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File state tax only 2. File state tax only   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. File state tax only Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. File state tax only Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. File state tax only Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. File state tax only The annual accounting period for your income tax return is called a tax year. File state tax only You can use one of the following tax years. File state tax only A calendar tax year. File state tax only A fiscal tax year. File state tax only Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. File state tax only A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. File state tax only Calendar tax year. File state tax only   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. File state tax only   You must adopt the calendar tax year if any of the following apply. File state tax only You do not keep books. File state tax only You have no annual accounting period. File state tax only Your present tax year does not qualify as a fiscal year. File state tax only Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. File state tax only   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. File state tax only For more information, see Change in tax year, later. File state tax only   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. File state tax only Fiscal tax year. File state tax only   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. File state tax only A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. File state tax only   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. File state tax only   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. File state tax only Change in tax year. File state tax only   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. File state tax only See the Instructions for Form 1128 for exceptions. File state tax only If you qualify for an automatic approval request, a user fee is not required. File state tax only If you do not qualify for automatic approval, a ruling must be requested. File state tax only See the instructions for Form 1128 for information about user fees if you are requesting a ruling. File state tax only Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. File state tax only Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. File state tax only You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. File state tax only After that, if you want to change your accounting method, you must generally get IRS approval. File state tax only See Change in Accounting Method, later. File state tax only Kinds of methods. File state tax only   Generally, you can use any of the following accounting methods. File state tax only Cash method. File state tax only An accrual method. File state tax only Special methods of accounting for certain items of income and expenses. File state tax only Combination method using elements of two or more of the above. File state tax only You must use the same accounting method to figure your taxable income and to keep your books. File state tax only Also, you must use an accounting method that clearly shows your income. File state tax only Business and personal items. File state tax only   You can account for business and personal items under different accounting methods. File state tax only For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. File state tax only Two or more businesses. File state tax only   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. File state tax only They are separate and distinct only if you maintain complete and separate books and records for each business. File state tax only Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. File state tax only However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. File state tax only For more information, see Inventories, later. File state tax only Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. File state tax only If you receive property or services, you must include their fair market value in income. File state tax only Example. File state tax only On December 30, 2012, Mrs. File state tax only Sycamore sent you a check for interior decorating services you provided to her. File state tax only You received the check on January 2, 2013. File state tax only You must include the amount of the check in income for 2013. File state tax only Constructive receipt. File state tax only   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. File state tax only You do not need to have possession of it. File state tax only If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. File state tax only Example. File state tax only Interest is credited to your bank account in December 2013. File state tax only You do not withdraw it or enter it into your passbook until 2014. File state tax only You must include it in your gross income for 2013. File state tax only Delaying receipt of income. File state tax only   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. File state tax only You must report the income in the year the property is received or made available to you without restriction. File state tax only Example. File state tax only Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. File state tax only She was told in December that her payment was available. File state tax only At her request, she was not paid until January 2014. File state tax only She must include this payment in her 2013 income because it was constructively received in 2013. File state tax only Checks. File state tax only   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. File state tax only Example. File state tax only Dr. File state tax only Redd received a check for $500 on December 31, 2013, from a patient. File state tax only She could not deposit the check in her business account until January 2, 2014. File state tax only She must include this fee in her income for 2013. File state tax only Debts paid by another person or canceled. File state tax only   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. File state tax only If you receive income in this way, you constructively receive the income when the debt is canceled or paid. File state tax only For more information, see Canceled Debt under Kinds of Income in chapter 5. File state tax only Repayment of income. File state tax only   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. File state tax only If the amount you repay is over $3,000, a special rule applies. File state tax only For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. File state tax only Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. File state tax only This includes business expenses for which you contest liability. File state tax only However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. File state tax only Expenses paid in advance. File state tax only   You can deduct an expense you pay in advance only in the year to which it applies. File state tax only Example. File state tax only You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. File state tax only You can deduct $500 in 2013 and $500 in 2014. File state tax only Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. File state tax only The purpose of an accrual method of accounting is to match income and expenses in the correct year. File state tax only Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. File state tax only Example. File state tax only You are a calendar year accrual method taxpayer. File state tax only You sold a computer on December 28, 2013. File state tax only You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. File state tax only You must include the amount received