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2012 Income Tax Booklet

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2012 Income Tax Booklet

2012 income tax booklet 35. 2012 income tax booklet   Education Credits Table of Contents Introduction Useful Items - You may want to see: Who Can Claim an Education Credit Qualified Education ExpensesNo Double Benefit Allowed Adjustments to Qualified Education Expenses Introduction For 2013, there are two tax credits available to persons who pay expenses for higher (postsecondary) education. 2012 income tax booklet They are: The American opportunity credit, and The lifetime learning credit. 2012 income tax booklet The chapter will present an overview of these education credits. 2012 income tax booklet To get the detailed information you will need to claim either of the credits, and for examples illustrating that information, see chapters 2 and 3 of Publication 970. 2012 income tax booklet Can you claim more than one education credit this year?   For each student, you can choose for any year only one of the credits. 2012 income tax booklet For example, if you choose to take the American opportunity credit for a child on your 2013 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2013. 2012 income tax booklet   If you are eligible to claim the American opportunity credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. 2012 income tax booklet   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity and the lifetime learning credits on a per-student, per-year basis. 2012 income tax booklet This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. 2012 income tax booklet Table 35-1. 2012 income tax booklet Comparison of Education Credits Caution. 2012 income tax booklet You can claim both the American opportunity credit and the lifetime learning credit on the same return—but not for the same student. 2012 income tax booklet   American Opportunity Credit Lifetime Learning Credit Maximum credit Up to $2,500 credit per eligible student Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly;  $90,000 if single, head of household, or qualifying widow(er) $127,000 if married filing jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable Credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) the Hope credit was claimed) Available for an unlimited number of years Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period beginning during the tax year Available for one or more courses Felony drug conviction At the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Felony drug convictions do not make the student ineligible Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Differences between the American opportunity and lifetime learning credits. 2012 income tax booklet   There are several differences between these two credits. 2012 income tax booklet These differences are summarized in Table 35-1, later. 2012 income tax booklet Useful Items - You may want to see: Publication 970 Tax Benefits for Education Form (and Instructions) 8863 Education Credits (American Opportunity and Lifetime Learning Credits) Who Can Claim an Education Credit You may be able to claim an education credit if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. 2012 income tax booklet The credits are based on the amount of qualified education expenses paid for the student in 2013 for academic periods beginning in 2013 and in the first 3 months of 2014. 2012 income tax booklet For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 education credit(s). 2012 income tax booklet Academic period. 2012 income tax booklet   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. 2012 income tax booklet In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. 2012 income tax booklet Eligible educational institution. 2012 income tax booklet   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 2012 income tax booklet S. 2012 income tax booklet Department of Education. 2012 income tax booklet It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 2012 income tax booklet The educational institution should be able to tell you if it is an eligible educational institution. 2012 income tax booklet   Certain educational institutions located outside the United States also participate in the U. 2012 income tax booklet S. 2012 income tax booklet Department of Education's Federal Student Aid (FSA) programs. 2012 income tax booklet Who can claim a dependent's expenses. 2012 income tax booklet   If an exemption is allowed as a deduction for any person who claims the student as a dependent, all qualified education expenses of the student are treated as having been paid by that person. 2012 income tax booklet Therefore, only that person can claim an education credit for the student. 2012 income tax booklet If a student is not claimed as a dependent on another person's tax return, only the student can claim a credit. 2012 income tax booklet Expenses paid by a third party. 2012 income tax booklet   Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. 2012 income tax booklet However, qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. 2012 income tax booklet Therefore, you are treated as having paid expenses that were paid by the third party. 2012 income tax booklet For more information and an example see Who Can Claim a Dependent's Expenses in Pub. 2012 income tax booklet 970, chapter 2 or 3. 2012 income tax booklet Who cannot claim a credit. 2012 income tax booklet   You cannot take an education credit if any of the following apply. 2012 income tax booklet You are claimed as a dependent on another person's tax return, such as your parent's return. 