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Filing Taxes

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Filing Taxes

Filing taxes 11. Filing taxes   Casualties, Thefts, and Condemnations Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Casualties and TheftsDeductible losses. Filing taxes Nondeductible losses. Filing taxes Family pet. Filing taxes Progressive deterioration. Filing taxes Decline in market value of stock. Filing taxes Mislaid or lost property. Filing taxes Farming Losses How To Figure a Loss Deduction Limits on Losses of Personal-Use Property When Loss Is Deductible Proof of Loss Figuring a Gain Other Involuntary ConversionsCondemnation Irrigation Project Livestock Losses Tree Seedlings Postponing GainException. Filing taxes Related persons. Filing taxes Replacement Property Replacement Period How To Postpone Gain Disaster Area LossesWho is eligible. Filing taxes Covered disaster area. Filing taxes Reporting Gains and Losses Introduction This chapter explains the tax treatment of casualties, thefts, and condemnations. Filing taxes A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. Filing taxes A theft occurs when property is stolen. Filing taxes A condemnation occurs when private property is legally taken for public use without the owner's consent. Filing taxes A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. Filing taxes You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation. Filing taxes An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter. Filing taxes If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. Filing taxes For more information, see Postponing Gain , later. Filing taxes Topics - This chapter discusses: Casualties and thefts How to figure a loss or gain Other involuntary conversions Postponing gain Disaster area losses Reporting gains and losses Drought involving property connected with a trade or business or a transaction entered into for profit Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 4684 Casualties and Thefts 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Filing taxes Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have a deductible loss. Filing taxes If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. Filing taxes Casualty. Filing taxes   A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Filing taxes A sudden event is one that is swift, not gradual or progressive. Filing taxes An unexpected event is one that is ordinarily unanticipated and unintended. Filing taxes An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Filing taxes Deductible losses. Filing taxes   Deductible casualty losses can result from a number of different causes, including the following. Filing taxes Airplane crashes. Filing taxes Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence. Filing taxes Earthquakes. Filing taxes Fires (but see Nondeductible losses next for exceptions). Filing taxes Floods. Filing taxes Freezing. Filing taxes Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses, in Publication 547. Filing taxes Lightning. Filing taxes Storms, including hurricanes and tornadoes. Filing taxes Terrorist attacks. Filing taxes Vandalism. Filing taxes Volcanic eruptions. Filing taxes Nondeductible losses. Filing taxes   A casualty loss is not deductible if the damage or destruction is caused by the following. Filing taxes Accidentally breaking articles such as glassware or china under normal conditions. Filing taxes A family pet (explained below). Filing taxes A fire if you willfully set it, or pay someone else to set it. Filing taxes A car, truck, or farm equipment accident if your willful negligence or willful act caused it. Filing taxes The same is true if the willful act or willful negligence of someone acting for you caused the accident. Filing taxes Progressive deterioration (explained below). Filing taxes Family pet. Filing taxes   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met. Filing taxes Example. Filing taxes You keep your horse in your yard. Filing taxes The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. Filing taxes Some of the trees were completely girdled and died. Filing taxes Because the damage was not unexpected or unusual, the loss is not deductible. Filing taxes Progressive deterioration. Filing taxes   Loss of property due to progressive deterioration is not deductible as a casualty loss. Filing taxes This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Filing taxes Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. Filing taxes However, weather-related conditions or disease may cause another type of involuntary conversion. Filing taxes See Other Involuntary Conversions , later. Filing taxes Theft. Filing taxes   A theft is the taking and removing of money or property with the intent to deprive the owner of it. Filing taxes The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Filing taxes You do not need to show a conviction for theft. Filing taxes   Theft includes the taking of money or property by the following means: Blackmail, Burglary, Embezzlement, Extortion, Kidnapping for ransom, Larceny, Robbery, or Threats. Filing taxes The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Filing taxes Decline in market value of stock. Filing taxes   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Filing taxes However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Filing taxes You report a capital loss on Schedule D (Form 1040). Filing taxes For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Filing taxes Mislaid or lost property. Filing taxes   The simple disappearance of money or property is not a theft. Filing taxes However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Filing taxes Example. Filing taxes A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Filing taxes The diamond falls from the ring and is never found. Filing taxes The loss of the diamond is a casualty. Filing taxes Farming Losses You can deduct certain casualty or theft losses that occur in the business of farming. Filing taxes The following is a discussion of some losses you can deduct and some you cannot deduct. Filing taxes Livestock or produce bought for resale. Filing taxes   Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. Filing taxes If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. Filing taxes You cannot take a separate deduction. Filing taxes Livestock, plants, produce, and crops raised for sale. Filing taxes   Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. Filing taxes You have already deducted the cost of raising these items as farm expenses, so their basis is equal to zero. Filing taxes   For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. Filing taxes You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. Filing taxes The uniform capitalization rules are discussed in chapter 6. Filing taxes   If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. Filing taxes You get the deduction by omitting the item from your inventory at the close of your tax year. Filing taxes You cannot take a separate casualty or theft deduction. Filing taxes Income loss. Filing taxes   A loss of future income is not deductible. Filing taxes Example. Filing taxes A severe flood destroyed your crops. Filing taxes Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale . Filing taxes You estimate that the crop loss will reduce your farm income by $25,000. Filing taxes This loss of future income is also not deductible. Filing taxes Loss of timber. Filing taxes   If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. Filing taxes If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. Filing taxes See Postponing Gain , later. Filing taxes Property used in farming. Filing taxes   Casualty and theft losses of property used in your farm business usually result in deductible losses. Filing taxes If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. Filing taxes See How To Figure a Loss , later. Filing taxes Raised draft, breeding, dairy, or sporting animals. Filing taxes   Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. Filing taxes However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you. Filing taxes You use inventories to determine your income and you included the animals in your inventory. Filing taxes You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft. Filing taxes When you include livestock in inventory, its last inventory value is its basis. Filing taxes When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. Filing taxes You cannot take a separate deduction. Filing taxes How To Figure a Loss How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed. Filing taxes Farm property. Filing taxes   Farm property is the property you use in your farming business. Filing taxes If your farm property was completely destroyed or stolen, your loss is figured as follows:      Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive      You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss. Filing taxes   If your farm property was partially damaged, use the steps shown under Personal-use property next to figure your casualty loss. Filing taxes However, the deduction limits, discussed later, do not apply to farm property. Filing taxes Personal-use property. Filing taxes   Personal-use property is property used by you or your family members for personal purposes and not used in your farm business or for income-producing purposes. Filing taxes The following items are examples of personal-use property: Your main home. Filing taxes Furniture and electronics used in your main home and not used in a home office or for business purposes. Filing taxes Clothing and jewelry. Filing taxes An automobile used for nonbusiness purposes. Filing taxes You figure the casualty or theft loss on this property by taking the following steps. Filing taxes Determine your adjusted basis in the property before the casualty or theft. Filing taxes Determine the decrease in fair market value of the property as a result of the casualty or theft. Filing taxes From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive or expect to receive. Filing taxes You must apply the deduction limits, discussed later, to determine your deductible loss. Filing taxes    You can use Publication 584 to list your stolen or damaged personal-use property and figure your loss. Filing taxes It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. Filing taxes Adjusted basis. Filing taxes   Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. Filing taxes For more information about adjusted basis, see chapter 6. Filing taxes Decrease in fair market value (FMV). Filing taxes   The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. Filing taxes FMV is defined in chapter 10 under Payments Received or Considered Received . Filing taxes Appraisal. Filing taxes   To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Filing taxes But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV. Filing taxes   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. Filing taxes The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Filing taxes This information is needed to limit any deduction to the actual loss resulting from damage to the property. Filing taxes Cost of cleaning up or making repairs. Filing taxes   The cost of cleaning up after a casualty is not part of a casualty loss. Filing taxes Neither is the cost of repairing damaged property after a casualty. Filing taxes But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Filing taxes The repairs are actually made. Filing taxes The repairs are necessary to bring the property back to its condition before the casualty. Filing taxes The amount spent for repairs is not excessive. Filing taxes The repairs fix the damage only. Filing taxes The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Filing taxes Related expenses. Filing taxes   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. Filing taxes However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. Filing taxes Separate computations for more than one item of property. Filing taxes   Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. Filing taxes Then combine the losses to determine your total loss. Filing taxes    There is an exception to this rule for personal-use real property. Filing taxes See Exception for personal-use real property, later. Filing taxes Example. Filing taxes A fire on your farm damaged a