for the computer in your 2013 income. File state tax only Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. File state tax only Estimated income. File state tax only   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. File state tax only Change in payment schedule for services. File state tax only   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. File state tax only Advance payments for services. File state tax only   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. File state tax only However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. File state tax only However, you cannot postpone including any payment beyond that tax year. File state tax only   For more information, see Advance Payment for Services under Accrual Method in Publication 538. File state tax only That publication also explains special rules for reporting the following types of income. File state tax only Advance payments for service agreements. File state tax only Prepaid rent. File state tax only Advance payments for sales. File state tax only   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. File state tax only If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. File state tax only An agreement includes a gift certificate that can be redeemed for goods. File state tax only Treat amounts that are due and payable as amounts you received. File state tax only   You generally include an advance payment in income for the tax year in which you receive it. File state tax only However, you can use an alternative method. File state tax only For information about the alternative method, see Publication 538. File state tax only Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. File state tax only The all-events test has been met. File state tax only The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. File state tax only Economic performance has occurred. File state tax only Economic performance. File state tax only   You generally cannot deduct or capitalize a business expense until economic performance occurs. File state tax only If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. File state tax only If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. File state tax only An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. File state tax only For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. File state tax only Example. File state tax only You are a calendar year taxpayer and use an accrual method of accounting. File state tax only You buy office supplies in December 2013. File state tax only You receive the supplies and the bill in December, but you pay the bill in January 2014. File state tax only You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. File state tax only Your office supplies may qualify as a recurring expense. File state tax only In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). File state tax only Keeping inventories. File state tax only   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. File state tax only If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. File state tax only For more information, see Inventories , later. File state tax only Special rule for related persons. File state tax only   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. File state tax only Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. File state tax only If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. File state tax only   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. File state tax only For a list of other related persons, see section 267 of the Internal Revenue Code. File state tax only Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. File state tax only However, the following restrictions apply. File state tax only If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. File state tax only (See, however, Inventories, later. File state tax only ) You can use the cash method for all other items of income and expenses. File state tax only If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. File state tax only If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. File state tax only If you use a combination method that includes the cash method, treat that combination method as the cash method. File state tax only Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. File state tax only However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. File state tax only These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). File state tax only A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. File state tax only A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. File state tax only Qualifying taxpayer. File state tax only   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. File state tax only (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. File state tax only ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. File state tax only Qualifying small business taxpayer. File state tax only   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. File state tax only (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. File state tax only ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. File state tax only Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). File state tax only Business not owned or not in existence for 3 years. File state tax only   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. File state tax only If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. File state tax only Materials and supplies that are not incidental. File state tax only   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. File state tax only If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. File state tax only Changing accounting method. File state tax only   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. File state tax only See Change in Accounting Method, later. File state tax only More information. File state tax only    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. File state tax only For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. File state tax only Items included in inventory. File state tax only   If you are required to account for inventories, include the following items when accounting for your inventory. File state tax only Merchandise or stock in trade. File state tax only Raw materials. File state tax only Work in process. File state tax only Finished products. File state tax only Supplies that physically become a part of the item intended for sale. File state tax only Valuing inventory. File state tax only   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). File state tax only To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. File state tax only   Inventory valuation rules cannot be the same for all kinds of businesses. File state tax only The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. File state tax only Your inventory practices must be consistent from year to year. File state tax only More information. File state tax only   For more information about inventories, see Publication 538. File state tax only Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. File state tax only Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. File state tax only You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. File state tax only Activities subject to the uniform capitalization rules. File state tax only   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. File state tax only Produce real or tangible personal property. File state tax only For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. File state tax only Acquire property for resale. File state tax only Exceptions. File state tax only   These rules do not apply to the following property. File state tax only