2012 income tax booklet Your filing status is married filing separately. 2012 income tax booklet You (or your spouse) were a nonresident alien for any part of 2013 and did not elect to be treated as a resident alien for tax purposes. 2012 income tax booklet Your MAGI is one of the following. 2012 income tax booklet American opportunity credit: $180,000 or more if married filing jointly, or $90,000 or more if single, head of household, or qualifying widow(er). 2012 income tax booklet Lifetime learning credit: $127,000 or more if married filing jointly, or $63,000 or more if single, head of household, or qualifying widow(er) . 2012 income tax booklet   Generally, your MAGI is the amount on your Form 1040, line 38, or Form 1040A, line 22. 2012 income tax booklet However, if you are filing Form 2555, Form 2555–EZ, or Form 4563, or are excluding income from Puerto RIco, add to the amount on your Form 1040, line 38, or Form 1040A, line 22, the amount of income you excluded. 2012 income tax booklet For details, see Pub. 2012 income tax booklet 970. 2012 income tax booklet    Figure 35-A may be helpful in determining if you can claim an education credit on your tax return. 2012 income tax booklet The American opportunity credit will always be greater than or equal to the lifetime learning credit for any student who is eligible for both credits. 2012 income tax booklet However, if any of the conditions for the American opportunity credit, listed in Table 35-1 earlier, are not met for any student, you cannot take the American opportunity credit for that student. 2012 income tax booklet You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. 2012 income tax booklet See Pub. 2012 income tax booklet 970 for information on other education benefits. 2012 income tax booklet Qualified Education Expenses Generally, qualified education expenses are amounts paid in 2013 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. 2012 income tax booklet It does not matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds. 2012 income tax booklet For course-related books, supplies, and equipment, only certain expenses qualify. 2012 income tax booklet American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. 2012 income tax booklet Lifetime learning credit: Qualified education expenses include amounts for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance. 2012 income tax booklet Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. 2012 income tax booklet However, fees for personal expenses (described below) are never qualified education expenses. 2012 income tax booklet Qualified education expenses for either credit do not include amounts paid for: Personal expenses. 2012 income tax booklet This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. 2012 income tax booklet Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills. 2012 income tax booklet You should receive Form 1098–T, Tuition Statement, from the institution reporting either payments received in 2013 (box 1) or amounts billed in 2013 (box 2). 2012 income tax booklet However, the amount in box 1 or 2 of Form 1098–T may be different from the amount you paid (or are treated as having paid). 2012 income tax booklet In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2013, reduced as necessary, as described in Adjustments to Qualified Education Expenses , later. 2012 income tax booklet Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. 2012 income tax booklet Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. 2012 income tax booklet If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits. 2012 income tax booklet Qualified education expenses for any academic period must be reduced by any tax-free educational assistance allocable to that academic period. 2012 income tax booklet See Adjustments to Qualified Education Expenses, later. 2012 income tax booklet Prepaid Expenses. 2012 income tax booklet   Qualified education expenses paid in 2013 for an academic period that begins in the first 3 months of 2014 can be used in figuring an education credit for 2013 only. 2012 income tax booklet See Academic period , earlier. 2012 income tax booklet For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). 2012 income tax booklet    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). 2012 income tax booklet Paid with borrowed funds. 2012 income tax booklet   You can claim an education credit for qualified education expenses paid with the proceeds of a loan. 2012 income tax booklet Use the expenses to figure the credit for the year in which the expenses are paid, not the year in which the loan is repaid. 2012 income tax booklet Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. 2012 income tax booklet Student withdraws from class(es). 2012 income tax booklet   You can claim an education credit for qualified education expenses not refunded when a student withdraws. 2012 income tax booklet No Double Benefit Allowed You cannot do any of the following. 2012 income tax booklet Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an education credit based on those same expenses. 2012 income tax booklet Claim more than one education credit based on the same qualified education expenses. 2012 income tax booklet Claim an education credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). 2012 income tax booklet Claim an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. 2012 income tax booklet See Adjustments to Qualified Education Expenses, next. 2012 income tax booklet Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid in 2013 by or on behalf of that student under the following rules. 