tractor and the barn in which it was stored. Filing taxes The tractor had an adjusted basis of $3,300. Filing taxes Its FMV was $28,000 just before the fire and $10,000 immediately afterward. Filing taxes The barn had an adjusted basis of $28,000. Filing taxes Its FMV was $55,000 just before the fire and $25,000 immediately afterward. Filing taxes You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. Filing taxes Figure your deductible casualty loss separately for the two items of property. Filing taxes     Tractor Barn 1) Adjusted basis $3,300 $28,000 2) FMV before fire $28,000 $55,000 3) FMV after fire 10,000 25,000 4) Decrease in FMV  (line 2 − line 3) $18,000 $30,000 5) Loss (lesser of line 1 or line 4) $3,300 $28,000 6) Minus: Insurance 2,100 26,000 7) Deductible casualty loss $1,200 $2,000 8) Total deductible casualty loss $3,200 Exception for personal-use real property. Filing taxes   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Filing taxes Figure the loss using the smaller of the following. Filing taxes The decrease in FMV of the entire property. Filing taxes The adjusted basis of the entire property. Filing taxes Example. Filing taxes You bought a farm in 1990 for $160,000. Filing taxes The adjusted basis of the residential part is now $128,000. Filing taxes In 2013, a windstorm blew down shade trees and three ornamental trees planted at a cost of $7,500 on the residential part. Filing taxes The adjusted basis of the residential part includes the $7,500. Filing taxes The fair market value (FMV) of the residential part immediately before the storm was $400,000, and $385,000 immediately after the storm. Filing taxes The trees were not covered by insurance. Filing taxes 1) Adjusted basis $128,000 2) FMV before the storm $400,000 3) FMV after the storm 385,000 4) Decrease in FMV (line 2 − line 3) $15,000 5) Loss before insurance (lesser of line 1 or line 4) $15,000 6) Minus: Insurance -0- 7) Amount of loss $15,000 Insurance and other reimbursements. Filing taxes   If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Filing taxes You do not have a casualty or theft loss to the extent you are reimbursed. Filing taxes   If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Filing taxes You must reduce your loss even if you do not receive payment until a later tax year. Filing taxes    Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. Filing taxes You may have to include a portion of these payments in your income. Filing taxes See Insurance payments for living expenses in Publication 547 for details. Filing taxes Disaster relief. Filing taxes   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. Filing taxes Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money. Filing taxes   Generally, disaster relief grants received under the Robert T. Filing taxes Stafford Disaster Relief and Emergency Assistance Act are not included in your income. Filing taxes See Federal disaster relief grants , later, under Disaster Area Losses . Filing taxes   Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. Filing taxes See Qualified disaster relief payments , later, under Disaster Area Losses . Filing taxes Reimbursement received after deducting loss. Filing taxes   If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. Filing taxes Actual reimbursement less than expected. Filing taxes   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Filing taxes Actual reimbursement more than expected. Filing taxes   If you later receive more reimbursement than you expected after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Filing taxes However, if any part of your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Filing taxes Do not refigure your tax for the year you claimed the deduction. Filing taxes See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. Filing taxes If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Filing taxes See Figuring a Gain in Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft. Filing taxes Actual reimbursement same as expected. Filing taxes   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Filing taxes Lump-sum reimbursement. Filing taxes   If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. Filing taxes Figure the gain or loss separately for each asset that has a separate basis. Filing taxes Adjustments to basis. Filing taxes   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. Filing taxes The result is your adjusted basis in the property. Filing taxes Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. Filing taxes See Adjusted Basis in chapter 6 for more information. Filing taxes Example. Filing taxes You built a new silo for $25,000. Filing taxes This is the basis in your silo because that is the total cost you incurred to build it. Filing taxes During the year, a tornado damaged your silo and your allowable casualty loss deduction was $1,000. Filing taxes In addition, your insurance company reimbursed you $4,000 for the damage and you spent $6,000 to restore the silo to its pre-casualty condition. Filing taxes Your adjusted basis in the silo after the casualty is $26,000 ($25,000 - $1,000 - $4,000 + $6,000). Filing taxes Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040). Filing taxes There are two limits on the deduction for casualty or theft loss of personal-use property. Filing taxes You figure these limits on Form 4684. Filing taxes $100 rule. Filing taxes   You must reduce each casualty or theft loss on personal-use property by $100. Filing taxes This rule applies after you have subtracted any reimbursement. Filing taxes 10% rule. Filing taxes   You must further reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Filing taxes Apply this rule after you reduce each loss by $100. Filing taxes Adjusted gross income is on line 38 of Form 1040. Filing taxes Example. Filing taxes In June, you discovered that your house had been burglarized. Filing taxes Your loss after insurance reimbursement was $2,000. Filing taxes Your adjusted gross income for the year you discovered the burglary is $57,000. Filing taxes Figure your theft loss deduction as follows: 1. Filing taxes Loss after insurance $2,000 2. Filing taxes Subtract $100 100 3. Filing taxes Loss after $100 rule $1,900 4. Filing taxes Subtract 10% (. Filing taxes 10) × $57,000 AGI $5,700 5. Filing taxes Theft loss deduction -0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700). Filing taxes    If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. Filing taxes See 10% Rule in Publication 547. Filing taxes When Loss Is Deductible Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. Filing taxes You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. Filing taxes However, losses in federally declared disaster areas are subject to different rules. Filing taxes See Disaster Area Losses , later, for an exception. Filing taxes If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. Filing taxes Leased property. Filing taxes   If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. Filing taxes This is true even if the loss occurred or the liability was paid in a different year. Filing taxes You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. Filing taxes Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. Filing taxes Example. Filing taxes Robert leased a tractor from First Implement, Inc. Filing taxes , for use in his farm business. Filing taxes The tractor was destroyed by a tornado in June 2012. Filing taxes The loss was not insured. Filing taxes First Implement billed Robert for the fair market value of the tractor on the date of the loss. Filing taxes Robert disagreed with the bill and refused to pay it. Filing taxes First Implement later filed suit in court against Robert. Filing taxes In 2013, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. Filing taxes Robert paid $20,000 in June 2013. Filing taxes He can claim the $20,000 as a loss on his 2013 tax return. Filing taxes Net operating loss (NOL). Filing taxes   If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. Filing taxes An NOL can be carried back or carried forward and deducted from income in other years. Filing taxes See Publication 536 for more information on NOLs. Filing taxes Proof of Loss To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. Filing taxes You must have records to support the amount you claim for the loss. Filing taxes Casualty loss proof. Filing taxes   For a casualty loss, your records should show all the following information. Filing taxes The type of casualty (car accident, fire, storm, etc. Filing taxes ) and when it occurred. Filing taxes That the loss was a direct result of the casualty. Filing taxes That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. Filing taxes Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Filing taxes Theft loss proof. Filing taxes   For a theft loss, your records should show all the following information. Filing taxes When you discovered your property was missing. Filing taxes That your property was stolen. Filing taxes That you were the owner of the property. Filing taxes Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Filing taxes Figuring a Gain A casualty or theft may result in a taxable gain. Filing taxes If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Filing taxes You generally report your gain as income in the year you receive the reimbursement. Filing taxes However, depending on the type of property you receive, you may not have to report your gain. Filing taxes See Postponing Gain , later. Filing taxes Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of the casualty or theft. Filing taxes Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. Filing taxes Amount you receive. Filing taxes   The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. Filing taxes It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. Filing taxes Example. Filing taxes A tornado severely damaged your barn. Filing taxes The adjusted basis of the barn was $25,000. Filing taxes Your insurance company reimbursed you $40,000 for the damaged barn. Filing taxes However, you had legal expenses of $2,000 to collect that insurance. Filing taxes Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain. Filing taxes 1) Insurance reimbursement $40,000 2) Legal expenses 2,000 3) Amount received  (line 1 − line 2) $38,000 4) Adjusted basis 25,000 5) Gain on casualty (line 3 − line 4) $13,000 Other Involuntary Conversions In addition to casualties and thefts, other events cause involuntary conversions of property. Filing taxes Some of these are discussed in the following paragraphs. Filing taxes Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. Filing taxes You report the gain or deduct the loss on your tax return for the year you realize it. Filing taxes However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. Filing taxes See Postponing Gain , later. Filing taxes Condemnation Condemnation is the process by which private property is legally taken for public use without the owner's consent. Filing taxes The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take property. Filing taxes The owner receives a condemnation award (money or property) in exchange for the property taken. Filing taxes A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. Filing taxes Threat of condemnation. Filing taxes   Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. Filing taxes Main home condemned. Filing taxes   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Filing taxes For information on this exclusion, see Publication 523. Filing taxes If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. Filing taxes See Postponing Gain , later. Filing taxes (You cannot deduct a loss from the condemnation of your main home. Filing taxes ) More information. Filing taxes   For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. Filing taxes Also see Postponing Gain , later, to find out if you can postpone reporting the gain. Filing taxes Irrigation Project The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. Filing taxes Livestock Losses Diseased livestock. Filing taxes   If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. Filing taxes If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses . Filing taxes Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. Filing taxes If you replace the livestock, you may be able to postpone reporting the gain. Filing taxes See