Personal property you acquire for resale if your average annual gross receipts are $10 million or less. File state tax only Property you produce if you meet either of the following conditions. File state tax only Your indirect costs of producing the property are $200,000 or less. File state tax only You use the cash method of accounting and do not account for inventories. File state tax only For more information, see Inventories, earlier. File state tax only Special Methods There are special methods of accounting for certain items of income or expense. File state tax only These include the following. File state tax only Amortization, discussed in chapter 8 of Publication 535, Business Expenses. File state tax only Bad debts, discussed in chapter 10 of Publication 535. File state tax only Depletion, discussed in chapter 9 of Publication 535. File state tax only Depreciation, discussed in Publication 946, How To Depreciate Property. File state tax only Installment sales, discussed in Publication 537, Installment Sales. File state tax only Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. File state tax only A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. File state tax only To get approval, you must file Form 3115, Application for Change in Accounting Method. File state tax only You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. File state tax only You may have to pay a user fee. File state tax only For more information, see the form instructions. File state tax only Automatic change procedures. File state tax only   Certain taxpayers can presume to have IRS approval to change their method of accounting. File state tax only The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. File state tax only No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. File state tax only   Generally, you must use Form 3115 to request an automatic change. File state tax only For more information, see the Instructions for Form 3115. File state tax only Prev  Up  Next   Home   More Online Publications
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File state tax only Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. File state tax only Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. File state tax only Method 2. File state tax only How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. File state tax only In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. File state tax only You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. File state tax only Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. File state tax only If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. File state tax only These wages must be included on line 7 of Form 1040. File state tax only See Form 8919 for more information. File state tax only Childcare providers. File state tax only   If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. File state tax only If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. File state tax only You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. File state tax only Babysitting. File state tax only   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. File state tax only Bankruptcy. File state tax only   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. File state tax only Your W-2 will show your total wages and withheld income tax for the year. File state tax only On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. File state tax only Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. File state tax only If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. File state tax only   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. File state tax only For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. File state tax only   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. File state tax only The statement must show the allocation and describe the method used to make the allocation. File state tax only For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. File state tax only R. File state tax only B. File state tax only 596, available at www. File state tax only irs. File state tax only gov/irb/2006-40_IRB/ar12. File state tax only html. File state tax only Miscellaneous Compensation This section discusses many types of employee compensation. File state tax only The subjects are arranged in alphabetical order. File state tax only Advance commissions and other earnings. File state tax only   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. File state tax only    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. File state tax only If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. File state tax only See Repayments , later. File state tax only Allowances and reimbursements. File state tax only    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. File state tax only If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. File state tax only Back pay awards. File state tax only   Include in income amounts you are awarded in a settlement or judgment for back pay. File state tax only These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. File state tax only They should be reported to you by your employer on Form W-2. File state tax only Bonuses and awards. File state tax only    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. File state tax only These include prizes such as vacation trips for meeting sales goals. File state tax only If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. File state tax only However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. File state tax only Employee achievement award. File state tax only   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. File state tax only However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. File state tax only Your employer can tell you whether your award is a qualified plan award. File state tax only Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. File state tax only   However, the exclusion does not apply to the following awards. File state tax only A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. File state tax only A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. File state tax only Example. File state tax only Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. File state tax only Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. File state tax only However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income. File state tax only Differential wage payments. File state tax only   This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. File state tax only These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. File state tax only The payments are reported as wages on Form W-2. File state tax only Government cost-of-living allowances. File state tax only   Most payments received by U. File state tax only S. File state tax only Government civilian employees for working abroad are taxable. File state tax only However, certain cost-of-living allowances are tax free. File state tax only Publication 516, U. File state tax only S. File state tax only Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. File state tax only Nonqualified deferred compensation plans. File state tax only   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. File state tax only This amount is shown on Form W-2, box 12, using code Y. File state tax only This amount is not included in your income. File state tax only   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. File state tax only This amount is included in your wages shown on Form W-2, box 1. File state tax only It is also shown on Form W-2, box 12, using code Z. File state tax only Nonqualified deferred compensation plans of nonqualified entities. File state tax only   