2012 income tax booklet The result is the amount of adjusted qualified education expenses for each student. 2012 income tax booklet Tax-free educational assistance. 2012 income tax booklet   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. 2012 income tax booklet See Academic period , earlier. 2012 income tax booklet      Tax-free educational assistance includes:    Tax-free parts of scholarships and fellowships (see chapter 12 of this publication and chapter 1 of Pub. 2012 income tax booklet 970), The tax-free part of Pell grants (see chapter 1 of Pub. 2012 income tax booklet 970), The tax-free part of employer-provided educational assistance (see Pub. 2012 income tax booklet 970), Veterans' educational assistance (see chapter 1 of Pub. 2012 income tax booklet 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 2012 income tax booklet Generally, any scholarship or fellowship is treated as tax-free educational assistance. 2012 income tax booklet However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent the student includes it in gross income (if the student is required to file a tax return) for the year the scholarship or fellowship is received and either: The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 2012 income tax booklet 970, chapter 1; or The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 2012 income tax booklet 970, chapter 1. 2012 income tax booklet You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year received. 2012 income tax booklet For details, see Adjustments of Qualified Education Expenses, in chapters 2 and 3 of Pub. 2012 income tax booklet 970. 2012 income tax booklet Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. 2012 income tax booklet This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). 2012 income tax booklet If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. 2012 income tax booklet If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. 2012 income tax booklet Refunds. 2012 income tax booklet   A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. 2012 income tax booklet Some tax-free educational assistance received after 2013 may be treated as a refund. 2012 income tax booklet See Tax-free educational assistance, earlier. 2012 income tax booklet Refunds received in 2013. 2012 income tax booklet   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. 2012 income tax booklet Refunds received after 2013 but before your income tax return is filed. 2012 income tax booklet   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund. 2012 income tax booklet Refunds received after 2013 and after your income tax return is filed. 2012 income tax booklet   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received after you file your 2013 income tax return, you may need to repay some or all of the credit that you claimed. 2012 income tax booklet See Credit recapture, next. 2012 income tax booklet Credit recapture. 2012 income tax booklet    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. 2012 income tax booklet You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. 2012 income tax booklet You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). 2012 income tax booklet Include that amount as an additional tax for the year the refund or tax-free assistance was received. 2012 income tax booklet Example. 2012 income tax booklet    You paid $8,000 tuition and fees in December 2013 for your child's Spring semester beginning in January 2014. 2012 income tax booklet You filed your 2013 tax return on February 3, 2014, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x . 2012 income tax booklet 20). 2012 income tax booklet You claimed no other tax credits. 2012 income tax booklet After you filed your return, your child withdrew from two courses and you received a refund of $1,400. 2012 income tax booklet You must refigure your 2013 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). 2012 income tax booklet The refigured credit is $1,320 and your tax liability increased by $280. 2012 income tax booklet You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2014 income tax return. 2012 income tax booklet See the instructions for your 2014 income tax return to determine where to include this tax. 2012 income tax booklet If you also pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. 2012 income tax booklet Amounts that do not reduce qualified education expenses. 2012 income tax booklet   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. 2012 income tax booklet   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. 2012 income tax booklet The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Chapter 1 of Pub. 2012 income tax booklet 970. 2012 income tax booklet The use of the money is not restricted. 2012 income tax booklet   For examples, see chapter 2 in Pub. 2012 income tax booklet 970. 2012 income tax booklet Figure 35-A. 2012 income tax booklet Can You Claim an Education Credit for 2013? This image is too large to be displayed in the current screen. 2012 income tax booklet Please click the link to view the image. 2012 income tax booklet Figure 35-A. 2012 income tax booklet Can You Claim an Education Credit for 2013? Prev  Up  Next   Home   More Online Publications
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Page Last Reviewed or Updated: 14-Mar-2014

The 2012 Income Tax Booklet