Postponing Gain below. Filing taxes Reporting dispositions of diseased livestock. Filing taxes   If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock were disposed of because of disease. Filing taxes You must also include other information on this statement. Filing taxes See How To Postpone Gain , later, under Postponing Gain . Filing taxes Weather-related sales of livestock. Filing taxes   If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. Filing taxes Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. Filing taxes Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. Filing taxes If you replace the livestock, you may be able to postpone reporting the gain. Filing taxes See Postponing Gain below. Filing taxes Example. Filing taxes It is your usual business practice to sell five of your dairy animals during the year. Filing taxes This year you sold 20 dairy animals because of drought. Filing taxes The sale of 15 animals is treated as an involuntary conversion. Filing taxes    If you do not replace the livestock, you may be able to report the gain in the following year's income. Filing taxes This rule also applies to other livestock (including poultry). Filing taxes See Sales Caused by Weather-Related Conditions in chapter 3. Filing taxes Tree Seedlings If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. Filing taxes Treat the loss as a loss from an involuntary conversion. Filing taxes The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. Filing taxes You deduct the loss on the return for the year the seedlings died. Filing taxes Postponing Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. Filing taxes Your basis in the new property is generally the same as your adjusted basis in the property it replaces. Filing taxes You must ordinarily report the gain on your stolen, destroyed, or other involuntarily converted property if you receive money or unlike property as reimbursement. Filing taxes However, you can choose to postpone reporting the gain if you purchase replacement property similar or related in service or use to your destroyed, stolen, or other involuntarily converted property within a specific replacement period. Filing taxes If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. Filing taxes To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. Filing taxes If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. Filing taxes Example 1. Filing taxes In 1985, you constructed a barn to store farm equipment at a cost of $20,000. Filing taxes In 1987, you added a silo to the barn at a cost of $15,000 to store grain. Filing taxes In May of this year, the property was worth $100,000. Filing taxes In June the barn and silo were destroyed by a tornado. Filing taxes At the time of the tornado, you had an adjusted basis of $0 in the property. Filing taxes You received $85,000 from the insurance company. Filing taxes You had a gain of $85,000 ($85,000 – $0). Filing taxes You spent $80,000 to rebuild the barn and silo. Filing taxes Since this is less than the insurance proceeds received, you must include $5,000 ($85,000 – $80,000) in your income. Filing taxes Example 2. Filing taxes In 1970, you bought a cabin in the mountains for your personal use at a cost of $18,000. Filing taxes You made no further improvements or additions to it. Filing taxes When a storm destroyed the cabin this January, the cabin was worth $250,000. Filing taxes You received $146,000 from the insurance company in March. Filing taxes You had a gain of $128,000 ($146,000 − $18,000). Filing taxes You spent $144,000 to rebuild the cabin. Filing taxes Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. Filing taxes Buying replacement property from a related person. Filing taxes   You cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person (discussed later). Filing taxes This rule applies to the following taxpayers. Filing taxes C corporations. Filing taxes Partnerships in which more than 50% of the capital or profits interest is owned by C corporations. Filing taxes Individuals, partnerships (other than those in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which there are realized gains is more than $100,000. Filing taxes For involuntary conversions described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. Filing taxes If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Filing taxes If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Filing taxes Exception. Filing taxes   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the involuntarily converted property. Filing taxes Related persons. Filing taxes   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. Filing taxes For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Filing taxes Death of a taxpayer. Filing taxes   If a taxpayer dies after having a gain, but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. Filing taxes The executor of the estate or the person succeeding to the funds from the involuntary conversion cannot postpone reporting the gain by buying replacement property. Filing taxes Replacement Property You must buy replacement property for the specific purpose of replacing your property. Filing taxes Your replacement property must be similar or related in service or use to the property it replaces. Filing taxes You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. Filing taxes If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone reporting the gain if you meet the other requirements. Filing taxes Property you acquire by gift or inheritance does not qualify as replacement property. Filing taxes Owner-user. Filing taxes   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Filing taxes Examples of property that functions in the same way as the property it replaces are a home that replaces another home, a dairy cow that replaces another dairy cow, and farm land that replaces other farm land. Filing taxes A grinding mill that replaces a tractor does not qualify. Filing taxes Neither does a breeding or draft animal that replaces a dairy cow. Filing taxes Soil or other environmental contamination. Filing taxes   If, because of soil or other environmental contamination, it is not feasible for you to reinvest your insurance money or other proceeds from destroyed or damaged livestock in property similar or related in service or use to the livestock, you can treat other property (including real property) used for farming purposes, as property similar or related in service or use to the destroyed or damaged livestock. Filing taxes Weather-related conditions. Filing taxes   If, because of drought, flood, or other weather-related conditions, it is not feasible for you to reinvest the insurance money or other proceeds in property similar or related in service or use to the livestock, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the livestock you disposed of. Filing taxes Example. Filing taxes Each year you normally sell 25 cows from your beef herd. Filing taxes However, this year you had to sell 50 cows. Filing taxes This is because a severe drought significantly reduced the amount of hay and pasture yield needed to feed your herd for the rest of the year. Filing taxes Because, as a result of the severe drought, it is not feasible for you to use the proceeds from selling the extra cows to buy new cows, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the cows you sold. Filing taxes Standing crop destroyed by casualty. Filing taxes   If a storm or other casualty destroyed your standing crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement property. Filing taxes The costs of planting and raising a new crop qualify as replacement costs for the destroyed crop only if you use the crop method of accounting (discussed in chapter 2). Filing taxes In that case, the costs of bringing the new crop to the same level of maturity as the destroyed crop qualify as replacement costs to the extent they are incurred during the replacement period. Filing taxes Timber loss. Filing taxes   Standing timber you bought with the proceeds from the sale of timber downed as a result of a casualty, such as high winds, earthquakes, or volcanic eruptions, qualifies as replacement property. Filing taxes If you bought the standing timber within the replacement period, you can postpone reporting the gain. Filing taxes Business or income-producing property located in a federally declared disaster area. Filing taxes   If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. Filing taxes For more information, see Disaster Area Losses in Publication 547. Filing taxes Substituting replacement property. Filing taxes   Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot substitute other qualified replacement property. Filing taxes This is true even if you acquire the other property within the replacement period. Filing taxes However, if you discover that the original replacement property was not qualified replacement property, you can, within the replacement period, substitute the new qualified replacement property. Filing taxes Basis of replacement property. Filing taxes   You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. Filing taxes In this way, tax on the gain is postponed until you dispose of the replacement property. Filing taxes Replacement Period To postpone reporting your gain, you must buy replacement property within a specified period of time. Filing taxes This is the replacement period. Filing taxes The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. Filing taxes The replacement period generally ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. Filing taxes Example. Filing taxes You are a calendar year taxpayer. Filing taxes While you were on vacation, farm equipment that cost $2,200 was stolen from your farm. Filing taxes You discovered the theft when you returned to your farm on November 11, 2012. Filing taxes Your insurance company investigated the theft and did not settle your claim until January 5, 2013, when they paid you $3,000. Filing taxes You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property. Filing taxes Main home in disaster area. Filing taxes   For your main home (or its contents) located in a federally declared disaster area, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. Filing taxes See Disaster Area Losses , later. Filing taxes Property in the Midwestern disaster areas. Filing taxes   For property located in the Midwestern disaster areas (defined in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or condemned, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Filing taxes This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Midwestern disaster areas. Filing taxes Property in the Kansas disaster area. Filing taxes   For property located in the Kansas disaster area that was destroyed, damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Filing taxes This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area. Filing taxes Property in the Hurricane Katrina disaster area. Filing taxes   For property located in the Hurricane Katrina disaster area that was destroyed, damaged, stolen, or condemned after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Filing taxes This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Filing taxes Weather-related sales of livestock in an area eligible for federal assistance. Filing taxes   For the sale or exchange of livestock due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Filing taxes The IRS may extend the replacement period on a regional basis if the weather-related conditions continue for longer than 3 years. Filing taxes   For information on extensions of the replacement period because of persistent drought, see Notice 2006-82, 2006-39 I. Filing taxes R. Filing taxes B. Filing taxes 529, available at  www. Filing taxes irs. Filing taxes gov/irb/2006-39_IRB/ar11. Filing taxes html. Filing taxes For a list of counties for which exceptional, extreme, or severe drought was reported during the 12 months ending August 31, 2013, see Notice 2013-62, available at IRS. Filing taxes gov. Filing taxes Condemnation. Filing taxes   The replacement period for a condemnation begins on the earlier of the following dates. Filing taxes The date on which you disposed of the condemned property. Filing taxes The date on which the threat of condemnation began. Filing taxes The replacement period generally ends 2 years after the close of the first tax year in which