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. File state tax only For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. File state tax only A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. File state tax only Note received for services. File state tax only   If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. File state tax only When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. File state tax only Do not include that part again in your income. File state tax only Include the rest of the payment in your income in the year of payment. File state tax only   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. File state tax only Severance pay. File state tax only   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. File state tax only Accrued leave payment. File state tax only   If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. File state tax only   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. File state tax only You can reduce gross wages by the amount you repaid in the same tax year in which you received it. File state tax only Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2. File state tax only Outplacement services. File state tax only   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. File state tax only    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). File state tax only Sick pay. File state tax only   Pay you receive from your employer while you are sick or injured is part of your salary or wages. File state tax only In addition, you must include in your income sick pay benefits received from any of the following payers. File state tax only A welfare fund. File state tax only A state sickness or disability fund. File state tax only An association of employers or employees. File state tax only An insurance company, if your employer paid for the plan. File state tax only However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. File state tax only For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. File state tax only Social security and Medicare taxes paid by employer. File state tax only   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. File state tax only The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. File state tax only However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. File state tax only Stock appreciation rights. File state tax only   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. File state tax only When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. File state tax only You include the cash payment in income in the year you use the right. File state tax only Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. File state tax only Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. File state tax only See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. File state tax only Recipient of fringe benefit. File state tax only   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. File state tax only You are considered to be the recipient even if it is given to another person, such as a member of your family. File state tax only An example is a car your employer gives to your spouse for services you perform. File state tax only The car is considered to have been provided to you and not to your spouse. File state tax only   You do not have to be an employee of the provider to be a recipient of a fringe benefit. File state tax only If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. File state tax only Provider of benefit. File state tax only   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. File state tax only The provider can be a client or customer of an independent contractor. File state tax only Accounting period. File state tax only   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. File state tax only Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. File state tax only The general rule: benefits are reported for a full calendar year (January 1–December 31). File state tax only The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. File state tax only For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. File state tax only Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. File state tax only   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). File state tax only Form W-2. File state tax only   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. File state tax only Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). File state tax only However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). File state tax only Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. File state tax only Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . File state tax only For information on the items covered in this section, other than Long-term care coverage , see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. File state tax only Long-term care coverage. File state tax only   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. File state tax only However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. File state tax only This amount will be reported as wages in box 1 of your Form W-2. File state tax only Archer MSA contributions. File state tax only    Contributions by your employer to your Archer MSA generally are not included in your income. File state tax only Their total will be reported in box 12 of Form W-2, with code R. File state tax only You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File state tax only File the form with your return. File state tax only Health flexible spending arrangement (health FSA). File state tax only   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. File state tax only   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. File state tax only The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. File state tax only For more information, see Notice 2012-40, 2012-26 I. File state tax only R. File state tax only B. File state tax only 1046, available at www. File state tax only irs. File state tax only gov/irb/2012-26 IRB/ar09. File state tax only html. File state tax only Health reimbursement arrangement (HRA). File state tax only   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. File state tax only Health savings accounts (HSA). File state tax only   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. File state tax only Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. File state tax only Contributions made by your employer are not included in your income. File state tax only Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. File state tax only Distributions not used for qualified medical expenses are included in your income. File state tax only See Publication 969 for the requirements of an HSA. File state tax only   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. File state tax only The contributions are treated as a distribution of money and are not included in the partner's gross income. File state tax only Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. File state tax only In both situations, the partner can deduct the contribution made to the partner's HSA. File state tax only   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. File state tax only The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. File state tax only Qualified HSA funding distribution. File state tax only   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. File state tax only See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. File state tax only Failure to maintain eligibility. File state tax only   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. File state tax only If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. File state tax only This income is also subject to an additional 10% tax. File state