld Interest paid in advance. W 2 show state income tax withheld   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. W 2 show state income tax withheld You can deduct in each year only the interest for that year. W 2 show state income tax withheld Interest on margin accounts. W 2 show state income tax withheld   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. W 2 show state income tax withheld You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. W 2 show state income tax withheld Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. W 2 show state income tax withheld   You cannot deduct any interest on money borrowed for personal reasons. W 2 show state income tax withheld Limit on interest deduction for market discount bonds. W 2 show state income tax withheld   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. W 2 show state income tax withheld This limit does not apply if you accrue the market discount and include it in your income currently. W 2 show state income tax withheld   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. W 2 show state income tax withheld Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . W 2 show state income tax withheld Interest not deducted due to limit. W 2 show state income tax withheld   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. W 2 show state income tax withheld Choosing to deduct disallowed interest expense before the year of disposition. W 2 show state income tax withheld   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. W 2 show state income tax withheld The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. W 2 show state income tax withheld Net interest income. W 2 show state income tax withheld   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. W 2 show state income tax withheld Limit on interest deduction for short-term obligations. W 2 show state income tax withheld   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. W 2 show state income tax withheld   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). W 2 show state income tax withheld The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . W 2 show state income tax withheld Interest not deducted due to limit. W 2 show state income tax withheld   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. W 2 show state income tax withheld Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. W 2 show state income tax withheld Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. W 2 show state income tax withheld You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. W 2 show state income tax withheld The interest carried over is treated as investment interest paid or accrued in that next year. W 2 show state income tax withheld You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. W 2 show state income tax withheld Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. W 2 show state income tax withheld Investment income. W 2 show state income tax withheld   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). W 2 show state income tax withheld Investment income does not include Alaska Permanent Fund dividends. W 2 show state income tax withheld It also does not include qualified dividends or net capital gain unless you choose to include them. W 2 show state income tax withheld Choosing to include qualified dividends. W 2 show state income tax withheld   Investment income generally does not include qualified dividends, discussed in chapter 1. W 2 show state income tax withheld However, you can choose to include all or part of your qualified dividends in investment income. W 2 show state income tax withheld   You make this choice by completing Form 4952, line 4g, according to its instructions. W 2 show state income tax withheld   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. W 2 show state income tax withheld Choosing to include net capital gain. W 2 show state income tax withheld    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). W 2 show state income tax withheld However, you can choose to include all or part of your net capital gain in investment income. W 2 show state income tax withheld   You make this choice by completing Form 4952, line 4g, according to its instructions. W 2 show state income tax withheld   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. W 2 show state income tax withheld   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. W 2 show state income tax withheld    Before making either choice, consider the overall effect on your tax liability. W 2 show state income tax withheld Compare your tax if you make one or both of these choices with your tax if you do not. W 2 show state income tax withheld Investment income of child reported on parent's return. W 2 show state income tax withheld   Investment income includes the part of your child's interest and dividend income you choose to report on your return. W 2 show state income tax withheld If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. W 2 show state income tax withheld Include it on line 4a of Form 4952. W 2 show state income tax withheld Example. W 2 show state income tax withheld Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. W 2 show state income tax withheld You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. W 2 show state income tax withheld Also enter $200 on Form 1040, line 21. W 2 show state income tax withheld Your investment income includes this $200. W 2 show state income tax withheld Child's qualified dividends. W 2 show state income tax withheld   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. W 2 show state income tax withheld However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. W 2 show state income tax withheld   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). W 2 show state income tax withheld Child's Alaska Permanent Fund dividends. W 2 show state income tax withheld   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. W 2 show state income tax withheld To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. W 2 show state income tax withheld Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. W 2 show state income tax withheld Subtract the result from the amount on Form 8814, line 12. W 2 show state income tax withheld Example. W 2 show state income tax withheld Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. W 2 show state income tax withheld You choose to report this on your return. W 2 show state income tax withheld You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. W 2 show state income tax withheld You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. W 2 show state income tax withheld You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. W 2 show state income tax withheld Child's capital gain distributions. W 2 show state income tax withheld   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. W 2 show state income tax withheld However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. W 2 show state income tax withheld   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). W 2 show state income tax withheld Investment expenses. W 2 show state income tax withheld   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. W 2 show state income tax withheld Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. W 2 show state income tax withheld Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. W 2 show state income tax withheld See Expenses of Producing Income , later, for a discussion of the 2% limit. W 2 show state income tax withheld Losses from passive activities. W 2 show state income tax withheld   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). W 2 show state income tax withheld See