any part of the gain on the condemnation is realized. Filing taxes But see Main home in disaster area , Property in the Midwestern disaster areas , Property in the Kansas disaster area , and Property in the Hurricane Katrina disaster area , earlier, for exceptions. Filing taxes Business or investment real property. Filing taxes   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the close of the first tax year in which any part of the gain on the condemnation is realized. Filing taxes Extension. Filing taxes   You can apply for an extension of the replacement period. Filing taxes Send your written application to the Internal Revenue Service Center where you file your tax return. Filing taxes See your tax return instructions for the address. Filing taxes Include all the details about your need for an extension. Filing taxes Make your application before the end of the replacement period. Filing taxes However, you can file an application within a reasonable time after the replacement period ends if you can show a good reason for the delay. Filing taxes You will get an extension of the replacement period if you can show reasonable cause for not making the replacement within the regular period. Filing taxes How To Postpone Gain You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. Filing taxes You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. Filing taxes Required statement. Filing taxes   You should attach a statement to your return for the year you have the gain. Filing taxes This statement should include all the following information. Filing taxes The date and details of the casualty, theft, or other involuntary conversion. Filing taxes The insurance or other reimbursement you received. Filing taxes How you figured the gain. Filing taxes Replacement property acquired before return filed. Filing taxes   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items. Filing taxes The replacement property. Filing taxes The postponed gain. Filing taxes The basis adjustment that reflects the postponed gain. Filing taxes Any gain you are reporting as income. Filing taxes Replacement property acquired after return filed. Filing taxes   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period. Filing taxes   You should then attach another statement to your return for the year in which you buy the replacement property. Filing taxes This statement should contain detailed information on the replacement property. Filing taxes If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. Filing taxes Include in the statement detailed information on the replacement property bought in that year. Filing taxes Reporting weather-related sales of livestock. Filing taxes   If you choose to postpone reporting the gain on weather-related sales or exchanges of livestock, show all the following information on a statement attached to your return for the tax year in which you first realize any of the gain. Filing taxes Evidence of the weather-related conditions that forced the sale or exchange of the livestock. Filing taxes The gain realized on the sale or exchange. Filing taxes The number and kind of livestock sold or exchanged. Filing taxes The number of livestock of each kind you would have sold or exchanged under your usual business practice. Filing taxes   Show all the following information and the preceding information on the return for the year in which you replace the livestock. Filing taxes The dates you bought the replacement property. Filing taxes The cost of the replacement property. Filing taxes Description of the replacement property (for example, the number and kind of the replacement livestock). Filing taxes Amended return. Filing taxes   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations. Filing taxes You do not acquire replacement property within the replacement period, plus extensions. Filing taxes On this amended return, you must report the gain and pay any additional tax due. Filing taxes You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. Filing taxes On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due. Filing taxes Disaster Area Losses Special rules apply to federally declared disaster area losses. Filing taxes A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Filing taxes Stafford Disaster Relief and Emergency Assistance Act. Filing taxes It includes a major disaster or emergency declaration under the act. Filing taxes A list of the areas warranting public or individual assistance (or both) under the Act is available at the Federal Emergency Management Agency (FEMA) web site at www. Filing taxes fema. Filing taxes gov. Filing taxes This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. Filing taxes For other special rules, see Disaster Area Losses in Publication 547. Filing taxes When to deduct the loss. Filing taxes   You generally must deduct a casualty loss in the year it occurred. Filing taxes However, if you have a deductible loss from a disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. Filing taxes If you make this choice, the loss is treated as having occurred in the preceding year. Filing taxes    Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund. Filing taxes   You must make the choice to take your casualty loss for the disaster in the preceding year by the later of the following dates. Filing taxes The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred. Filing taxes The due date (with extensions) for the return for the preceding tax year. Filing taxes Federal disaster relief grants. Filing taxes   Do not include post-disaster relief grants received under the Robert T. Filing taxes Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Filing taxes Do not deduct casualty losses or medical expenses to the extent they are specifically reimbursed by these disaster relief grants. Filing taxes If the casualty loss was specifically reimbursed by the grant and you received the grant after the year in which you deducted the casualty loss, see Reimbursement received after deducting loss , earlier. Filing taxes Unemployment assistance payments under the Act are taxable unemployment compensation. Filing taxes Qualified disaster relief payments. Filing taxes   Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. Filing taxes These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). Filing taxes No withholding applies to these payments. Filing taxes   Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses. Filing taxes Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster. Filing taxes Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. Filing taxes (A personal residence can be a rented residence or one you own. Filing taxes ) Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster. Filing taxes   Qualified disaster relief payments include amounts paid by a federal, state, or local government in connection with a federally declared disaster to individuals affected by the disaster. Filing taxes    Qualified disaster relief payments do not include: Payments for expenses otherwise paid for by insurance or other reimbursements, or Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. Filing taxes Qualified disaster mitigation payments. Filing taxes   Qualified disaster mitigation payments made under the Robert T. Filing taxes Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not included in income. Filing taxes These are payments you, as a property owner, receive to reduce the risk of future damage to your property. Filing taxes You cannot increase your basis in property, or take a deduction or credit, for expenditures made with respect to those payments. Filing taxes Sale of property under hazard mitigation program. Filing taxes   Generally, if you sell or otherwise transfer property, you must recognize any gain or loss for tax purposes unless the property is your main home. Filing taxes You report the gain or deduct the loss on your tax return for the year you realize it. Filing taxes (You cannot deduct a loss on personal-use property unless the loss resulted from a casualty, as discussed earlier. Filing taxes ) However, if you sell or otherwise transfer property to the Federal Government, a state or local government, or an Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. Filing taxes See Postponing Gain , earlier, for the rules that apply. Filing taxes Other federal assistance programs. Filing taxes    For more information about other federal assistance programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3 earlier. Filing taxes Postponed tax deadlines. Filing taxes   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. Filing taxes The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA. Filing taxes   If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). Filing taxes Go to http://www. Filing taxes irs. Filing taxes gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. Filing taxes Who is eligible. Filing taxes   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. Filing taxes Any individual whose main home is located in a covered disaster area (defined next). Filing taxes Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. Filing taxes Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area. Filing taxes Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Filing taxes The main home or principal place of business does not have to be located in the covered disaster area. Filing taxes Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Filing taxes The spouse on a joint return with a taxpayer who is eligible for postponements. Filing taxes Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to meet a postponed tax deadline are located in the covered disaster area. Filing taxes Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. Filing taxes Any other person determined by the IRS to be affected by a federally declared disaster. Filing taxes Covered disaster area. Filing taxes   This is an area of a federally declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year. Filing taxes Abatement of interest and penalties. Filing taxes   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines. Filing taxes Reporting Gains and Losses You will have to file one or more of the following forms to report your gains or losses from involuntary conversions. Filing taxes Form 4684. Filing taxes   Use this form to report your gains and losses from casualties and thefts. Filing taxes Form 4797. Filing taxes   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Filing taxes Also use this form if you have a gain from a casualty or theft on trade, business or income-producing property held for more than 1 year and you have to recapture some or all of your gain as ordinary income. Filing taxes Form 8949. Filing taxes   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. Filing taxes Schedule A (Form 1040). Filing taxes   Use this form to deduct your losses from casualties and thefts of personal-use property and income-producing property, that you reported on Form 4684. Filing taxes Schedule D (Form 1040). Filing taxes   Use this form to carry over the following gains. Filing taxes Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year. Filing taxes Net gain shown on Form 4684 from the casualty or theft of personal-use property. Filing taxes    Also use this form to figure the overall gain or loss from transactions reported on Form 8949. Filing taxes Schedule F (Form 1040). Filing taxes   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 32, if you use the cash method of accounting and have not otherwise deducted these losses. Filing taxes Prev  Up  Next   Home   More Online Publications
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The Filing Taxes