tax only Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. File state tax only See Instructions for Form 8839, Qualified Adoption Expenses, for more information. File state tax only Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. File state tax only They also are included as social security and Medicare wages in boxes 3 and 5. File state tax only However, they are not included as wages in box 1. File state tax only To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. File state tax only File the form with your return. File state tax only Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. File state tax only The gym must be used primarily by employees, their spouses, and their dependent children. File state tax only If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. File state tax only De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. File state tax only In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. File state tax only Also see Employee Discounts , later. File state tax only Holiday gifts. File state tax only   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. File state tax only However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. File state tax only Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. File state tax only Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. File state tax only The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). File state tax only Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. File state tax only Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. File state tax only To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. File state tax only See the Instructions for Form 2441 for more information. File state tax only Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. File state tax only For more information, see Publication 970. File state tax only Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. File state tax only The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. File state tax only However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). File state tax only The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. File state tax only For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. File state tax only (Ask your employer for this percentage. File state tax only ) For a discount on services, 20%. File state tax only Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. File state tax only If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). File state tax only Qualified retirement planning services paid for you by your employer may be excluded from your income. File state tax only For more information, see Retirement Planning Services , later. File state tax only Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. File state tax only However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. File state tax only For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. File state tax only If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. File state tax only Also, it is shown separately in box 12 with code C. File state tax only Group-term life insurance. File state tax only   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. File state tax only Permanent benefits. File state tax only   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. File state tax only Your employer should be able to tell you the amount to include in your income. File state tax only Accidental death benefits. File state tax only   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. File state tax only Former employer. File state tax only   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. File state tax only Also, it is shown separately in box 12 with code C. File state tax only Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. File state tax only You must pay these taxes with your income tax return. File state tax only Include them on line 60, Form 1040, and follow the instructions forline 60. File state tax only For more information, see the Instructions for Form 1040. File state tax only Two or more employers. File state tax only   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. File state tax only If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. File state tax only You must figure how much to include in your income. File state tax only Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. File state tax only Figuring the taxable cost. File state tax only    Use the following worksheet to figure the amount to include in your income. File state tax only   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. File state tax only However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . File state tax only Worksheet 1. File state tax only Figuring the Cost of Group-Term Life Insurance To Include in Income 1. File state tax only Enter the total amount of your insurance coverage from your employer(s) 1. File state tax only   2. File state tax only Limit on exclusion for employer-provided group-term life insurance coverage 2. File state tax only 50,000 3. File state tax only Subtract line 2 from line 1 3. File state tax only   4. File state tax only Divide line 3 by $1,000. File state tax only Figure to the nearest tenth 4. File state tax only   5. File state tax only Go to Table 1. File state tax only Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. File state tax only   6. File state tax only Multiply line 4 by line 5 6. File state tax only     7. File state tax only Enter the number of full months of coverage at this cost 7. File state tax only   8. File state tax only Multiply line 6 by line 7 8. File state tax only   9. File state tax only Enter the premiums you paid per month 9. File state tax only       10. File state tax only Enter the number of months you paid the  premiums 10. File state tax only       11. File state tax only Multiply line 9 by line 10. File state tax only 11. File state tax only   12. File state tax only Subtract line 11 from line 8. File state tax only Include this amount in your income as wages 12. File state tax only   Table 1. File state tax only Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . File state tax only 05     25 through 29 . File state tax only 06     30 through 34 . File state tax only 08     35 through 39 . File state tax only 09     40 through 44 . File state tax only 10     45 through 49 . File state tax only 15     50 through 54 . File state tax only 23     55 through 59 . File state tax only 43     60 through 64 . File state tax only 66     65 through 69 1. File state tax only 27     70 and older 2. File state tax only 06   Example. File state tax only You are 51 years old and work for employers A and B. File state tax only Both employers provide group-term life insurance coverage for you for the entire year. File state tax only Your coverage is $35,000 with employer A and $45,000 with employer B. File state tax only You pay premiums of $4. File state tax only 15 a month under the employer B group plan. File state tax only You figure the amount to include in your income as follows. File state tax only   Worksheet 1. File state tax only Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. File state tax only Enter the total amount of your insurance coverage from your employer(s) 1. File state tax only 80,000 2. File state tax only Limit on exclusion for employer-provided group-term life insurance coverage 2. File state tax only 50,000 3. File state tax only Subtract line 2 from line 1 3. File state tax only 30,000 4. File state tax only Divide line 3 by $1,000. File state tax only Figure to the nearest tenth 4. File state tax only 30. File state tax only 0 5. File state tax only Go to Table 1. File state tax only Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. File