2012 income tax booklet 1. 2012 income tax booklet   Definitions You Need To Know Table of Contents Other options. 2012 income tax booklet Exception. 2012 income tax booklet Certain terms used in this publication are defined below. 2012 income tax booklet The same term used in another publication may have a slightly different meaning. 2012 income tax booklet Annual additions. 2012 income tax booklet   Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account. 2012 income tax booklet Annual benefits. 2012 income tax booklet   Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees do not contribute and under which no rollover contributions are made. 2012 income tax booklet Business. 2012 income tax booklet   A business is an activity in which a profit motive is present and economic activity is involved. 2012 income tax booklet Service as a newspaper carrier under age 18 or as a public official is not a business. 2012 income tax booklet Common-law employee. 2012 income tax booklet   A common-law employee is any individual who, under common law, would have the status of an employee. 2012 income tax booklet A leased employee can also be a common-law employee. 2012 income tax booklet   A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. 2012 income tax booklet For example, the employer: Provides the employee's tools, materials, and workplace, and Can fire the employee. 2012 income tax booklet   Common-law employees are not self-employed and cannot set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes. 2012 income tax booklet For example, common-law employees who are ministers, members of religious orders, full-time insurance salespeople, and U. 2012 income tax booklet S. 2012 income tax booklet citizens employed in the United States by foreign governments cannot set up retirement plans for their earnings from those employments, even though their earnings are treated as self-employment income. 2012 income tax booklet   However, an individual may be a common-law employee and a self-employed person as well. 2012 income tax booklet For example, an attorney can be a corporate common-law employee during regular working hours and also practice law in the evening as a self-employed person. 2012 income tax booklet In another example, a minister employed by a congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes. 2012 income tax booklet However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment earnings for qualified plan purposes. 2012 income tax booklet Compensation. 2012 income tax booklet   Compensation for plan allocations is the pay a participant received from you for personal services for a year. 2012 income tax booklet You can generally define compensation as including all the following payments. 2012 income tax booklet Wages and salaries. 2012 income tax booklet Fees for professional services. 2012 income tax booklet Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items. 2012 income tax booklet Commissions and tips. 2012 income tax booklet Fringe benefits. 2012 income tax booklet Bonuses. 2012 income tax booklet   For a self-employed individual, compensation means the earned income, discussed later, of that individual. 2012 income tax booklet   Compensation generally includes amounts deferred in the following employee benefit plans. 2012 income tax booklet These amounts are elective deferrals. 2012 income tax booklet Qualified cash or deferred arrangement (section 401(k) plan). 2012 income tax booklet Salary reduction agreement to contribute to a tax-sheltered annuity (section 403(b) plan), a SIMPLE IRA plan, or a SARSEP. 2012 income tax booklet Section 457 nonqualified deferred compensation plan. 2012 income tax booklet Section 125 cafeteria plan. 2012 income tax booklet   However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. 2012 income tax booklet The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4. 2012 income tax booklet Other options. 2012 income tax booklet   In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation. 2012 income tax booklet The employee's wages as defined for income tax withholding purposes. 2012 income tax booklet The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement. 2012 income tax booklet The employee's social security wages (including elective deferrals). 2012 income tax booklet   Compensation generally cannot include either of the following items. 2012 income tax booklet Nontaxable reimbursements or other expense allowances. 2012 income tax booklet Deferred compensation (other than elective deferrals). 2012 income tax booklet SIMPLE plans. 2012 income tax booklet   A special definition of compensation applies for SIMPLE plans. 2012 income tax booklet See chapter 3. 2012 income tax booklet Contribution. 2012 income tax booklet   A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. 2012 income tax booklet Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant. 2012 income tax booklet Deduction. 2012 income tax booklet   A deduction is the plan contributions you can subtract from gross income on your federal income tax return. 2012 income tax booklet Limits apply to the amount deductible. 2012 income tax booklet Earned income. 2012 income tax booklet   Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income. 2012 income tax booklet   You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. 2012 income tax booklet Earned income includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. 2012 income tax booklet It includes income from licensing the use of property other than goodwill. 2012 income tax booklet   Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax. 2012 income tax booklet   If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan. 2012 income tax booklet Employer. 