Filing taxes 2. Filing taxes   Taxable and Nontaxable Income Table of Contents Compensation for Services Retirement Plan DistributionsIndividual Retirement Arrangements (IRAs) Pensions and Annuities Social Security and Equivalent Railroad Retirement BenefitsAre Any of Your Benefits Taxable? How Much Is Taxable? How To Report Your Benefits Lump-Sum Election Repayments More Than Gross Benefits Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Life Insurance ProceedsInstallments for life. Filing taxes Surviving spouse. Filing taxes Endowment Contract Proceeds Accelerated Death Benefits Sale of HomeMaximum Amount of Exclusion Ownership and Use Tests Married Persons Business Use or Rental of Home Reporting the Sale Reverse Mortgages Other ItemsWelfare benefits. Filing taxes Payments from a state fund for victims of crime. Filing taxes Home Affordable Modification Program (HAMP). Filing taxes Mortgage assistance payments. Filing taxes Payments to reduce cost of winter energy use. Filing taxes Nutrition Program for the Elderly. Filing taxes Reemployment Trade Adjustment Assistance (RTAA). Filing taxes Generally, income is taxable unless it is specifically exempt (not taxed) by law. Filing taxes Your taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income of all kinds. Filing taxes Under special provisions of the law, certain items are partially or fully exempt from tax. Filing taxes Provisions that are of special interest to older taxpayers are discussed in this chapter. Filing taxes Compensation for Services Generally, you must include in gross income everything you receive in payment for personal services. Filing taxes In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Filing taxes You need not receive the compensation in cash for it to be taxable. Filing taxes Payments you receive in the form of goods or services generally must be included in gross income at their fair market value. Filing taxes Volunteer work. Filing taxes   Do not include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket expenses under any of the following volunteer programs. Filing taxes Retired Senior Volunteer Program (RSVP). Filing taxes Foster Grandparent Program. Filing taxes Senior Companion Program. Filing taxes Service Corps of Retired Executives (SCORE). Filing taxes Unemployment compensation. Filing taxes   You must include in income all unemployment compensation you or your spouse (if married filing jointly) received. Filing taxes More information. Filing taxes   See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income. Filing taxes Retirement Plan Distributions This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements (IRA), employee pensions or annuities, and disability pensions or annuities. Filing taxes A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. Filing taxes A Roth IRA is an individual retirement plan that can be either an account or an annuity and features nondeductible contributions and tax-free distributions. Filing taxes A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Filing taxes More detailed information can be found in Publication 590, Individual Retirement Arrangements (IRAs), and Publication 575, Pension and Annuity Income. Filing taxes Individual Retirement Arrangements (IRAs) In general, distributions from a traditional IRA are taxable in the year you receive them. Filing taxes Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. Filing taxes These are discussed in Publication 590. Filing taxes If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. Filing taxes If you do not file Form 8606 with your return, you may have to pay a $50 penalty. Filing taxes Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Filing taxes Early distributions. Filing taxes   Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age  59½. Filing taxes You must include early distributions of taxable amounts in your gross income. Filing taxes These taxable amounts are also subject to an additional 10% tax unless the distribution qualifies for an exception. Filing taxes For purposes of the additional 10% tax, an IRA is a qualified retirement plan. Filing taxes For more information about this tax, see Tax on Early Distributions under Pensions and Annuities, later. Filing taxes After age 59½ and before age 70½. Filing taxes   After you reach age 59½, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. Filing taxes Even though you can receive distributions after you reach age 59½, distributions are not required until you reach  age 70½. Filing taxes Required distributions. Filing taxes   If you are the owner of a traditional IRA, you generally must receive the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 70½. Filing taxes See When Must You Withdraw Assets? (Required Minimum Distributions) in Publication 590. Filing taxes If distributions from your traditional IRA(s) are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. Filing taxes For purposes of the 50% excise tax, an IRA is a qualified retirement plan. Filing taxes For more information about this tax, see Tax on Excess Accumulation under Pensions and Annuities, later. Filing taxes See also Excess Accumulations (Insufficient Distributions) in Publication 590. Filing taxes Pensions and Annuities Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. Filing taxes However, see Insurance Premiums for Retired Public Safety Officers , later. Filing taxes If you paid part of the cost of your pension or annuity plan (see Cost , later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract). Filing taxes This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. Filing taxes The rest of each payment is taxable. Filing taxes However, see Insurance Premiums for Retired Public Safety Officers , later. Filing taxes You figure the tax-free part of the payment using one of the following methods. Filing taxes Simplified Method. Filing taxes You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). Filing taxes You cannot use this method if your annuity is paid under a nonqualified plan. Filing taxes General Rule. Filing taxes You must use this method if your annuity is paid under a nonqualified plan. Filing taxes You generally cannot use this method if your annuity is paid under a qualified plan. Filing taxes Contact your employer or plan administrator to find out if your pension or annuity is paid under a qualified or nonqualified plan. Filing taxes You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Filing taxes Exclusion limit. Filing taxes   If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost cannot exceed your total cost. Filing taxes Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Filing taxes This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Filing taxes   If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Filing taxes If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Filing taxes The total exclusion may be more than your cost. Filing taxes Cost. Filing taxes   Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost in the plan (your investment in the contract). Filing taxes Your total cost in the plan includes everything that you paid. Filing taxes It also includes amounts your employer contributed that were taxable to you when paid. Filing taxes However, see Foreign employment contributions , later. Filing taxes   From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts you received by the later of the annuity starting date or the date on which you received your first payment. Filing taxes   The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the plan's obligations became fixed. Filing taxes    The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Filing taxes , that you receive. Filing taxes Foreign employment contributions. Filing taxes   If you worked abroad, certain amounts your employer paid into your retirement plan that were not includible in your gross income may be considered part of your cost. Filing taxes For details, see Foreign employment contributions in Publication 575. Filing taxes Withholding. Filing taxes   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to you. Filing taxes However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. Filing taxes (These are distributions that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. Filing taxes ) See Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information. Filing taxes   For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form W-4P, Withholding Certificate for Pension or Annuity Payments. Filing taxes Simplified Method. Filing taxes   Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Filing taxes For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Filing taxes For any other annuity, this number is the number of monthly annuity payments under the contract. Filing taxes Who must use the Simplified Method. Filing taxes   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your pension or annuity payments from a qualified plan or annuity, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments (defined next). Filing taxes   In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use the Simplified Method for payments from a qualified plan, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments. Filing taxes If you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. Filing taxes Guaranteed payments. Filing taxes   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Filing taxes If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Filing taxes Who cannot use the Simplified Method. Filing taxes   You cannot use the Simplified Method and must use the General Rule if you receive pension or annuity payments from: A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan, or A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed payments (defined above). Filing taxes   In addition, you had to use the General Rule for either circumstance described above if your annuity starting date is after July 1, 1986, and before November 19, 1996. Filing taxes If you did not have to use the General Rule, you could have chosen to use it. Filing taxes You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July 2, 1986, and you did not qualify to use the Three-Year Rule. Filing taxes   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Filing taxes   Unless your annuity starting date was before 1987, once you have recovered all of your non-taxable investment, all of each remaining payment you receive is fully taxable. Filing taxes Once your remaining payments are fully taxable, there is no longer a concern with the General Rule or Simplified Method. Filing taxes   Complete information on the General Rule, including the actuarial tables you need, is contained in Publication 939, General Rule for Pensions and Annuities. Filing taxes How to use the Simplified Method. Filing taxes   Complete the Simplified Method Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions or in Publication 575 to figure your taxable annuity for 2013. Filing taxes Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. Filing taxes   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. Filing taxes How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. Filing taxes For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. Filing taxes    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Filing taxes Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Filing taxes Single-life annuity. Filing taxes   If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Filing taxes Enter on line 3 the number shown for your age on your annuity starting date. Filing taxes This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Filing taxes Multiple-lives annuity. Filing taxes   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Filing taxes Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. Filing taxes For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. Filing taxes For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Filing taxes Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. Filing taxes   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Filing taxes Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Filing taxes This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Filing taxes Fixed-period annuities. Filing taxes   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Filing taxes Line 6. Filing taxes   The amount on line 6 should include all amounts that could have been recovered in prior years. Filing taxes If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. Filing taxes    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years. Filing taxes Example. Filing taxes Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Filing taxes Bill's annuity starting date is January 1, 2013. Filing taxes The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Filing taxes Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Filing taxes Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Filing taxes Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Filing taxes See the illustrated Worksheet 2-A, Simplified Method Worksheet, later. Filing taxes You can find a blank