Publication 925 for information about passive activities. W 2 show state income tax withheld Example. W 2 show state income tax withheld Ted is a partner in a partnership that operates a business. W 2 show state income tax withheld However, he does not materially participate in the partnership's business. W 2 show state income tax withheld Ted's interest in the partnership is considered a passive activity. W 2 show state income tax withheld Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. W 2 show state income tax withheld His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. W 2 show state income tax withheld His investment interest expense is $8,000. W 2 show state income tax withheld Ted also has income from the partnership of $2,000. W 2 show state income tax withheld Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. W 2 show state income tax withheld His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. W 2 show state income tax withheld Form 4952 Use Form 4952 to figure your deduction for investment interest. W 2 show state income tax withheld See Form 4952 for more information. W 2 show state income tax withheld Exception to use of Form 4952. W 2 show state income tax withheld   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. W 2 show state income tax withheld Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. W 2 show state income tax withheld You do not have any other deductible investment expenses. W 2 show state income tax withheld You have no carryover of investment interest expense from 2012. W 2 show state income tax withheld   If you meet all of these tests, you can deduct all of your investment interest. W 2 show state income tax withheld    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. W 2 show state income tax withheld If the bond yields taxable interest, you can choose to amortize the premium. W 2 show state income tax withheld This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. W 2 show state income tax withheld If you make this choice, you must reduce your basis in the bond by the amortization for the year. W 2 show state income tax withheld If the bond yields tax-exempt interest, you must amortize the premium. W 2 show state income tax withheld This amortized amount is not deductible in determining taxable income. W 2 show state income tax withheld However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. W 2 show state income tax withheld Bond premium. W 2 show state income tax withheld   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). W 2 show state income tax withheld For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. W 2 show state income tax withheld Special rules to determine amounts payable on a bond. W 2 show state income tax withheld   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. W 2 show state income tax withheld 171-3. W 2 show state income tax withheld Basis. W 2 show state income tax withheld   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. W 2 show state income tax withheld However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. W 2 show state income tax withheld See Regulations section 1. W 2 show state income tax withheld 171-1(e). W 2 show state income tax withheld Dealers. W 2 show state income tax withheld   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. W 2 show state income tax withheld   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. W 2 show state income tax withheld How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. W 2 show state income tax withheld Constant yield method. W 2 show state income tax withheld   Figure the bond premium amortization for each accrual period as follows. W 2 show state income tax withheld Step 1: Determine your yield. W 2 show state income tax withheld   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. W 2 show state income tax withheld Figure the yield as of the date you got the bond. W 2 show state income tax withheld It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. W 2 show state income tax withheld   If you do not know the yield, consult your broker or tax advisor. W 2 show state income tax withheld Databases available to them are likely to show the yield at the date of purchase. W 2 show state income tax withheld Step 2: Determine the accrual periods. W 2 show state income tax withheld   You can choose the accrual periods to use. W 2 show state income tax withheld They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. W 2 show state income tax withheld The computation is simplest if accrual periods are the same as the intervals between interest payment dates. W 2 show state income tax withheld Step 3: Determine the bond premium for the accrual period. W 2 show state income tax withheld   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. W 2 show state income tax withheld Then subtract the result from the qualified stated interest for the period. W 2 show state income tax withheld   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. W 2 show state income tax withheld After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. W 2 show state income tax withheld Example. W 2 show state income tax withheld On February 1, 2012, you bought a taxable bond for $110,000. W 2 show state income tax withheld The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). W 2 show state income tax withheld The bond pays qualified stated interest of $10,000 on February 1 of each year. W 2 show state income tax withheld Your yield is 8. W 2 show state income tax withheld 07439% compounded annually. W 2 show state income tax withheld You choose to use annual accrual periods ending on February 1 of each year. W 2 show state income tax withheld To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. W 2 show state income tax withheld When you subtract the result ($8,881. W 2 show state income tax withheld 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. W 2 show state income tax withheld 17. W 2 show state income tax withheld Special rules to figure amortization. W 2 show state income tax withheld   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. W 2 show state income tax withheld 171-3. W 2 show state income tax withheld Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. W 2 show state income tax withheld Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. W 2 show state income tax withheld Straight-line method. W 2 show state income tax withheld   Under this method, the amount of your bond premium amortization is the same each month. W 2 show state income tax withheld Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. W 2 show state income tax withheld Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). W 2 show state income tax withheld This gives you your bond premium amortization for the year. W 2 show state income tax withheld Revenue Ruling 82-10 method. W 2 show state income tax withheld   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. W 2 show state income tax withheld This method is explained in Revenue Ruling 82-10, 1982-1 C. W 2 show state income tax withheld B. W 2 show state income tax withheld 46. W 2 show state income tax withheld Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. W 2 show state income tax withheld You should attach a statement to your return that you are making this choice under section 171. W 2 show state income tax withheld See How To Report Amortization, next. W 2 show state income tax withheld This choice is binding for the year you make it and for later tax years. W 2 show state income tax withheld It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. W 2 show state income tax withheld You can change your decision