2012 income tax booklet   An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. 2012 income tax booklet A sole proprietor is treated as his or her own employer for retirement plan purposes. 2012 income tax booklet However, a partner is not an employer for retirement plan purposes. 2012 income tax booklet Instead, the partnership is treated as the employer of each partner. 2012 income tax booklet Highly compensated employee. 2012 income tax booklet   A highly compensated employee is an individual who: Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compensation from you of more than $115,000 (if the preceding year is 2012, 2013, or 2014) and, if you so choose, was in the top 20% of employees when ranked by compensation. 2012 income tax booklet Leased employee. 2012 income tax booklet   A leased employee who is not your common-law employee must generally be treated as your employee for retirement plan purposes if he or she does all the following. 2012 income tax booklet Provides services to you under an agreement between you and a leasing organization. 2012 income tax booklet Has performed services for you (or for you and related persons) substantially full time for at least 1 year. 2012 income tax booklet Performs services under your primary direction or control. 2012 income tax booklet Exception. 2012 income tax booklet   A leased employee is not treated as your employee if all the following conditions are met. 2012 income tax booklet Leased employees are not more than 20% of your non-highly compensated work force. 2012 income tax booklet The employee is covered under the leasing organization's qualified pension plan. 2012 income tax booklet The leasing organization's plan is a money purchase pension plan that has all the following provisions. 2012 income tax booklet Immediate participation. 2012 income tax booklet (This requirement does not apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000. 2012 income tax booklet ) Full and immediate vesting. 2012 income tax booklet A nonintegrated employer contribution rate of at least 10% of compensation for each participant. 2012 income tax booklet However, if the leased employee is your common-law employee, that employee will be your employee for all purposes, regardless of any pension plan of the leasing organization. 2012 income tax booklet Net earnings from self-employment. 2012 income tax booklet   For SEP and qualified plans, net earnings from self-employment is your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. 2012 income tax booklet Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax. 2012 income tax booklet   Net earnings from self-employment does not include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts. 2012 income tax booklet   For the deduction limits, earned income is net earnings for personal services actually rendered to the business. 2012 income tax booklet You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings. 2012 income tax booklet   Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). 2012 income tax booklet It does not include income passed through to shareholders of S corporations. 2012 income tax booklet Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. 2012 income tax booklet Distributions of other income or loss to limited partners are not net earnings from self-employment. 2012 income tax booklet   For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself. 2012 income tax booklet Qualified plan. 2012 income tax booklet   A qualified plan is a retirement plan that offers a tax-favored way to save for retirement. 2012 income tax booklet You can deduct contributions made to the plan for your employees. 2012 income tax booklet Earnings on these contributions are generally tax free until distributed at retirement. 2012 income tax booklet Profit-sharing, money purchase, and defined benefit plans are qualified plans. 2012 income tax booklet A 401(k) plan is also a qualified plan. 2012 income tax booklet Participant. 2012 income tax booklet   A participant is an eligible employee who is covered by your retirement plan. 2012 income tax booklet See the discussions of the different types of plans for the definition of an employee eligible to participate in each type of plan. 2012 income tax booklet Partner. 2012 income tax booklet   A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. 2012 income tax booklet For retirement plans, a partner is treated as an employee of the partnership. 2012 income tax booklet Self-employed individual. 2012 income tax booklet   An individual in business for himself or herself, and whose business is not incorporated, is self-employed. 2012 income tax booklet Sole proprietors and partners are self-employed. 2012 income tax booklet Self-employment can include part-time work. 2012 income tax booklet   Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. 2012 income tax booklet See Common-law employee and Net earnings from self-employment , earlier. 2012 income tax booklet   In addition, certain fishermen may be considered self-employed for setting up a qualified plan. 2012 income tax booklet See Publication 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed. 2012 income tax booklet Sole proprietor. 2012 income tax booklet   A sole proprietor is an individual who owns an unincorporated business by himself or herself, including a single member limited liability company that is treated as a disregarded entity for tax purposes. 2012 income tax booklet For retirement plans, a sole proprietor is treated as both an employer and an employee. 2012 income tax booklet Prev  Up  Next   Home   More Online Publications