version of this worksheet in Publication 575. Filing taxes (The references in the illustrated worksheet are to sections in Publication 575). Filing taxes His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65), and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet and finds the line 3 amount to be 310. Filing taxes Bill's tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet). Filing taxes Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Filing taxes The full amount of any annuity payments received after 310 payments are paid must generally be included in gross income. Filing taxes If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Filing taxes This deduction is not subject to the 2%-of-adjusted-gross-income limit. Filing taxes Worksheet 2-A. Filing taxes Simplified Method Worksheet—Illustrated 1. Filing taxes Enter the total pension or annuity payments received this year. Filing taxes Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Filing taxes $ 14,400 2. Filing taxes Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion* See Cost (Investment in the Contract), earlier 2. Filing taxes 31,000   Note. Filing taxes If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Filing taxes Otherwise, go to line 3. Filing taxes     3. Filing taxes Enter the appropriate number from Table 1 below. Filing taxes But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Filing taxes 310 4. Filing taxes Divide line 2 by the number on line 3 4. Filing taxes 100 5. Filing taxes Multiply line 4 by the number of months for which this year's payments were made. Filing taxes If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Filing taxes Otherwise, go to line 6 5. Filing taxes 1,200 6. Filing taxes Enter any amount previously recovered tax free in years after 1986. Filing taxes This is the amount shown on line 10 of your worksheet for last year 6. Filing taxes 0 7. Filing taxes Subtract line 6 from line 2 7. Filing taxes 31,000 8. Filing taxes Enter the smaller of line 5 or line 7 8. Filing taxes 1,200 9. Filing taxes Taxable amount for year. Filing taxes Subtract line 8 from line 1. Filing taxes Enter the result, but not less than zero. Filing taxes Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Filing taxes Note. Filing taxes If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Filing taxes If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers, earlier, before entering an amount on your tax return. Filing taxes 9. Filing taxes $ 13,200 10. Filing taxes Was your annuity starting date before 1987? □ Yes. Filing taxes STOP. Filing taxes Do not complete the rest of this worksheet. Filing taxes  ☑ No. Filing taxes Add lines 6 and 8. Filing taxes This is the amount you have recovered tax free through 2013. Filing taxes You will need this number if you need to fill out this worksheet next year. Filing taxes 10. Filing taxes 1,200 11. Filing taxes Balance of cost to be recovered. Filing taxes Subtract line 10 from line 2. Filing taxes If zero, you will not have to complete this worksheet next year. Filing taxes The payments you receive next year will generally be fully taxable 11. Filing taxes $ 29,800 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Filing taxes   Table 1 for Line 3 Above       AND your annuity starting date was—   IF your age on your annuity starting date was . Filing taxes . Filing taxes . Filing taxes   BEFORE November 19, 1996, enter on line 3 . Filing taxes . Filing taxes . Filing taxes AFTER November 18, 1996, enter on line 3 . Filing taxes . Filing taxes . Filing taxes   55 or under 300 360   56-60 260 310   61-65 240 260   66-70 170 210   71 or over 120 160 Table 2 for Line 3 Above   IF the annuitants' combined ages on your annuity starting date were . Filing taxes . Filing taxes . Filing taxes   THEN enter on line 3 . Filing taxes . Filing taxes . Filing taxes         110 or under   410         111-120   360         121-130   310         131-140   260         141 or over   210       Survivors of retirees. Filing taxes   Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the same way the retiree would have included them in gross income. Filing taxes   If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in your income. Filing taxes The retiree's cost has already been recovered tax free. Filing taxes   If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your initial payment called for in the contract. Filing taxes The resulting tax-free amount will then remain fixed. Filing taxes Any increases in the survivor annuity are fully taxable. Filing taxes   If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Filing taxes See Simplified Method , earlier. Filing taxes How to report. Filing taxes   If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. Filing taxes If your pension or annuity is fully taxable, enter it on line 16b. Filing taxes Do not make an entry on line 16a. Filing taxes   If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. Filing taxes If your pension or annuity is fully taxable, enter it on line 12b. Filing taxes Do not make an entry on line 12a. Filing taxes   If you file Form 1040NR, report your total annuity on line 17a, and the taxable part on line 17b. Filing taxes If your pension or annuity is fully taxable, enter it on line 17b. Filing taxes Do not make an entry on line 17a. Filing taxes Example. Filing taxes You are a Form 1040 filer and you received monthly payments totaling $1,200 (12 months x $100) during 2013 from a pension plan that was completely financed by your employer. Filing taxes You had paid no tax on the payments that your employer made to the plan, and the payments were not used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers ). Filing taxes The entire $1,200 is taxable. Filing taxes You include $1,200 only on Form 1040, line 16b. Filing taxes Joint return. Filing taxes   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on line 16a of Form 1040, line 12a of Form 1040A, or line 17a of Form 1040NR. Filing taxes Report the total of the taxable parts on line 16b of Form 1040, line 12b of Form 1040A, or line 17b of Form 1040NR. Filing taxes Form 1099-R. Filing taxes   You should receive a Form 1099-R for your pension or annuity. Filing taxes Form 1099-R shows your pension or annuity for the year and any income tax withheld. Filing taxes You should receive a Form W-2 if you receive distributions from certain nonqualified plans. Filing taxes You must attach Forms 1099-R or Forms W-2 to your 2013 tax return if federal income tax was withheld. Filing taxes Generally, you should be sent these forms by January 31, 2014. Filing taxes Nonperiodic Distributions If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. Filing taxes Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends) on your investment, and certain loans. Filing taxes For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575. Filing taxes The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. Filing taxes See Tax on Early Distributions, later. Filing taxes Lump-sum distributions. Filing taxes   If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Filing taxes The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Filing taxes The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Filing taxes You may be able to use the 10-year tax option to figure tax on the ordinary income part. Filing taxes Form 1099-R. Filing taxes   If you receive a total distribution from a plan, you should receive a Form 1099-R. Filing taxes If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain part of the distribution. Filing taxes The amount in box 2a, Taxable amount, minus the amount in box 3, Capital gain, is the ordinary income part. Filing taxes More information. Filing taxes   For more detailed information on lump-sum distributions, see Publication 575 or Form 4972, Tax on Lump-Sum Distributions. Filing taxes Tax on Early Distributions Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age 59½ are subject to an additional tax of 10%. Filing taxes The tax applies to the taxable part of the distribution. Filing taxes For this purpose, a qualified retirement plan is: A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)), A qualified employee annuity plan, A tax-sheltered annuity plan (403(b) plan), or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Filing taxes  An IRA is also a qualified retirement plan for purposes of this tax. Filing taxes General exceptions to tax. Filing taxes   The early distribution tax does not apply to any distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Filing taxes Additional exceptions. Filing taxes   There are additional exceptions to the early distribution tax for certain distributions from qualified retirement plans and nonqualified annuity contracts. Filing taxes See Publication 575 for details. Filing taxes Reporting tax. Filing taxes   If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is correctly shown in Form 1099-R, box 7, multiply the taxable part of the early distribution by 10% (. Filing taxes 10) and enter the result on Form 1040, line 58, or Form 1040NR, line 56. Filing taxes See the instructions for line 58 of Form 1040 or line 56 of Form 1040NR for more information about reporting the early distribution tax. Filing taxes Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date. Filing taxes Unless the rule for 5% owners applies, this is generally April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Filing taxes However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you reach 70½, even if you have not retired. Filing taxes For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986). Filing taxes  An IRA is also a qualified retirement plan for purposes of this tax. Filing taxes An excess accumulation is the undistributed remainder of the required minimum distribution that was left in your qualified retirement plan. Filing taxes 5% owners. Filing taxes   If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions from the plan by April 1 of the year after the calendar year in which you reach age 70½. Filing taxes See Publication 575 for more information. Filing taxes Amount of tax. Filing taxes   If you do not receive the required minimum distribution, you are subject to an additional tax. Filing taxes The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. Filing taxes You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall. Filing taxes Form 5329. Filing taxes   You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan. Filing taxes Additional information. Filing taxes   For more detailed information on the tax on excess accumulation, see Publication 575. Filing taxes Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. Filing taxes The premiums can be for coverage for you, your spouse, or dependent(s). Filing taxes The distribution must be made directly from the plan to the insurance provider. Filing taxes You can exclude from income the smaller of the amount of the insurance premiums or $3,000. Filing taxes You can only make this election for amounts that would otherwise be included in your income. Filing taxes The amount excluded from your income cannot be used to claim a medical expense deduction. Filing taxes An eligible retirement plan is a governmental plan that is a: Qualified trust, Section 403(a) plan, Section 403(b) annuity, or Section 457(b) plan. Filing taxes If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. Filing taxes The taxable amount shown in box 2a of any Form 1099-R that you receive does not reflect the exclusion. Filing taxes Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Filing taxes Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Filing taxes Enter “PSO” next to the appropriate line on which you report the taxable amount. Filing taxes Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. Filing taxes These categories are treated differently for income tax purposes. Filing taxes Social security equivalent benefits. Filing taxes   The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. Filing taxes This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated for tax purposes like social security benefits. Filing taxes (See Social Security and Equivalent Railroad Retirement Benefits , later. Filing taxes ) Non-social security equivalent benefits. Filing taxes   The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB). Filing taxes It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Filing