state tax only . File state tax only 23 6. File state tax only Multiply line 4 by line 5 6. File state tax only 6. File state tax only 90 7. File state tax only Enter the number of full months of coverage at this cost. File state tax only 7. File state tax only 12 8. File state tax only Multiply line 6 by line 7 8. File state tax only 82. File state tax only 80 9. File state tax only Enter the premiums you paid per month 9. File state tax only 4. File state tax only 15     10. File state tax only Enter the number of months you paid the premiums 10. File state tax only 12     11. File state tax only Multiply line 9 by line 10. File state tax only 11. File state tax only 49. File state tax only 80 12. File state tax only Subtract line 11 from line 8. File state tax only Include this amount in your income as wages 12. File state tax only 33. File state tax only 00 The total amount to include in income for the cost of excess group-term life insurance is $33. File state tax only Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. File state tax only You must add it to the wages shown on your Forms W-2 and include the total on your return. File state tax only Entire cost excluded. File state tax only   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. File state tax only You are permanently and totally disabled and have ended your employment. File state tax only Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. File state tax only A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. File state tax only (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. File state tax only ) The plan existed on January 1, 1984, and: You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. File state tax only Entire cost taxed. File state tax only   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. File state tax only The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. File state tax only You are a key employee and your employer's plan discriminates in favor of key employees. File state tax only Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. File state tax only The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. File state tax only The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. File state tax only (You must accept it in order to be able to properly perform your duties. File state tax only ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. File state tax only See De Minimis (Minimal) Benefits , earlier. File state tax only Faculty lodging. File state tax only   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. File state tax only However, the lodging must be qualified campus lodging, and you must pay an adequate rent. File state tax only Academic health center. File state tax only   This is an organization that meets the following conditions. File state tax only Its principal purpose or function is to provide medical or hospital care or medical education or research. File state tax only It receives payments for graduate medical education under the Social Security Act. File state tax only One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. File state tax only Qualified campus lodging. File state tax only   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. File state tax only The lodging must be located on or near a campus of the educational institution or academic health center. File state tax only Adequate rent. File state tax only   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. File state tax only If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. File state tax only   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. File state tax only Example. File state tax only Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. File state tax only The house is appraised at $200,000. File state tax only The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. File state tax only Carl pays an annual rent of $11,000. File state tax only Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). File state tax only If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). File state tax only Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. File state tax only See Publication 521 for more information. File state tax only No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). File state tax only In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. File state tax only Example. File state tax only You are employed as a flight attendant for a company that owns both an airline and a hotel chain. File state tax only Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. File state tax only The value of the personal flight is not included in your income. File state tax only However, the value of the hotel room is included in your income because you do not work in the hotel business. File state tax only Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. File state tax only Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. File state tax only You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. File state tax only Also, see Financial Counseling Fees , earlier. File state tax only Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. File state tax only A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. File state tax only Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. File state tax only However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. File state tax only Exclusion limit. File state tax only   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. File state tax only   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. File state tax only   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. File state tax only   If the benefits have a value that is more than these limits, the excess must be included in your income. File state tax only You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. File state tax only Commuter highway vehicle. File state tax only   This is a highway vehicle that seats at least six adults (not including the driver). File state tax only At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). File state tax only Transit pass. File state tax only   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. File state tax only Qualified parking. File state tax only   This is parking provided to an employee at or near the employer's place of business. File state tax only It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. File state tax only It does not include parking at or near the employee's home. File state tax only Qualified bicycle commuting. File state tax only   This is reimbursement based on the number of qualified bicycle commuting months for the year. File state tax only A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. File state tax only The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. File state tax only Tuition Reduction You can exclude a qualified tuition reduction from your income. File state tax only This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. File state tax only For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. File state tax only Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. File state tax only For more information, see Publication 970. File state tax only Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. File state tax only Example. File state tax only You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. File state tax only The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. File state tax only Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. File state tax only For an exception, see Group-Term Life Insurance , earlier. File state tax only General valuation rule. File state tax only   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. File