to amortize bond premium only with the written approval of the IRS. W 2 show state income tax withheld To request approval, use Form 3115. W 2 show state income tax withheld For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. W 2 show state income tax withheld You can find Revenue Procedure 2011-14 at www. W 2 show state income tax withheld irs. W 2 show state income tax withheld gov/irb/2011-04_IRB/ar08. W 2 show state income tax withheld html. W 2 show state income tax withheld How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. W 2 show state income tax withheld Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. W 2 show state income tax withheld Under your last entry on line 1, put a subtotal of all interest listed on line 1. W 2 show state income tax withheld Below this subtotal, print “ABP Adjustment,” and the total interest you received. W 2 show state income tax withheld Subtract this amount from the subtotal, and enter the result on line 2. W 2 show state income tax withheld Bond premium amortization more than interest. W 2 show state income tax withheld   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. W 2 show state income tax withheld    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. W 2 show state income tax withheld Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. W 2 show state income tax withheld Pre-1998 election to amortize bond premium. W 2 show state income tax withheld   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. W 2 show state income tax withheld Bonds acquired before October 23, 1986. W 2 show state income tax withheld   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. W 2 show state income tax withheld Bonds acquired after October 22, 1986, but before 1988. W 2 show state income tax withheld    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. W 2 show state income tax withheld Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). W 2 show state income tax withheld To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. W 2 show state income tax withheld The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. W 2 show state income tax withheld The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. W 2 show state income tax withheld The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. W 2 show state income tax withheld For information on how to report expenses of producing income, see How To Report Investment Expenses , later. W 2 show state income tax withheld Attorney or accounting fees. W 2 show state income tax withheld   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. W 2 show state income tax withheld However, in some cases, attorney or accounting fees are part of the basis of property. W 2 show state income tax withheld See Basis of Investment Property in chapter 4. W 2 show state income tax withheld Automatic investment service and dividend reinvestment plans. W 2 show state income tax withheld   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. W 2 show state income tax withheld Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. W 2 show state income tax withheld Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. W 2 show state income tax withheld   A corporation in which you own stock also may have a dividend reinvestment plan. W 2 show state income tax withheld This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. W 2 show state income tax withheld   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. W 2 show state income tax withheld If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. W 2 show state income tax withheld Deduct the charges in the year you pay them. W 2 show state income tax withheld Clerical help and office rent. W 2 show state income tax withheld   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. W 2 show state income tax withheld Cost of replacing missing securities. W 2 show state income tax withheld   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. W 2 show state income tax withheld You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. W 2 show state income tax withheld   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. W 2 show state income tax withheld Under certain types of insurance policies, you can recover some of the expenses. W 2 show state income tax withheld   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. W 2 show state income tax withheld If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. W 2 show state income tax withheld Fees to collect income. W 2 show state income tax withheld   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. W 2 show state income tax withheld Fees to buy or sell. W 2 show state income tax withheld   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. W 2 show state income tax withheld You must add the fee to the cost of the property. W 2 show state income tax withheld See Basis of Investment Property in chapter 4. W 2 show state income tax withheld    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. W 2 show state income tax withheld They can be used only to figure gain or loss from the sale. W 2 show state income tax withheld See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. W 2 show state income tax withheld Investment counsel and advice. W 2 show state income tax withheld   You can deduct fees you pay for counsel and advice about investments that produce taxable income. W 2 show state income tax withheld This includes amounts you pay for investment advisory services. W 2 show state income tax withheld Safe deposit box rent. W 2 show state income tax withheld   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. W 2 show state income tax withheld If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. W 2 show state income tax withheld See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. W 2 show state income tax withheld State and local transfer taxes. W 2 show state income tax withheld   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. W 2 show state income tax withheld If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. W 2 show state income tax withheld If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. W 2 show state income tax withheld Trustee's commissions for revocable trust. W 2 show state income tax withheld   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. W 2 show state income tax withheld However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. W 2 show state income tax withheld   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. W 2 show state income tax withheld You cannot deduct the entire amount in the year you pay it. W 2 show state income tax withheld Investment expenses from pass-through entities. W 2 show state income tax withheld   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. W 2 show state income tax withheld A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). W 2 show state income tax withheld A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). W 2 show state income tax withheld Publicly-offered mutual funds are discussed later. W 2 show state income tax withheld   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. W 2 show state income tax withheld Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). W 2 show state income tax withheld   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. W 2 show state income tax withheld Including mutual fund or REMIC expenses in income. W 2 show state income tax withheld   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. W 2 show state income tax withheld You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. W 2 show state income tax withheld If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). W 2 show state income tax withheld If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. W 2 show state income tax withheld If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. W 2 show state income tax withheld Publicly-offered mutual funds. W 2 show state income tax withheld   Most mutual funds are publicly offered. W 2 show state income tax withheld These mutual funds, generally, are traded on an established securities exchange. W 2 show state income tax withheld These funds do not pass investment expenses through to you. W 2 show state income tax withheld Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. W 2 show state income tax withheld As a result, you cannot deduct the expenses on your return. W 2 show state income tax withheld   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. W 2 show state income tax withheld    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. W 2 show state income tax withheld Contact your mutual fund if you are not sure whether it is publicly offered. W 2 show state income tax withheld Nondeductible Expenses Some expenses that you incur as an investor are not deductible. W 2 show state income tax withheld Stockholders' meetings. W 2 show state income tax withheld   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. W 2 show state income tax withheld This is true even if your purpose in attending is to get information that would be useful in making further investments. W 2 show state income tax withheld Investment-related seminar. W 2 show state income tax withheld   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. W 2 show state income tax withheld Single-premium life insurance, endowment, and annuity contracts. W 2 show state income tax withheld   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. W 2 show state income tax withheld Used as collateral. W 2 show state income tax withheld   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. W 2 show state income tax withheld Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. W 2 show state income tax withheld Borrowing on insurance. W 2 show state income tax withheld   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. W 2 show state income tax withheld This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. W 2 show state income tax withheld Tax-exempt income. W 2 show state income tax withheld   You cannot deduct expenses you incur to produce tax-exempt income. W 2 show state income tax withheld Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. W 2 show state income tax withheld Short-sale expenses. W 2 show state income tax withheld   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. W 2 show state income tax withheld However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. W 2 show state income tax withheld Short sales are discussed in Short Sales in chapter 4. W 2 show state income tax withheld Expenses for both tax-exempt and taxable income. W 2 show state income tax withheld   You may have expenses that are for both tax-exempt and taxable income. W 2 show state income tax withheld If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. W 2 show state income tax withheld You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. W 2 show state income tax withheld   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. W 2 show state income tax withheld If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. W 2 show state income tax withheld To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. W 2 show state income tax withheld Example. W 2 show state income tax withheld You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. W 2 show state income tax withheld In earning this income, you had $500 of expenses. W 2 show state income tax withheld You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. W 2 show state income tax withheld 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. W 2 show state income tax withheld You cannot deduct $400 (80% of $500) of the expenses. W 2 show state income tax withheld You can deduct $100 (the rest of the expenses) because they are for the taxable interest. W 2 show state income tax withheld State income taxes. W 2 show state income tax withheld   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. W 2 show state income tax withheld But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. W 2 show state income tax withheld Interest expense and carrying charges on straddles. W 2 show state income tax withheld   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. W 2 show state income tax withheld The nondeductible interest and carrying charges are added to the basis of the straddle property. W 2 show state income tax withheld However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. W 2 show state income tax withheld  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. W 2 show state income tax withheld   Interest includes any amount you pay or incur in connection with personal property used in a short sale. W 2 show state income tax withheld However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. W 2 show state income tax withheld   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). W 2 show state income tax withheld Nondeductible amount. W 2 show state income tax withheld   Figure the nondeductible interest and carrying charges on straddle property as follows. W 2 show state income tax withheld Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. W 2 show state income tax withheld Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. W 2 show state income tax withheld Basis adjustment. W 2 show state income tax withheld   Add the nondeductible amount to the basis of your straddle property. W 2 show state income tax withheld How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). W 2 show state income tax withheld Enter your deductible investment interest expense on Schedule A (Form1040), line 14. W 2 show state income tax withheld Include any deductible short sale expenses. W 2 show state income tax withheld (See Short Sales in chapter 4 for information on these expenses. W 2 show state income tax withheld ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. W 2 show state income tax withheld Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. W 2 show state income tax withheld List the type and amount of each expense on the dotted lines next to line 23. W 2 show state income tax withheld (If necessary, you can show the required information on an attached statement. W 2 show state income tax withheld ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. W 2 show state income tax withheld When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. W 2 show state income tax withheld If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. W 2 show state income tax withheld Also see When To Deduct Investment Interest , earlier in this chapter. W 2 show state income tax withheld Unpaid expenses owed to related party. W 2 show state income tax withheld   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. W 2 show state income tax withheld The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. W 2 show state income tax withheld If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. W 2 show state income tax withheld   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . W 2 show state income tax withheld It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. W 2 show state income tax withheld   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. W 2 show state income tax withheld This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. W 2 show state income tax withheld Prev  Up  Next   Home   More Online Publications