taxes This category of benefits is treated as an amount received from a qualified employee plan. Filing taxes This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Filing taxes Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. Filing taxes More information. Filing taxes   For more information about railroad retirement benefits, see Publication 575. Filing taxes Military Retirement Pay Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, lines 16a and 16b; on Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. Filing taxes But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. Filing taxes For more information, including information about veterans' benefits and insurance, see Publication 525. Filing taxes Social Security and Equivalent Railroad Retirement Benefits This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. Filing taxes Social security benefits include monthly retirement, survivor, and disability benefits. Filing taxes They do not include supplemental security income (SSI) payments, which are not taxable. Filing taxes Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. Filing taxes They commonly are called the social security equivalent benefit (SSEB) portion of tier 1 benefits. Filing taxes If you received these benefits during 2013, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are a nonresident alien), showing the amount of the benefits. Filing taxes Are Any of Your Benefits Taxable? Note. Filing taxes When the term “benefits” is used in this section, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits. Filing taxes  To find out whether any of your benefits may be taxable, compare the base amount for your filing status (explained later) with the total of: One-half of your benefits, plus All your other income, including tax-exempt interest. Filing taxes When making this comparison, do not reduce your other income by any exclusions for: Interest from qualified U. Filing taxes S. Filing taxes savings bonds, Employer-provided adoption benefits, Foreign earned income or foreign housing, or Income earned in American Samoa or Puerto Rico by bona fide residents. Filing taxes Figuring total income. Filing taxes   To figure the total of one-half of your benefits plus your other income, use Worksheet 2-B. Filing taxes If that total amount is more than your base amount, part of your benefits may be taxable. Filing taxes If you are married and file a joint return for 2013, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Filing taxes Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable. Filing taxes If the only income you received during 2013 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. Filing taxes If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. Filing taxes Worksheet 2-B. Filing taxes A Quick Way To Check if Your Benefits May Be Taxable A. Filing taxes Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Filing taxes Include  the full amount of any lump-sum benefit payments received in 2013, for 2013 and  earlier years. Filing taxes (If you received more than one form, combine the amounts from box 5  and enter the total. Filing taxes ) A. Filing taxes     Note. Filing taxes If the amount on line A is zero or less, stop here; none of your benefits are  taxable this year. Filing taxes     B. Filing taxes Enter one-half of the amount on line A B. Filing taxes   C. Filing taxes Enter your taxable pensions, wages, interest, dividends, and other taxable income C. Filing taxes   D. Filing taxes Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income for: •Interest from qualified U. Filing taxes S. Filing taxes savings bonds, •Employer-provided adoption benefits, •Foreign earned income or foreign housing, or •Income earned in American Samoa or Puerto Rico by bona fide residents D. Filing taxes   E. Filing taxes Add lines B, C, and D and enter the total E. Filing taxes   F. Filing taxes If you are: •Married filing jointly, enter $32,000 •Single, head of household, qualifying widow(er), or married filing separately and you  lived apart from your spouse for all of 2013, enter $25,000 •Married filing separately and you lived with your spouse at any time during 2013,  enter -0- F. Filing taxes   G. Filing taxes Is the amount on line F less than or equal to the amount on line E? □ No. Filing taxes None of your benefits are taxable this year. Filing taxes  □ Yes. Filing taxes Some of your benefits may be taxable. Filing taxes To figure how much of your benefits  are taxable, see Which worksheet to use under How Much Is Taxable. Filing taxes     Base Amount Your base amount is: $25,000 if you are single, head of household, or qualifying widow(er) with dependent child, $25,000 if you are married filing separately and lived apart from your spouse for all of 2013, $32,000 if you are married filing jointly, or $0 if you are married filing separately and lived with your spouse at any time during 2013. Filing taxes Repayment of Benefits Any repayment of benefits you made during 2013 must be subtracted from the gross benefits you received in 2013. Filing taxes It does not matter whether the repayment was for a benefit you received in 2013 or in an earlier year. Filing taxes If you repaid more than the gross benefits you received in 2013, see Repayments More Than Gross Benefits , later. Filing taxes Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Filing taxes Your repayments are shown in box 4. Filing taxes The amount in box 5 shows your net benefits for 2013 (box 3 minus box 4). Filing taxes Use the amount in box 5 to figure whether any of your benefits are taxable. Filing taxes Tax Withholding and Estimated Tax You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits. Filing taxes If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. Filing taxes If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the year. Filing taxes For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals. Filing taxes How Much Is Taxable? If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. Filing taxes Generally, the higher that total amount, the greater the taxable part of your benefits. Filing taxes Maximum taxable part. Filing taxes   The taxable part of your benefits usually cannot be more than 50%. Filing taxes However, up to 85% of your benefits can be taxable if either of the following situations applies to you. Filing taxes The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly). Filing taxes You are married filing separately and lived with your spouse at any time during 2013. Filing taxes   If you are a nonresident alien, 85% of your benefits are taxable. Filing taxes However, this income is exempt under some tax treaties. Filing taxes Which worksheet to use. Filing taxes   A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. Filing taxes However, you will need to use a different worksheet(s) if any of the following situations applies to you. Filing taxes You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement plan at work. Filing taxes In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits. Filing taxes Situation (1) does not apply and you take one or more of the following exclusions. Filing taxes Interest from qualified U. Filing taxes S. Filing taxes savings bonds (Form 8815). Filing taxes Employer-provided adoption benefits (Form 8839). Filing taxes Foreign earned income or housing (Form 2555 or Form 2555-EZ). Filing taxes Income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. Filing taxes In these situations, you must use Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure your taxable benefits. Filing taxes You received a lump-sum payment for an earlier year. Filing taxes In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. Filing taxes See Lump-Sum Election , later. Filing taxes How To Report Your Benefits If part of your benefits are taxable, you must use Form 1040, Form 1040A, or Form 1040NR. Filing taxes You cannot use Form 1040EZ. Filing taxes Reporting on Form 1040. Filing taxes   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. Filing taxes If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 20a. Filing taxes Reporting on Form 1040A. Filing taxes   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. Filing taxes If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 14a. Filing taxes Reporting on Form 1040NR. Filing taxes   Report 85% of the total amount of your benefits (box 5 of your Form SSA-1042S or Form RRB-1042S) in the appropriate column of Form 1040NR, Schedule NEC, line 8. Filing taxes Benefits not taxable. Filing taxes   If you are filing Form 1040EZ, do not report any benefits on your tax return. Filing taxes If you are filing Form 1040 or Form 1040A, report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on Form 1040, line 20a, or Form 1040A, line 14a. Filing taxes Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. Filing taxes If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. Filing taxes Lump-Sum Election You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2013 in your 2013 income, even if the payment includes benefits for an earlier year. Filing taxes This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. Filing taxes No part of the lump-sum death benefit is subject to tax. Filing taxes For more information about the lump-sum death benefit, visit the Social Security Administration website at www. Filing taxes SSA. Filing taxes gov, and use keyword: death benefit. Filing taxes Generally, you use your 2013 income to figure the taxable part of the total benefits received in 2013. Filing taxes However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. Filing taxes You can elect this method if it lowers your taxable benefits. Filing taxes See Publication 915 for more information. Filing taxes Repayments More Than Gross Benefits In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. Filing taxes If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Filing taxes If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year. Filing taxes If you have any questions about this negative figure, contact your local Social Security Administration office or your local U. Filing taxes S. Filing taxes Railroad Retirement Board field office. Filing taxes Joint return. Filing taxes   If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5 but your spouse's does not, subtract the box 5 amount on your form from the box 5 amount on your spouse's form. Filing taxes You do this to get your net benefits when figuring if your combined benefits are taxable. Filing taxes Repayment of benefits received in an earlier year. Filing taxes   If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year. Filing taxes   If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Filing taxes Claim it on Schedule A (Form 1040), line 23. Filing taxes   If this deduction is more than $3,000, you have to follow some special instructions. Filing taxes See Publication 915 for those instructions. Filing taxes Sickness and Injury Benefits Generally, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. Filing taxes If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. Filing taxes However, certain payments may not be taxable to you. Filing taxes Some of these payments are discussed later in this section. Filing taxes Also, see Military and Government Disability Pensions and Other Sickness and Injury Benefits in Publication 525. Filing taxes Cost paid by you. Filing taxes   If you pay the entire cost of an accident or health plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. Filing taxes If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. Filing taxes Disability Pensions If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. Filing taxes You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Filing taxes Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Filing taxes If you were 65 or older by the end of 2013 or you were retired on permanent and total disability and received taxable disability income, you may be able to claim the credit for the elderly or the disabled. Filing taxes See Credit for the Elderly or the Disabled, later. Filing taxes For more information on this credit, see Publication 524, Credit for the Elderly or the Disabled. Filing taxes Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Filing taxes Report the payments on lines 16a and 16b of Form 1040, on lines 12a and 12b of Form 1040A, or on lines 17a and 17b of Form 1040NR. Filing taxes For more information on pensions and annuities, see Publication 575. Filing taxes Retirement and profit-sharing plans. Filing taxes   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. Filing taxes The payments must be reported as a pension or annuity. Filing taxes Accrued leave payment. Filing taxes   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. Filing taxes The payment is not a disability payment. Filing taxes Include it in your income in the tax year you receive it. Filing taxes Long-Term Care Insurance Contracts In most cases, long-term care insurance contracts generally are treated as accident and health insurance contracts. Filing taxes Amounts you receive from them (other than policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal injury or sickness. Filing taxes However, the amount you can exclude may be limited. Filing taxes Long-term care insurance contracts are discussed in more detail in Publication 525. Filing taxes Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. Filing taxes The exemption also applies to your survivors. Filing taxes The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. Filing taxes If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Filing taxes For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Filing taxes Return to work. Filing taxes   If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. Filing taxes Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. Filing taxes Federal Employees' Compensation Act (FECA). Filing taxes   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. Filing taxes However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Filing taxes Report this income on Form 1040, line 7; Form 1040A, line 7; on Form 1040EZ, line 1; or Form 1040NR, line 8. Filing taxes Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. Filing taxes    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Filing taxes For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Filing taxes Other compensation. Filing taxes   Many other amounts you receive as compensation for sickness or injury are not taxable. Filing taxes These include the following amounts. Filing taxes Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. Filing taxes Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. Filing taxes Compensation you receive for permanent loss or loss of use of a part or function of your body, for your permanent disfigurement, or for such loss or disfigurement suffered by your spouse or dependent(s). Filing taxes This compensation must be based only on the injury and not on the period of your absence from work. Filing taxes These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. Filing taxes Life Insurance Proceeds Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. Filing taxes This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. Filing taxes Proceeds not received in installments. Filing taxes   If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. Filing taxes If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death. Filing taxes Proceeds received in installments. Filing taxes   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. Filing taxes   To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Filing taxes Include anything over this excluded part in your income as interest. Filing taxes Installments for life. Filing taxes   If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. Filing taxes If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee. Filing taxes Surviving spouse. Filing taxes   If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude, in any year, up to $1,000 of the interest included in the installments. Filing taxes If you remarry, you can continue to take the exclusion. Filing taxes Surrender of policy for cash. Filing taxes   If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Filing taxes In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income. Filing taxes You should receive a Form 1099-R showing the total proceeds and the taxable part. Filing taxes Report these amounts on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or Form 1040NR, lines 17a and 17b. Filing taxes Endowment Contract Proceeds An endowment contract is a policy that pays over to you a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Filing taxes Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. Filing taxes To determine your cost, subtract from the total premiums (or other consideration) paid for the contract any amount that you previously received under the contract and excluded from your income. Filing taxes Include in your income the part of the lump-sum payment that is more than your cost. Filing taxes Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity. Filing taxes The tax treatment of an annuity is explained in Publication 575. Filing taxes For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. Filing taxes This election must be made within 60 days after the lump-sum payment first becomes payable to you. Filing taxes Accelerated Death Benefits Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are generally excluded from income if the insured is terminally or chronically ill. Filing taxes However, see Exception , later. Filing taxes For a chronically ill individual, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Filing taxes Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit. Filing taxes In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. Filing taxes Generally, a viatical settlement provider is one who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill. Filing taxes To report taxable accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. Filing taxes Terminally or chronically ill defined. Filing taxes   A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months from the date of the certification. Filing taxes A chronically ill person is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions. Filing taxes The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity. Filing taxes The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment. Filing taxes Exception. Filing taxes   The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of the insured because the insured: Is a director, officer, or employee of the other person, or Has a financial interest in the business of the other person. Filing taxes Sale of Home You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. Filing taxes Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return. Filing taxes You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Filing taxes Main home. Filing taxes   Usually, your main home is the home you live in most of the time and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Filing taxes Repaying the first-time homebuyer credit because you sold your home. Filing taxes   If you claimed a first-time homebuyer credit for your main home and you sell it, you may have to repay the credit. Filing taxes For a home purchased in 2008 and used as your main home until sold in 2013, you must file Form 5405 and repay the balance of the unpaid credit on your 2013 tax return. Filing taxes   For a home purchased after 2008, you generally must repay the entire credit if the home was sold (or otherwise ceased to be your main home) within 36 months of the purchase date. Filing taxes If you purchased your home in 2009 and used it as your main home until sold in 2013, you do not have to repay the credit or file Form 5405. Filing taxes If you purchased your home in 2010 and used it as your main home until sold in 2013, you may have to file Form 5405 and repay the entire credit on your 2013 tax return. Filing taxes   See the Instructions for Form 5405 for more information about repaying the credit and exceptions to repayment that may apply to you. Filing taxes Maximum Amount of Exclusion You can generally exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Filing taxes You meet the ownership test. Filing taxes You meet the use test. Filing taxes During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Filing taxes You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Filing taxes Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Filing taxes This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Filing taxes Exception to ownership and use tests. Filing taxes   If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in some cases. Filing taxes Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances. Filing taxes The maximum amount you can exclude will be reduced. Filing taxes See Publication 523, Selling Your Home, for more information. Filing taxes Exception to use test for individuals with a disability. Filing taxes   There is an exception to the use test if, during the 5-year period before the sale of your home: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year. Filing taxes Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition. Filing taxes   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Filing taxes Exception to ownership test for property acquired in a like-kind exchange. Filing taxes   You must have owned your main home for at least 5 years to qualify for the exclusion if you acquired your main home in a like-kind exchange. Filing taxes This special 5-year ownership rule continues to apply to a home you acquired in a like-kind exchange and gave to another person. Filing taxes A like-kind exchange is an exchange of property held for productive use in a trade or business or for investment. Filing taxes See Publication 523 for more information. Filing taxes Period of nonqualified use. Filing taxes   Generally, the gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gain is allocated to periods of nonqualified use. Filing taxes Nonqualified use is any period after December 31, 2008, during which the property is not used as the main home. Filing taxes See Publication 523 for more information. Filing taxes Married Persons In the special situations discussed below, if you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of gain. Filing taxes However, see Special rules for joint returns , next. Filing taxes Special rules for joint returns. Filing taxes   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Filing taxes You are married and file a joint return for the year. Filing taxes Either you or your spouse meets the ownership test. Filing taxes Both you and your spouse meet the use test. Filing taxes During the 2-year period ending on the date of the sale, neither you nor your spouse exclude gain from the sale of another home. Filing taxes Sale of home by surviving spouse. Filing taxes   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Filing taxes   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home in 2013. Filing taxes The sale or exchange took place no more than 2 years after the date of death of your spouse. Filing taxes You have not remarried. Filing taxes You and your spouse met the use test at the time of your spouse's death. Filing taxes You or your spouse met the ownership test at the time of your spouse's death. Filing taxes Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Filing taxes Home transferred from spouse. Filing taxes   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Filing taxes Use of home after divorce. Filing taxes   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Filing taxes Business Use or Rental of Home You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. Filing taxes However, you must meet the ownership and use tests. Filing taxes See Publication 523 for more information. Filing taxes Depreciation after May 6, 1997. Filing taxes   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Filing taxes See Publication 523 for more information. Filing taxes Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and you do not qualify to exclude all of it, You have a gain and you choose not to exclude it, or You received Form 1099-S. Filing taxes If you have a gain that you cannot or choose not to exclude, if you received a Form 1099-S, or if you have a deductible loss, report the sale on your tax return. Filing taxes Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. Filing taxes If you used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property, to report the sale of the business or rental part. Filing taxes See Publication 523 for more information. Filing taxes Reverse Mortgages A revers