state tax only If you pay fair market value for a fringe benefit, no amount is included in your income. File state tax only Fair market value. File state tax only   The fair market value of a fringe benefit is determined by all the facts and circumstances. File state tax only It is the amount you would have to pay a third party to buy or lease the benefit. File state tax only This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. File state tax only Employer-provided vehicles. File state tax only   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. File state tax only   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. File state tax only An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. File state tax only The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. File state tax only Flights on employer-provided aircraft. File state tax only   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. File state tax only   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. File state tax only The division must be based on all the facts, including which employee or employees control the use of the aircraft. File state tax only Special valuation rules. File state tax only   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. File state tax only If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. File state tax only You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. File state tax only   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. File state tax only The special valuation rules are the following. File state tax only The automobile lease rule. File state tax only The vehicle cents-per-mile rule. File state tax only The commuting rule. File state tax only The unsafe conditions commuting rule. File state tax only The employer-operated eating-facility rule. File state tax only   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. File state tax only    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. File state tax only 61-21(g) and 1. File state tax only 61-21(h) of the regulations. File state tax only Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. File state tax only (Your employer can tell you whether your retirement plan is qualified. File state tax only ) However, the cost of life insurance coverage included in the plan may have to be included. File state tax only See Group-Term Life Insurance , earlier, under Fringe Benefits. File state tax only If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. File state tax only However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. File state tax only For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. File state tax only S. File state tax only Civil Service Retirement Benefits, if you are a federal employee or retiree). File state tax only Elective Deferrals If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. File state tax only The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. File state tax only An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. File state tax only However, it is included in wages subject to social security and Medicare taxes. File state tax only Elective deferrals include elective contributions to the following retirement plans. File state tax only Cash or deferred arrangements (section 401(k) plans). File state tax only The Thrift Savings Plan for federal employees. File state tax only Salary reduction simplified employee pension plans (SARSEP). File state tax only Savings incentive match plans for employees (SIMPLE plans). File state tax only Tax-sheltered annuity plans (403(b) plans). File state tax only Section 501(c)(18)(D) plans. File state tax only (But see Reporting by employer , later. File state tax only ) Section 457 plans. File state tax only Qualified automatic contribution arrangements. File state tax only   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. File state tax only You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. File state tax only The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. File state tax only   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. File state tax only Overall limit on deferrals. File state tax only   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3), earlier. File state tax only The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. File state tax only Amounts deferred under specific plan limits are part of the overall limit on deferrals. File state tax only   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. File state tax only However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. File state tax only Catch-up contributions. File state tax only   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. File state tax only For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. File state tax only   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. File state tax only SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. File state tax only Section 457 plans, see Limit for deferrals under section 457 plans , later. File state tax only Limit for deferrals under SIMPLE plans. File state tax only   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. File state tax only Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. File state tax only Limit for tax-sheltered annuities. File state tax only   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. File state tax only However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. File state tax only $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. File state tax only   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. File state tax only   For more information, see Publication 571. File state tax only Limit for deferral under section 501(c)(18) plans. File state tax only   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. File state tax only Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. File state tax only Limit for deferrals under section 457 plans. File state tax only   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. File state tax only However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. File state tax only See Increased limit , later. File state tax only Includible compensation. File state tax only   This is the pay you received for the year from the employer who maintained the section 457 plan. File state tax only In most cases, it includes all the following payments. File state tax only Wages and salaries. File state tax only Fees for professional services. File state tax only The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. File state tax only Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. File state tax only Commissions and tips. File state tax only Fringe benefits. File state tax only Bonuses. File state tax only Employer contributions (elective deferrals) to: The section 457 plan. File state tax only Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. File state tax only A salary reduction simplified employee pension (SARSEP). File state tax only A tax-sheltered annuity (section 403(b) plan). File state tax only A savings incentive match plan for employees (SIMPLE plan). File state tax only A section 125 cafeteria plan. File state tax only   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. File state tax only Your wages as defined for income tax withholding purposes. File state tax only Your wages as reported in box 1 of Form W-2. File state tax only Your wages that are subject to social security withholding (including elective deferrals). File state tax only Increased limit. File state tax only   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). File state tax only Catch-up contributions. File state tax only   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. File state tax only If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. File state tax only However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. File state tax only Designated Roth contributions. File state tax only   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. File state tax only Designated Roth contributions are treated as elective deferrals, except that they are included in income. File state tax only Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. File state tax only   Qualified distributions from a Roth plan are not included in income. File state tax only In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. File state tax only Reporting by employer. File state tax only   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. File state tax only Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. File state tax only Section 501(c)(18)(D) contributions. File state tax only   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. File state tax only The amount you contributed should be identified with code “H” in box 12. File state tax only You may deduct the amount deferred subject to the limits that apply. File state tax only Include your deduction in the total on Form 1040, line 36. File state tax only Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. File state tax only Designated Roth contributions. File state tax only    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. File state tax only Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. File state tax only Excess deferrals. File state tax only   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. File state tax only If the plan permits, the excess amount will be distributed to you. File state tax only If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. File state tax only You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. File state tax only The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. File state tax only   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. File state tax only File Form 1040 to add the excess deferral amount to your wages on line 7. File state tax only Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. File state tax only Excess not distributed. File state tax only   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. File state tax only Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. File state tax only Excess distributed to you. File state tax only   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. File state tax only If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. File state tax only Any income on the excess deferral taken out is taxable in the tax year in which you take it out. File state tax only If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. File state tax only    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. File state tax only Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. File state tax only If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. File state tax only Add the excess deferral amount to your wages on your 2013 tax return. File state tax only If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. File state tax only Do not add this amount to your wages on your 2013 return. File state tax only If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. File state tax only If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. File state tax only S. File state tax only Individual Income Tax Return. File state tax only If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. File state tax only If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. File state tax only Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. File state tax only Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. File state tax only Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. File state tax only ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. File state tax only It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. File state tax only Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. File state tax only If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. File state tax only You must include the excess contributions in your income as wages on Form 1040, line 7. File state tax only You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. File state tax only If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. File state tax only The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. File state tax only You should receive a Form 1099-R for the year the excess contributions are distributed to you. File state tax only Add the distribution to your wages for that year. File state tax only Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. File state tax only It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. File state tax only Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. File state tax only Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. File state tax only A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. File state tax only A corrective payment consisting of your after-tax contributions is not taxable. File state tax only If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. File state tax only Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. File state tax only Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. File state tax only Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. File state tax only It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. File state tax only Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. File state tax only The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. File state tax only Your employer can tell you which kind of option you hold. File state tax only Nonstatutory Stock Options Grant of option. File state tax only   If you are granted a nonstatutory stock option, you may have income when you receive the option. File state tax only The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. File state tax only The fair market value of an option can be readily determined if it is actively traded on an established market. File state tax only    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. File state tax only You can transfer the option. File state tax only You can exercise the option immediately in full. File state tax only The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. File state tax only The fair market value of the option privilege can be readily determined. File state tax only The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. File state tax only For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. File state tax only The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. File state tax only If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. File state tax only For more information on the excise tax, see Internal Revenue Code section 4985. File state tax only Option with readily determinable value. File state tax only   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. File state tax only See Restricted Property , later, for rules on how much income to include and when to include it. File state tax only However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. File state tax only Option without readily determinable value. File state tax only   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. File state tax only    Exercise or transfer of option. File state tax only   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. File state tax only Option with readily determinable value. File state tax only   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. File state tax only Option without readily determinable value. File state tax only   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope