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Free State Tax E-filing

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Free State Tax E-filing

Free state tax e-filing Publication 721 - Main Content Table of Contents Part I General InformationRefund of Contributions Tax Withholding and Estimated Tax Filing Requirements Part II Rules for RetireesAnnuity starting date. Free state tax e-filing Gross monthly rate. Free state tax e-filing Your cost. Free state tax e-filing Choosing a survivor annuity after retirement. Free state tax e-filing Canceling a survivor annuity after retirement. Free state tax e-filing Annuity starting date after 1986. Free state tax e-filing Annuity starting date before 1987. Free state tax e-filing Simplified Method General Rule Three-Year Rule Alternative Annuity Option Federal Gift Tax Retirement During the Past Year Reemployment After Retirement Nonresident Aliens Thrift Savings Plan Rollover Rules Distributions Used To Pay Insurance Premiums for Public Safety Officers How To Report Benefits Part III Rules for Disability Retirement and Credit for the Elderly or the DisabledDisability Annuity Other Benefits Credit for the Elderly or the Disabled Part IV Rules for Survivors of Federal EmployeesFERS Death Benefit CSRS or FERS Survivor Annuity Lump-Sum CSRS or FERS Payment Thrift Savings Plan Federal Estate Tax Part V Rules for Survivors of Federal RetireesCSRS or FERS Survivor Annuity Lump-Sum CSRS or FERS Payment Voluntary Contributions Thrift Savings Plan Federal Estate Tax Income Tax Deduction for Estate Tax Paid How To Get Tax HelpLow Income Taxpayer Clinics Part I General Information This part of the publication contains information that can apply to most recipients of civil service retirement benefits. Free state tax e-filing Refund of Contributions If you leave federal government service or transfer to a job not under the CSRS or FERS and you are not eligible for an immediate annuity, you can choose to receive a refund of the money in your CSRS or FERS retirement account. Free state tax e-filing The refund will include both regular and voluntary contributions you made to the fund, plus any interest payable. Free state tax e-filing If the refund includes only your contributions, none of the refund is taxable. Free state tax e-filing If it includes any interest, the interest is taxable unless you roll it over directly into another qualified plan or a traditional individual retirement arrangement (IRA). Free state tax e-filing If you do not have the Office of Personnel Management (OPM) transfer the interest to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. Free state tax e-filing See Rollover Rules in Part II for information on how to make a rollover. Free state tax e-filing Interest is not paid on contributions to the CSRS for service after 1956 unless your service was for more than 1 year but not more than 5 years. Free state tax e-filing Therefore, many employees who withdraw their contributions under the CSRS do not get interest and do not owe any tax on their refund. Free state tax e-filing If you do not roll over interest included in your refund, it may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. Free state tax e-filing If you separate from service before the calendar year in which you reach age 55, it may be subject to an additional 10% tax on early distributions. Free state tax e-filing For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575. Free state tax e-filing A lump-sum distribution is eligible for capital gain treatment or the 10-year tax option only if the plan participant was born before January 2, 1936. Free state tax e-filing Tax Withholding and Estimated Tax The CSRS or FERS annuity you receive is subject to federal income tax withholding, unless you choose not to have tax withheld. Free state tax e-filing OPM will tell you how to make the choice. Free state tax e-filing The choice for no withholding remains in effect until you change it. Free state tax e-filing These withholding rules also apply to a disability annuity, whether received before or after minimum retirement age. Free state tax e-filing If you choose not to have tax withheld, or if you do not have enough tax withheld, you may have to make estimated tax payments. Free state tax e-filing You may owe a penalty if the total of your withheld tax and estimated tax does not cover most of the tax shown on your return. Free state tax e-filing Generally, you will owe the penalty for 2014 if the additional tax you must pay with your return is $1,000 or more and more than 10% of the tax to be shown on your 2014 return. Free state tax e-filing For more information, including exceptions to the penalty, see chapter 4 of Publication 505, Tax Withholding and Estimated Tax. Free state tax e-filing Form CSA 1099R. Free state tax e-filing   Form CSA 1099R is mailed to you by OPM each year. Free state tax e-filing It will show any tax you had withheld. Free state tax e-filing File a copy of Form CSA 1099R with your tax return if any federal income tax was withheld. Free state tax e-filing    You also can view and download your Form CSA 1099R by visiting the OPM website at  www. Free state tax e-filing servicesonline. Free state tax e-filing opm. Free state tax e-filing gov. Free state tax e-filing To log in, you will need your retirement CSA claim number and your personal identification number. Free state tax e-filing Choosing no withholding on payments outside the United States. Free state tax e-filing   The choice for no withholding generally cannot be made for annuity payments to be delivered outside the United States and its possessions. Free state tax e-filing   To choose no withholding if you are a U. Free state tax e-filing S. Free state tax e-filing citizen or resident alien, you must provide OPM with your home address in the United States or its possessions. Free state tax e-filing Otherwise, OPM has to withhold tax. Free state tax e-filing For example, OPM must withhold if you provide a U. Free state tax e-filing S. Free state tax e-filing address for a nominee, trustee, or agent (such as a bank) to whom the benefits are to be delivered, but you do not provide your own U. Free state tax e-filing S. Free state tax e-filing home address. Free state tax e-filing   If you do not provide a home address in the United States or its possessions, you can choose not to have tax withheld only if you certify to OPM that you are not a U. Free state tax e-filing S. Free state tax e-filing citizen, a U. Free state tax e-filing S. Free state tax e-filing resident alien, or someone who left the United States to avoid tax. Free state tax e-filing But if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. Free state tax e-filing For details, see Publication 519, U. Free state tax e-filing S. Free state tax e-filing Tax Guide for Aliens. Free state tax e-filing Withholding certificate. Free state tax e-filing   If you give OPM a Form W-4P-A, Election of Federal Income Tax Withholding, you can choose not to have tax withheld or you can choose to have tax withheld. Free state tax e-filing The amount of tax withheld depends on your marital status, the number of withholding allowances, and any additional amount you designate to be withheld. Free state tax e-filing If you do not make either of these choices, OPM must withhold as if you were married with three withholding allowances. Free state tax e-filing To change the amount of tax withholding or to stop withholding, call OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D. Free state tax e-filing C. Free state tax e-filing calling area must call 202-606-0500). Free state tax e-filing No special form is needed. Free state tax e-filing You will need your retirement CSA or CSF claim number, your social security number, and your personal identification number (PIN) when you call. Free state tax e-filing If you have TTY/TDD equipment, call 1-855–887–4957. Free state tax e-filing If you need a PIN, call OPM's Retirement Information Office. Free state tax e-filing You also can change the amount of withholding or stop withholding online by visiting the OPM website at www. Free state tax e-filing servicesonline. Free state tax e-filing opm. Free state tax e-filing gov. Free state tax e-filing You will need your retirement CSA or CSF claim number and your PIN. Free state tax e-filing Withholding from certain lump-sum payments. Free state tax e-filing   If you leave the federal government before becoming eligible to retire and you apply for a refund of your CSRS or FERS contributions, or you die without leaving a survivor eligible for an annuity, you or your beneficiary will receive a distribution of your contributions to the retirement plan plus any interest payable. Free state tax e-filing Tax will be withheld at a 20% rate on the interest distributed. Free state tax e-filing However, tax will not be withheld if you have OPM transfer (roll over) the interest directly to your traditional IRA or other qualified plan. Free state tax e-filing If you have OPM transfer (roll over) the interest directly to a Roth IRA, the entire amount will be taxed in the current year. Free state tax e-filing Because no income tax will be withheld at the time of the transfer, you may want to increase your withholding or pay estimated taxes. Free state tax e-filing See Rollover Rules in Part II. Free state tax e-filing If you receive only your contributions, no tax will be withheld. Free state tax e-filing Withholding from Thrift Savings Plan payments. Free state tax e-filing   Generally, a distribution that you receive from the TSP is subject to federal income tax withholding. Free state tax e-filing The amount withheld is: 20% if the distribution is an eligible rollover distribution, 10% if it is a nonperiodic distribution other than an eligible rollover distribution, or An amount determined as if you were married with three withholding allowances, unless you submit a withholding certificate (Form W-4P), if it is a periodic distribution. Free state tax e-filing  However, you usually can choose not to have tax withheld from TSP payments other than eligible rollover distributions. Free state tax e-filing By January 31 after the end of the year in which you receive a distribution, the TSP will issue Form 1099-R showing the total distributions you received in the prior year and the amount of tax withheld. Free state tax e-filing   For a detailed discussion of withholding on distributions from the TSP, see Important Tax Information About Payments From Your TSP Account, available from your agency personnel office or from the TSP. Free state tax e-filing The above document is also available in the “Forms & Publications” section of the TSP website at www. Free state tax e-filing tsp. Free state tax e-filing gov. Free state tax e-filing Estimated tax. Free state tax e-filing   Generally, you must make estimated tax payments for 2014 if you expect to owe at least $1,000 in tax for 2014 (after subtracting your withholding and credits) and you expect your withholding and your credits to be less than the smaller of: 90% of the tax to be shown on your income tax return for 2014, or 100% of the tax shown on your 2013 income tax return (110% of that amount if the adjusted gross income shown on the return was more than $150,000 ($75,000 if your filing status for 2014 will be married filing separately)). Free state tax e-filing The return must cover all 12 months. Free state tax e-filing   You do not have to pay estimated tax for 2014 if you were a U. Free state tax e-filing S. Free state tax e-filing citizen or resident alien for all of 2013 and you had no tax liability for the full 12-month 2013 tax year. Free state tax e-filing   Publication 505 contains information that you can use to help you figure your estimated tax payments. Free state tax e-filing Filing Requirements If your gross income, including the taxable part of your annuity, is less than a certain amount, you generally do not have to file a federal income tax return for that year. Free state tax e-filing The gross income filing requirements for the tax year are in the instructions to Form 1040, 1040A, or 1040EZ. Free state tax e-filing Children. Free state tax e-filing   If you are the surviving spouse of a federal employee or retiree and your monthly annuity check includes a survivor annuity for one or more children, each child's annuity counts as his or her own income (not yours) for federal income tax purposes. Free state tax e-filing   If your child can be claimed as a dependent, treat the taxable part of his or her annuity as unearned income when applying the filing requirements for dependents. Free state tax e-filing Form CSF 1099R. Free state tax e-filing   Form CSF 1099R will be mailed to you by January 31 after the end of each tax year. Free state tax e-filing It will show the total amount of the annuity you received in the past year. Free state tax e-filing It also should show, separately, the survivor annuity for a child or children. Free state tax e-filing Only the part that is each individual's survivor annuity should be shown on that individual's Form 1040 or 1040A. Free state tax e-filing   If your Form CSF 1099R does not show separately the amount paid to you for a child or children, attach a statement to your return, along with a copy of Form CSF 1099R, explaining why the amount shown on the tax return differs from the amount shown on Form CSF 1099R. Free state tax e-filing    You also can view and download your Form CSF 1099R by visiting the OPM website at  www. Free state tax e-filing servicesonline. Free state tax e-filing opm. Free state tax e-filing gov. Free state tax e-filing To log in you will need your retirement CSF claim number and personal identification number. Free state tax e-filing    You may request a Summary of Payments, showing the amounts paid to you for your child(ren), from OPM by calling OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D. Free state tax e-filing C. Free state tax e-filing calling area must call 202-606-0500). Free state tax e-filing You will need your CSF claim number and your social security number when you call. Free state tax e-filing Taxable part of annuity. Free state tax e-filing   To find the taxable part of a retiree's annuity when applying the filing requirements, see the discussion in Part II, Rules for Retirees , or Part III, Rules for Disability Retirement and Credit for the Elderly or the Disabled , whichever applies. Free state tax e-filing To find the taxable part of each survivor annuity when applying the filing requirements, see the discussion in Part IV, Rules for Survivors of Federal Employees , or Part V, Rules for Survivors of Federal Retirees , whichever applies. Free state tax e-filing Part II Rules for Retirees This part of the publication is for retirees who retired on nondisability retirement. Free state tax e-filing If you retired on disability before you reached your minimum retirement age, see Part III, Rules for Disability Retirement and Credit for the Elderly or the Disabled. Free state tax e-filing However, on the day after you reach your minimum retirement age, use the rules in this section to report your disability retirement and begin recovering your cost. Free state tax e-filing Annuity statement. Free state tax e-filing   The statement you received from OPM when your CSRS or FERS annuity was approved shows the commencing date (the annuity starting date), the gross monthly rate of your annuity benefit, and your total contributions to the retirement plan (your cost). Free state tax e-filing You will use this information to figure the tax-free recovery of your cost. Free state tax e-filing Annuity starting date. Free state tax e-filing   If you retire from federal government service on a regular annuity, your annuity starting date is the commencing date on your annuity statement from OPM. Free state tax e-filing If something delays payment of your annuity, such as a late application for retirement, it does not affect the date your annuity begins to accrue or your annuity starting date. Free state tax e-filing Gross monthly rate. Free state tax e-filing   This is the amount you were to get after any adjustment for electing a survivor's annuity or for electing the lump-sum payment under the alternative annuity option (if either applied) but before any deduction for income tax withholding, insurance premiums, etc. Free state tax e-filing Your cost. Free state tax e-filing   Your monthly annuity payment contains an amount on which you have previously paid income tax. Free state tax e-filing This amount represents part of your contributions to the retirement plan. Free state tax e-filing Even though you did not receive the money that was contributed to the plan, it was included in your gross income for federal income tax purposes in the years it was taken out of your pay. Free state tax e-filing   The cost of your annuity is the total of your contributions to the retirement plan, as shown on your annuity statement from OPM. Free state tax e-filing If you elected the alternative annuity option, it includes any deemed deposits and any deemed redeposits that were added to your lump-sum credit. Free state tax e-filing (See Lump-sum credit under Alternative Annuity Option, later. Free state tax e-filing )   If you repaid contributions that you had withdrawn from the retirement plan earlier, or if you paid into the plan to receive full credit for service not subject to retirement deductions, the entire repayment, including any interest, is a part of your cost. Free state tax e-filing You cannot claim an interest deduction for any interest payments. Free state tax e-filing You cannot treat these payments as voluntary contributions; they are considered regular employee contributions. Free state tax e-filing Recovering your cost tax free. Free state tax e-filing   How you figure the tax-free recovery of the cost of your CSRS or FERS annuity depends on your annuity starting date. Free state tax e-filing If your annuity starting date is before July 2, 1986, either the Three-Year Rule or the General Rule (both discussed later) applies to your annuity. Free state tax e-filing If your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method (discussed later). Free state tax e-filing If your annuity starting date is after November 18, 1996, you must use the Simplified Method. Free state tax e-filing   Under both the General Rule and the Simplified Method, each of your monthly annuity payments is made up of two parts: the tax-free part that is a return of your cost, and the taxable part that is the amount of each payment that is more than the part that represents your cost (unless such payment is used for purposes discussed under Distributions Used To Pay Insurance Premiums for Public Safety Officers , later). Free state tax e-filing The tax-free part is a fixed dollar amount. Free state tax e-filing It remains the same, even if your annuity is increased. Free state tax e-filing Generally, this rule applies as long as you receive your annuity. Free state tax e-filing However, see Exclusion limit , later. Free state tax e-filing Choosing a survivor annuity after retirement. Free state tax e-filing    If you retired without a survivor annuity and report your annuity under the Simplified Method, do not change your tax-free monthly amount even if you later choose a survivor annuity. Free state tax e-filing   If you retired without a survivor annuity and report your annuity under the General Rule, you must figure the tax-free part of your annuity using a new exclusion percentage if you later choose a survivor annuity and take reduced annuity payments. Free state tax e-filing To figure the new exclusion percentage, reduce your cost by the amount you previously recovered tax free. Free state tax e-filing Figure the expected return as of the date the reduced annuity begins. Free state tax e-filing For details on the General Rule, see Publication 939. Free state tax e-filing Canceling a survivor annuity after retirement. Free state tax e-filing   If you retired with a survivor annuity payable to your spouse upon your death and you notify OPM that your marriage has ended, your annuity might be increased to remove the reduction for a survivor benefit. Free state tax e-filing The increased annuity does not change the cost recovery you figured at the annuity starting date. Free state tax e-filing The tax-free part of each annuity payment remains the same. Free state tax e-filing    For more information about choosing or canceling a survivor annuity after retirement, contact OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D. Free state tax e-filing C. Free state tax e-filing calling area must call 202-606-0500). Free state tax e-filing Exclusion limit. Free state tax e-filing   Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years. Free state tax e-filing Annuity starting date after 1986. Free state tax e-filing   If your annuity starting date is after 1986, the total amount of annuity income that you (or the survivor annuitant) can exclude over the years as a return of your cost cannot exceed your total cost. Free state tax e-filing Annuity payments you or your survivors receive after the total cost in the plan has been recovered are generally fully taxable. Free state tax e-filing Example. Free state tax e-filing Your annuity starting date is after 1986 and you exclude $100 a month under the Simplified Method. Free state tax e-filing If your cost is $12,000, the exclusion ends after 10 years (120 months). Free state tax e-filing Thereafter, your entire annuity is generally fully taxable. Free state tax e-filing Annuity starting date before 1987. Free state tax e-filing   If your annuity starting date is before 1987, you can continue to take your monthly exclusion figured under the General Rule or Simplified Method for as long as you receive your annuity. Free state tax e-filing If you chose a joint and survivor annuity, your survivor can continue to take that same exclusion. Free state tax e-filing The total exclusion may be more than your cost. Free state tax e-filing Deduction of unrecovered cost. Free state tax e-filing   If your annuity starting date is after July 1, 1986, and the cost of your annuity has not been fully recovered at your (or the survivor annuitant's) death, a deduction is allowed for the unrecovered cost. Free state tax e-filing The deduction is claimed on your (or your survivor's) final tax return as a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income limit). Free state tax e-filing If your annuity starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost at death. Free state tax e-filing Simplified Method If your annuity starting date is after November 18, 1996, you must use the Simplified Method to figure the tax-free part of your CSRS or FERS annuity. Free state tax e-filing (OPM has figured the taxable amount of your annuity shown on your Form CSA 1099R using the Simplified Method. Free state tax e-filing ) You could have chosen to use either the Simplified Method or the General Rule if your annuity starting date is after July 1, 1986, but before November 19, 1996. Free state tax e-filing The Simplified Method does not apply if your annuity starting date is before July 2, 1986. Free state tax e-filing Under the Simplified Method, you figure the tax-free part of each full monthly payment by dividing your cost by a number of months based on your age. Free state tax e-filing This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Free state tax e-filing If your annuity starting date is after 1997 and your annuity includes a survivor benefit for your spouse, this number is based on your combined ages. Free state tax e-filing Worksheet A. Free state tax e-filing   Use Worksheet A. Free state tax e-filing Simplified Method (near the end of this publication), to figure your taxable annuity. Free state tax e-filing Be sure to keep the completed worksheet. Free state tax e-filing It will help you figure your taxable amounts for later years. Free state tax e-filing Instead of Worksheet A, you generally can use the Simplified Method Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR to figure your taxable annuity. Free state tax e-filing However, you must use Worksheet A and Worksheet B in this publication if you chose the alternative annuity option, discussed later. Free state tax e-filing Line 2. Free state tax e-filing   See Your cost , earlier, for an explanation of your cost in the plan. Free state tax e-filing If your annuity starting date is after November 18, 1996, and you chose the alternative annuity option (explained later), you must reduce your cost by the tax-free part of the lump-sum payment you received. Free state tax e-filing Line 3. Free state tax e-filing   The number you enter on line 3 is the appropriate number from Table 1 or 2 representing approximate life expectancies in months. Free state tax e-filing If your annuity starting date is after 1997, use: Table 1 for an annuity without a survivor benefit, or Table 2 for an annuity with a survivor benefit. Free state tax e-filing If your annuity starting date is before 1998, use Table 1. Free state tax e-filing Line 6. Free state tax e-filing   If you received contributions tax free before 2013, the amount previously recovered tax free that you must enter on line 6 is the total amount from line 10 of last year's worksheet. Free state tax e-filing If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, this amount includes the tax-free part of the lump-sum payment you received. Free state tax e-filing Example. Free state tax e-filing Bill Smith retired from the Federal Government on March 31, 2013, under an annuity that will provide a survivor benefit for his wife, Kathy. Free state tax e-filing His annuity starting date is April 1, 2013, the annuity is paid in arrears, and he received his first monthly annuity payment on May 1, 2013. Free state tax e-filing He must use the Simplified Method to figure the tax-free part of his annuity benefits. Free state tax e-filing Bill's monthly annuity benefit is $1,000. Free state tax e-filing He had contributed $31,000 to his retirement plan and had received no distributions before his annuity starting date. Free state tax e-filing At his annuity starting date, he was 65 and Kathy was 57. Free state tax e-filing Bill's completed Worksheet A is shown later. Free state tax e-filing To complete line 3, he used Table 2 at the bottom of the worksheet and found that 310 is the number in the second column opposite the age range that includes 122 (his and Kathy's combined ages). Free state tax e-filing Bill keeps a copy of the completed worksheet for his records. Free state tax e-filing It will help him (and Kathy, if she survives him) figure the taxable amount of the annuity in later years. Free state tax e-filing Bill's tax-free monthly amount is $100. Free state tax e-filing (See line 4 of the worksheet. Free state tax e-filing ) If he lives to collect more than 310 monthly payments, he will generally have to include in his gross income the full amount of any annuity payments received after 310 payments have been made. Free state tax e-filing If Bill does not live to collect 310 monthly payments and his wife begins to receive monthly payments, she also will exclude $100 from each monthly payment until 310 payments (Bill's and hers) have been collected. Free state tax e-filing If she dies before 310 payments have been made, a miscellaneous itemized deduction (not subject to the 2%-of-adjusted- gross-income limit) will be allowed for the unrecovered cost on her final income tax return. Free state tax e-filing General Rule If your annuity starting date is after November 18, 1996, you cannot use the General Rule to figure the tax-free part of your CSRS or FERS annuity. Free state tax e-filing If your annuity starting date is after July 1, 1986, but before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Free state tax e-filing If your annuity starting date is before July 2, 1986, you could have chosen to use the General Rule only if you could not use the Three-Year Rule. Free state tax e-filing Under the General Rule, you figure the tax-free part of each full monthly payment by multiplying the initial gross monthly rate of your annuity by an exclusion percentage. Free state tax e-filing Figuring this percentage is complex and requires the use of actuarial tables. Free state tax e-filing For these tables and other information about using the General Rule, see Publication 939. Free state tax e-filing Three-Year Rule If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the Three-Year Rule. Free state tax e-filing Under this rule, you excluded all the annuity payments from income until you fully recovered your cost. Free state tax e-filing After your cost was recovered, all payments became fully taxable. Free state tax e-filing You cannot use another rule to again exclude amounts from income. Free state tax e-filing The Three-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986. Free state tax e-filing Worksheet A. Free state tax e-filing Simplified Method for Bill Smith See the instructions in Part II of this publication under Simplified Method. Free state tax e-filing 1. Free state tax e-filing Enter the total pension or annuity payments received this year. Free state tax e-filing Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Free state tax e-filing $ 8,000 2. Free state tax e-filing Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion*. Free state tax e-filing See Your cost in Part II, Rules for Retirees, earlier 2. Free state tax e-filing 31,000 Note: 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). Free state tax e-filing Otherwise, go to line 3. Free state tax e-filing   3. Free state tax e-filing Enter the appropriate number from Table 1 below. Free state tax e-filing 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. Free state tax e-filing 3. Free state tax e-filing 310 4. Free state tax e-filing Divide line 2 by the number on line 3 4. Free state tax e-filing 100 5. Free state tax e-filing Multiply line 4 by the number of months for which this year's payments were made. Free state tax e-filing If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Free state tax e-filing Otherwise, go to line 6 5. Free state tax e-filing 800 6. Free state tax e-filing Enter any amounts previously recovered tax free in years after 1986. Free state tax e-filing This is the amount shown on line 10 of your worksheet for last year 6. Free state tax e-filing 0 7. Free state tax e-filing Subtract line 6 from line 2 7. Free state tax e-filing 31,000 8. Free state tax e-filing Enter the smaller of line 5 or line 7 8. Free state tax e-filing 800 9. Free state tax e-filing Taxable amount for year. Free state tax e-filing Subtract line 8 from line 1. Free state tax e-filing Enter the result, but not less than zero. Free state tax e-filing Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. Free state tax e-filing If you are a nonresident alien, also enter this amount on line 1 of Worksheet C. Free state tax e-filing If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount figured on this line instead. Free state tax e-filing If you are a retired public safety officer, see Distributions Used To Pay Insurance Premiums for Public Safety Officers in Part II before entering an amount on your tax return or Worksheet C, line 1 9. Free state tax e-filing $7,200 10. Free state tax e-filing Was your annuity starting date before 1987?   Yes. Free state tax e-filing Do not complete the rest of this worksheet. Free state tax e-filing    No. Free state tax e-filing Add lines 6 and 8. Free state tax e-filing This is the amount you have recovered tax free through 2013. Free state tax e-filing You will need this number if you need to fill out this worksheet next year 10. Free state tax e-filing 800 11. Free state tax e-filing Balance of cost to be recovered. Free state tax e-filing Subtract line 10 from line 2. Free state tax e-filing If zero, you will not have to complete this worksheet next year. Free state tax e-filing The payments you receive next year will generally be fully taxable 11. Free state tax e-filing $30,200 Table 1 for Line 3 Above    IF your age on your  annuity starting date was   AND your annuity starting date was—     before November 19, 1996,  THEN enter on line 3 after November 18, 1996,  THEN enter on line 3   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   THEN enter on line 3         110 or under   410         111–120   360         121–130   310         131–140   260         141 or over   210       * A death benefit exclusion of up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. Free state tax e-filing Alternative Annuity Option If you are eligible, you may choose an alternative form of annuity. Free state tax e-filing If you make this choice, you will receive a lump-sum payment equal to your contributions to the plan and a reduced monthly annuity. Free state tax e-filing You are eligible to make this choice if you meet all of the following requirements. Free state tax e-filing You are retiring, but not on disability. Free state tax e-filing You have a life-threatening illness or other critical medical condition. Free state tax e-filing You do not have a former spouse entitled to court ordered benefits based on your service. Free state tax e-filing If you are not eligible or do not choose this alternative annuity, you can skip the following discussion and go to Federal Gift Tax , later. Free state tax e-filing Lump-Sum Payment The lump-sum payment you receive under the alternative annuity option generally has a tax-free part and a taxable part. Free state tax e-filing The tax-free part represents part of your cost. Free state tax e-filing The taxable part represents part of the earnings on your annuity contract. Free state tax e-filing Your lump-sum credit (discussed later) may include a deemed deposit or redeposit that is treated as being included in your lump-sum payment even though you do not actually receive such amounts. Free state tax e-filing Deemed deposits and redeposits, which are described later under Lump-sum credit , are taxable to you in the year of retirement. Free state tax e-filing Your taxable amount may therefore be more than the lump-sum payment you receive. Free state tax e-filing You must include the taxable part of the lump-sum payment in your income for the year you receive the payment unless you roll it over into another qualified plan or an IRA. Free state tax e-filing If you do not have OPM transfer the taxable amount to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. Free state tax e-filing See Rollover Rules , later, for information on how to make a rollover. Free state tax e-filing OPM can make a direct rollover only up to the amount of the lump-sum payment. Free state tax e-filing Therefore, to defer tax on the full taxable amount if it is more than the payment, you must add funds from another source. Free state tax e-filing The taxable part of the lump-sum payment does not qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. Free state tax e-filing It also may be subject to an additional 10% tax on early distributions if you separate from service before the calendar year in which you reach age 55, even if you reach age 55 in the year you receive the lump-sum payment. Free state tax e-filing For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575. Free state tax e-filing Worksheet B. Free state tax e-filing   Use Worksheet B. Free state tax e-filing Lump-Sum Payment (near the end of this publication), to figure the taxable part of your lump-sum payment. Free state tax e-filing Be sure to keep the completed worksheet for your records. Free state tax e-filing   To complete the worksheet, you will need to know the amount of your lump-sum credit and the present value of your annuity contract. Free state tax e-filing Lump-sum credit. Free state tax e-filing   Generally, this is the same amount as the lump-sum payment you receive (the total of your contributions to the retirement system). Free state tax e-filing However, for purposes of the alternative annuity option, your lump-sum credit also may include deemed deposits and redeposits that OPM advanced to your retirement account so that you are given credit for the service they represent. Free state tax e-filing Deemed deposits (including interest) are for federal employment during which no retirement contributions were taken out of your pay. Free state tax e-filing Deemed redeposits (including interest) are for any refunds of retirement contributions that you received and did not repay. Free state tax e-filing You are treated as if you had received a lump-sum payment equal to the amount of your lump-sum credit and then had made a repayment to OPM of the advanced amounts. Free state tax e-filing Present value of your annuity contract. Free state tax e-filing   The present value of your annuity contract is figured using actuarial tables provided by the IRS. Free state tax e-filing If you are receiving a lump-sum payment under the Alternative Annuity Option, you can write to the address below to find out the present value of your annuity contract. Free state tax e-filing Internal Revenue Service Attn: Actuarial Group 2 TE/GE SE:T:EP:RA:T:A2 NCA-629 1111 Constitution Ave. Free state tax e-filing , NW Washington, DC 20224-0002 Example. Free state tax e-filing David Brown retired from the federal government in 2013, one month after his 55th birthday. Free state tax e-filing He had contributed $31,000 to his retirement plan and chose to receive a lump-sum payment of that amount under the alternative annuity option. Free state tax e-filing The present value of his annuity contract was $155,000. Free state tax e-filing The tax-free part and the taxable part of the lump-sum payment are figured using Worksheet B, as shown below. Free state tax e-filing The taxable part ($24,800) is also his net cost in the plan, which is used to figure the taxable part of his reduced annuity payments. Free state tax e-filing See Reduced Annuity , later. Free state tax e-filing Worksheet B. Free state tax e-filing Lump-Sum Payment for David Brown See the instructions in Part II of this publication under Alternative Annuity Option . Free state tax e-filing  1. Free state tax e-filing Enter your lump-sum credit (your cost in the plan at the annuity starting date) 1. Free state tax e-filing $ 31,000 2. Free state tax e-filing Enter the present value of your annuity contract 2. Free state tax e-filing 155,000 3. Free state tax e-filing Divide line 1 by line 2 3. Free state tax e-filing . Free state tax e-filing 20 4. Free state tax e-filing Tax-free amount. Free state tax e-filing Multiply line 1 by line 3. Free state tax e-filing (Caution: Do not include this amount on line 6 of Worksheet A in this publication. Free state tax e-filing ) 4. Free state tax e-filing $6,200 5. Free state tax e-filing Taxable amount (net cost in the plan). Free state tax e-filing Subtract line 4 from line 1. Free state tax e-filing Include this amount in the total on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Free state tax e-filing Also, enter this amount on line 2 of Worksheet A in this publication. Free state tax e-filing 5. Free state tax e-filing $24,800   Lump-sum payment in installments. Free state tax e-filing   If you choose the alternative annuity option, you usually will receive the lump-sum payment in two equal installments. Free state tax e-filing You will receive the first installment after you make the choice upon retirement. Free state tax e-filing The second installment will be paid to you, with interest, in the next calendar year. Free state tax e-filing (Exceptions to the installment rule are provided for cases of critical medical need. Free state tax e-filing )   Even though the lump-sum payment is made in installments, the overall tax treatment (explained at the beginning of this discussion) is the same as if the whole payment were paid at once. Free state tax e-filing If the payment has a tax-free part, you must treat the taxable part as received first. Free state tax e-filing How to report. Free state tax e-filing   Add any actual or deemed payment of your lump-sum credit (defined earlier) to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Free state tax e-filing Add the taxable part to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b, unless you roll over the taxable part to your traditional IRA or a qualified retirement plan. Free state tax e-filing    If you receive the lump-sum payment in two installments, include any interest paid with the second installment on line 8a of either Form 1040 or Form 1040A, or on line 9a of Form 1040NR. Free state tax e-filing Reduced Annuity If you have chosen to receive a lump-sum payment under the alternative annuity option, you also will receive reduced monthly annuity payments. Free state tax e-filing These annuity payments each will have a tax-free and a taxable part. Free state tax e-filing To figure the tax-free part of each annuity payment, you must use the Simplified Method (Worksheet A). Free state tax e-filing For instructions on how to complete the worksheet, see Worksheet A under Simplified Method, earlier. Free state tax e-filing To complete Worksheet A, line 2, you must reduce your cost in the plan by the tax-free part of the lump-sum payment you received. Free state tax e-filing Enter as your net cost on line 2 the amount from Worksheet B, line 5. Free state tax e-filing Do not include the tax-free part of the lump-sum payment with other amounts recovered tax free (Worksheet A, line 6) when limiting your total exclusion to your total cost. Free state tax e-filing Example. Free state tax e-filing The facts are the same as in the example for David Brown in the preceding discussion. Free state tax e-filing In addition, David received 10 annuity payments in 2013 of $1,200 each. Free state tax e-filing Using Worksheet A, he figures the taxable part of his annuity payments. Free state tax e-filing He completes line 2 by reducing his $31,000 cost by the $6,200 tax-free part of his lump-sum payment. Free state tax e-filing His entry on line 2 is his $24,800 net cost in the plan (the amount from Worksheet B, line 5). Free state tax e-filing He does not include the tax-free part of his lump-sum payment on Worksheet A, line 6. Free state tax e-filing David's filled-in Worksheet A is shown on the next page. Free state tax e-filing Worksheet A. Free state tax e-filing Simplified Method for David Brown See the instructions in Part II of this publication under Simplified Method . Free state tax e-filing 1. Free state tax e-filing Enter the total pension or annuity payments received this year. Free state tax e-filing Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Free state tax e-filing $ 12,000 2. Free state tax e-filing Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion*. Free state tax e-filing See Your cost in Part II, Rules for Retirees, earlier 2. Free state tax e-filing 24,800 Note: 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). Free state tax e-filing Otherwise, go to line 3. Free state tax e-filing   3. Free state tax e-filing Enter the appropriate number from Table 1 below. Free state tax e-filing 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. Free state tax e-filing 3. Free state tax e-filing 360 4. Free state tax e-filing Divide line 2 by the number on line 3 4. Free state tax e-filing 68. Free state tax e-filing 89 5. Free state tax e-filing Multiply line 4 by the number of months for which this year's payments were made. Free state tax e-filing If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Free state tax e-filing Otherwise, go to line 6 5. Free state tax e-filing 688. Free state tax e-filing 90 6. Free state tax e-filing Enter any amounts previously recovered tax free in years after 1986. Free state tax e-filing This is the amount shown on line 10 of your worksheet for last year 6. Free state tax e-filing 0 7. Free state tax e-filing Subtract line 6 from line 2 7. Free state tax e-filing 24,800 8. Free state tax e-filing Enter the smaller of line 5 or line 7 8. Free state tax e-filing 688. Free state tax e-filing 90 9. Free state tax e-filing Taxable amount for year. Free state tax e-filing Subtract line 8 from line 1. Free state tax e-filing Enter the result, but not less than zero. Free state tax e-filing Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. Free state tax e-filing If you are a nonresident alien, also enter this amount on line 1 of Worksheet C. Free state tax e-filing If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount figured on this line instead. Free state tax e-filing If you are a retired public safety officer, see Distributions Used To Pay Insurance Premiums for Public Safety Officers in Part II before entering an amount on your tax return or Worksheet C, line 1 9. Free state tax e-filing $11,311. Free state tax e-filing 10 10. Free state tax e-filing Was your annuity starting date before 1987?   Yes. Free state tax e-filing Do not complete the rest of this worksheet. Free state tax e-filing    No. Free state tax e-filing Add lines 6 and 8. Free state tax e-filing This is the amount you have recovered tax free through 2013. Free state tax e-filing You will need this number if you need to fill out this worksheet next year 10. Free state tax e-filing 688. Free state tax e-filing 90 11. Free state tax e-filing Balance of cost to be recovered. Free state tax e-filing Subtract line 10 from line 2. Free state tax e-filing If zero, you will not have to complete this worksheet next year. Free state tax e-filing The payments you receive next year will generally be fully taxable 11. Free state tax e-filing $24,111. Free state tax e-filing 10 Table 1 for Line 3 Above    IF your age on your annuity starting date was   AND your annuity starting date was—     before November 19, 1996,  THEN enter on line 3 after November 18, 1996,  THEN enter on line 3   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   THEN enter on line 3         110 or under   410         111–120   360         121–130   310         131–140   260         141 or over   210       * A death benefit exclusion of up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. Free state tax e-filing Reemployment after choosing the alternative annuity option. Free state tax e-filing If you chose this option when you retired and then you were reemployed by the Federal Government before retiring again, your Form CSA 1099R may show only the amount of your contributions to your retirement plan during your reemployment. Free state tax e-filing If the amount on the form does not include all your contributions, disregard it and use your total contributions to figure the taxable part of your annuity payments. Free state tax e-filing Annuity starting date before November 19, 1996. Free state tax e-filing   If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, the taxable and tax-free parts of your lump-sum payment and your annuity payments are figured using different rules. Free state tax e-filing Under those rules, you do not reduce your cost in the plan (Worksheet A, line 2) by the tax-free part of the lump-sum payment. Free state tax e-filing However, you must include that tax-free amount with other amounts previously recovered tax free (Worksheet A, line 6) when limiting your total exclusion to your total cost. Free state tax e-filing Federal Gift Tax If, through the exercise or nonexercise of an election or option, you provide an annuity for your beneficiary at or after your death, you have made a gift. Free state tax e-filing The gift may be taxable for gift tax purposes. Free state tax e-filing The value of the gift is equal to the value of the annuity. Free state tax e-filing Joint and survivor annuity. Free state tax e-filing   If the gift is an interest in a joint and survivor annuity where only you and your spouse can receive payments before the death of the last spouse to die, the gift generally will qualify for the unlimited marital deduction. Free state tax e-filing This will eliminate any gift tax liability with regard to that gift. Free state tax e-filing   If you provide survivor annuity benefits for someone other than your current spouse, such as your former spouse, the unlimited marital deduction will not apply. Free state tax e-filing This may result in a taxable gift. Free state tax e-filing More information. Free state tax e-filing   For information about the gift tax, see Publication 950, Introduction to Estate and Gift Taxes, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and its instructions. Free state tax e-filing Retirement During the Past Year If you have recently retired, the following discussions covering annual leave, voluntary contributions, and community property may apply to you. Free state tax e-filing Annual leave. Free state tax e-filing   A payment for accrued annual leave received on retirement is a salary payment. Free state tax e-filing It is taxable as wages in the tax year you receive it. Free state tax e-filing Voluntary contributions. Free state tax e-filing   Voluntary contributions to the retirement fund are those made in addition to the regular contributions that were deducted from your salary. Free state tax e-filing They also include the regular contributions withheld from your salary after you have the years of service necessary for the maximum annuity allowed by law. Free state tax e-filing Voluntary contributions are not the same as employee contributions to the Thrift Savings Plan. Free state tax e-filing See Thrift Savings Plan , later. Free state tax e-filing Additional annuity benefit. Free state tax e-filing   If you choose to receive an additional annuity benefit from your voluntary contributions, it is treated separately from the annuity benefit that comes from the regular contributions deducted from your salary. Free state tax e-filing This separate treatment applies for figuring the amounts to be excluded from, and included in, gross income. Free state tax e-filing It does not matter that you receive only one monthly check covering both benefits. Free state tax e-filing Each year you will receive a Form CSA 1099R that will show how much of your total annuity received in the past year was from each type of benefit. Free state tax e-filing   Figure the taxable and tax-free parts of your additional monthly benefits from voluntary contributions using the rules that apply to regular CSRS and FERS annuities, as explained earlier. Free state tax e-filing Refund of voluntary contributions. Free state tax e-filing   If you choose to receive a refund of your voluntary contributions plus accrued interest, the interest is taxable to you in the tax year it is distributed unless you roll it over to a traditional IRA or another qualified retirement plan. Free state tax e-filing If you do not have OPM transfer the interest to a traditional IRA or other qualified retirement plan in a direct rollover, tax will be withheld at a 20% rate. Free state tax e-filing See Rollover Rules , later. Free state tax e-filing The interest does not qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. Free state tax e-filing It also may be subject to an additional 10% tax on early distributions if you separate from service before the calendar year in which you reach age 55. Free state tax e-filing For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575. Free state tax e-filing Community property laws. Free state tax e-filing   State community property laws apply to your annuity. Free state tax e-filing These laws will affect your income tax only if you file a return separately from your spouse. Free state tax e-filing   Generally, the determination of whether your annuity is separate income (taxable to you) or community income (taxable to both you and your spouse) is based on your marital status and domicile when you were working. Free state tax e-filing Regardless of whether you are now living in a community property state or a noncommunity property state, your current annuity may be community income if it is based on services you performed while married and domiciled in a community property state. Free state tax e-filing   At any time, you have only one domicile even though you may have more than one home. Free state tax e-filing Your domicile is your fixed and permanent legal home that you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. Free state tax e-filing The question of your domicile is mainly a matter of your intentions as indicated by your actions. Free state tax e-filing   If your annuity is a mixture of community income and separate income, you must divide it between the two kinds of income. Free state tax e-filing The division is based on your periods of service and domicile in community and noncommunity property states while you were married. Free state tax e-filing   For more information, see Publication 555, Community Property. Free state tax e-filing Reemployment After Retirement If you retired from federal service and are later rehired by the Federal Government as an employee, you can continue to receive your annuity during reemployment. Free state tax e-filing The employing agency usually will pay you the difference between your salary for your period of reemployment and your annuity. Free state tax e-filing This amount is taxable as wages. Free state tax e-filing Your annuity will continue to be taxed just as it was before. Free state tax e-filing If you are still recovering your cost, you continue to do so. Free state tax e-filing If you have recovered your cost, the annuity you receive while you are reemployed generally is fully taxable. Free state tax e-filing Nonresident Aliens The following special rules apply to nonresident alien federal employees performing services outside the United States and to nonresident alien retirees and beneficiaries. Free state tax e-filing A nonresident alien is an individual who is not a citizen or a resident alien of the United States. Free state tax e-filing Special rule for figuring your total contributions. Free state tax e-filing   Your contributions to the retirement plan (your cost) also include the government's contributions to the plan to a certain extent. Free state tax e-filing You include government contributions that would not have been taxable to you at the time they were contributed if they had been paid directly to you. Free state tax e-filing For example, government contributions would not have been taxable to you if, at the time made, your services were performed outside the United States. Free state tax e-filing Thus, your cost is increased by these government contributions and the benefits that you, or your beneficiary, must include in income are reduced. Free state tax e-filing   This method of figuring your total contributions does not apply to any contributions the government made on your behalf after you became a citizen or a resident alien of the United States. Free state tax e-filing Limit on taxable amount. Free state tax e-filing   There is a limit on the taxable amount of payments received from the CSRS, the FERS, or the TSP by a nonresident alien retiree or nonresident alien beneficiary. Free state tax e-filing Figure this limited taxable amount by multiplying the otherwise taxable amount by a fraction. Free state tax e-filing The numerator of the fraction is the retiree's total U. Free state tax e-filing S. Free state tax e-filing Government basic pay, other than tax-exempt pay for services performed outside the United States. Free state tax e-filing The denominator is the retiree's total U. Free state tax e-filing S. Free state tax e-filing Government basic pay for all services. Free state tax e-filing    Basic pay includes regular pay plus any standby differential. Free state tax e-filing It does not include bonuses, overtime pay, certain retroactive pay, uniform or other allowances, or lump-sum leave payments. Free state tax e-filing   To figure the limited taxable amount of your CSRS or FERS annuity or your TSP distributions, use Worksheet C. Free state tax e-filing (For an annuity, first complete Worksheet A in this publication. Free state tax e-filing ) Worksheet C. Free state tax e-filing Limited Taxable Amount for Nonresident Alien 1. Free state tax e-filing Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A or from Forms CSA 1099R or CSF 1099R) or TSP distributions (from Form 1099R) 1. Free state tax e-filing   2. Free state tax e-filing Enter the total U. Free state tax e-filing S. Free state tax e-filing Government basic pay other than tax-exempt pay for services performed outside the United States 2. Free state tax e-filing   3. Free state tax e-filing Enter the total U. Free state tax e-filing S. Free state tax e-filing Government basic pay for all services 3. Free state tax e-filing   4. Free state tax e-filing Divide line 2 by line 3 4. Free state tax e-filing   5. Free state tax e-filing Limited taxable amount. Free state tax e-filing Multiply line 1 by line 4. Free state tax e-filing Enter this amount on Form 1040NR, line 17b 5. Free state tax e-filing   Example 1. Free state tax e-filing You are a nonresident alien who performed all services for the U. Free state tax e-filing S. Free state tax e-filing Government abroad as a nonresident alien. Free state tax e-filing You retired and began to receive a monthly annuity of $200. Free state tax e-filing Your total basic pay for all services for the U. Free state tax e-filing S. Free state tax e-filing Government was $100,000. Free state tax e-filing All of your basic pay was tax exempt because it was not U. Free state tax e-filing S. Free state tax e-filing source income. Free state tax e-filing The taxable amount of your annuity using Worksheet A in this publication is $720. Free state tax e-filing You are a nonresident alien, so you figure the limited taxable amount of your annuity using Worksheet C as follows. Free state tax e-filing Worksheet C. Free state tax e-filing Limited Taxable Amount for Nonresident Alien — Example 1 1. Free state tax e-filing Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A or from Forms CSA 1099R or CSF 1099R) or TSP distributions (from Form 1099R) 1. Free state tax e-filing $ 720 2. Free state tax e-filing Enter the total U. Free state tax e-filing S. Free state tax e-filing Government basic pay other than tax-exempt pay for services performed outside the United States 2. Free state tax e-filing 0 3. Free state tax e-filing Enter the total U. Free state tax e-filing S. Free state tax e-filing Government basic pay for all services 3. Free state tax e-filing 100,000 4. Free state tax e-filing Divide line 2 by line 3 4. Free state tax e-filing 0 5. Free state tax e-filing Limited taxable amount. Free state tax e-filing Multiply line 1 by line 4. Free state tax e-filing Enter this amount on Form 1040NR, line 17b 5. Free state tax e-filing 0 Example 2. Free state tax e-filing You are a nonresident alien who performed services for the U. Free state tax e-filing S. Free state tax e-filing Government as a nonresident alien both within the United States and abroad. Free state tax e-filing You retired and began to receive a monthly annuity of $240. Free state tax e-filing Your total basic pay for your services for the U. Free state tax e-filing S. Free state tax e-filing Government was $120,000; $40,000 was for work done in the United States and $80,000 was for your work done in a foreign country. Free state tax e-filing The part of your total basic pay for your work done in a foreign country was tax exempt because it was not U. Free state tax e-filing S. Free state tax e-filing source income. Free state tax e-filing The taxable amount of your annuity figured using Worksheet A in this publication is $1,980. Free state tax e-filing You are a nonresident alien, so you figure the limited taxable amount of your annuity using Worksheet C as follows. Free state tax e-filing Worksheet C. Free state tax e-filing Limited Taxable Amount for Nonresident Alien — Example 2 1. Free state tax e-filing Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A or from Forms CSA 1099R or CSF 1099R) or TSP distributions (from Form 1099R) 1. Free state tax e-filing $ 1,980 2. Free state tax e-filing Enter the total U. Free state tax e-filing S. Free state tax e-filing Government basic pay other than tax-exempt pay for services performed outside the United States 2. Free state tax e-filing 40,000 3. Free state tax e-filing Enter the total U. Free state tax e-filing S. Free state tax e-filing Government basic pay for all services 3. Free state tax e-filing 120,000 4. Free state tax e-filing Divide line 2 by line 3 4. Free state tax e-filing . Free state tax e-filing 333 5. Free state tax e-filing Limited taxable amount. Free state tax e-filing Multiply line 1 by line 4. Free state tax e-filing Enter this amount on Form 1040NR, line 17b 5. Free state tax e-filing 659 Thrift Savings Plan Generally, all of the money in your TSP account is taxed as ordinary income when you receive it. Free state tax e-filing (However, see Roth TSP balance and Uniformed services TSP accounts, next. Free state tax e-filing ) This is because neither the contributions to your traditional TSP balance nor its earnings have been included previously in your taxable income. Free state tax e-filing The way that you withdraw your account balance determines when you must pay the tax. Free state tax e-filing Roth TSP balance. Free state tax e-filing   The TSP also offers a Roth TSP option, which allows you to make after-tax contributions into your TSP account. Free state tax e-filing This means Roth TSP contributions are included in your income. Free state tax e-filing The contribution limits are the same as the traditional TSP. Free state tax e-filing You can elect to have part or all of your TSP contributions designated as a Roth TSP. Free state tax e-filing Agency contributions will be part of your traditional TSP balance. Free state tax e-filing Also, you cannot roll over any portion of your traditional TSP into your Roth TSP. Free state tax e-filing   Qualified distributions from your Roth TSP are not included in income. Free state tax e-filing This applies to both your cost in the account and income earned on that account. Free state tax e-filing A qualified distribution is generally a distribution that is: Made after a 5-tax-year period of participation, and Made on or after the date you reach age 59½, made to a beneficiary or your estate on or after your death, or attributable to your being disabled. Free state tax e-filing   For more information, go to the TSP website, www. Free state tax e-filing tsp. Free state tax e-filing gov, or the TSP Service Office. Free state tax e-filing See Publication 575, Pension and Annuity Income, for more information about designated Roth accounts. Free state tax e-filing Uniformed services TSP accounts. Free state tax e-filing   If you have a uniformed services TSP account that includes contributions from combat zone pay, the distributions attributable to those contributions are tax exempt. Free state tax e-filing However, any earnings on those contributions to a traditional TSP balance are subject to tax when they are distributed. Free state tax e-filing See Roth TSP balance discussed previously to get more information about Roth contributions. Free state tax e-filing The statement you receive from the TSP will separately state the total amount of your distribution and the amount of your taxable distribution for the year. Free state tax e-filing You can get more information from the TSP website, www. Free state tax e-filing tsp. Free state tax e-filing gov, or the TSP Service Office. Free state tax e-filing Direct rollover by the TSP. Free state tax e-filing   If you ask the TSP to transfer any part of the money in your account, from traditional contributions and its earnings, to a traditional IRA or other qualified retirement plan, the tax on that part is deferred until you receive payments from the traditional IRA or other plan. Free state tax e-filing However, see the following Note for a discussion on direct rollovers by the TSP of Roth contributions and its earnings. Free state tax e-filing Also, see Rollover Rules , later. Free state tax e-filing Direct rollover by the TSP to a Roth IRA. Free state tax e-filing   If you ask the TSP to transfer any part of the money in your account, from traditional contributions and its earnings, to a Roth IRA, the amount transferred will be taxed in the current year. Free state tax e-filing However, see the following Note for a discussion on direct rollovers by the TSP of Roth contributions and its earnings. Free state tax e-filing Also, see Rollovers to Roth IRAs for more information, later. Free state tax e-filing Note. Free state tax e-filing A direct rollover of your Roth contributions and its earnings (if certain conditions are met, see Roth TSP balance , earlier) in your TSP account to a Roth 401(k), Roth 403(b), Roth 457(b), or Roth IRA are not subject to tax when they are transferred or when you receive payments from those accounts at a later date. Free state tax e-filing This is because you already paid tax on those contributions. Free state tax e-filing You cannot rollover Roth contributions and its earnings in your TSP account to a traditional IRA. Free state tax e-filing TSP annuity. Free state tax e-filing   If you ask the TSP to buy an annuity with the money in your account, from traditional contributions and its earnings, the annuity payments are taxed when you receive them. Free state tax e-filing The payments are not subject to the additional 10% tax on early distributions, even if you are under age 55 when they begin. Free state tax e-filing However, there is no tax on the annuity payments if the annuity is purchased using the money in your account from Roth contributions and its earnings if certain conditions are met. Free state tax e-filing See Roth TSP balance , earlier. Free state tax e-filing This is because you already paid tax on those contributions. Free state tax e-filing Cash withdrawals. Free state tax e-filing   If you withdraw any of the money in your TSP account, from traditional contributions and its earnings, it is generally taxed as ordinary income when you receive it unless you roll it over into a traditional IRA or other qualified plan. Free state tax e-filing (See Rollover Rules , later. Free state tax e-filing ) If you receive your entire TSP account balance in a single tax year, you may be able to use the 10-year tax option to figure your tax. Free state tax e-filing See Lump-Sum Distributions in Publication 575 for details. Free state tax e-filing However, there is no tax if you withdraw money in your TSP account from Roth contributions and its earnings if certain conditions are met. Free state tax e-filing See Roth TSP balance , earlier. Free state tax e-filing    To qualify for the 10-year tax option, the plan participant must have been born before January 2, 1936. Free state tax e-filing   If you receive a single payment or you choose to receive your account balance in monthly payments over a period of less than 10 years, the TSP generally must withhold 20% for federal income tax. Free state tax e-filing If you choose to receive your account balance in monthly payments over a period of 10 or more years or a period based on your life expectancy, the payments are subject to withholding as if you are married with three withholding allowances, unless you submit a withholding certificate. Free state tax e-filing See also Withholding from Thrift Savings Plan payments earlier under Tax Withholding and Estimated Tax in Part I. Free state tax e-filing However, there is no withholding requirement for amounts withdrawn from your TSP account that is from Roth contributions and its earnings, if certain conditions are met. Free state tax e-filing See Roth TSP balance , earlier, for a discussion of those conditions. Free state tax e-filing Tax on early distributions. Free state tax e-filing   Any money paid to you from your TSP account before you reach age 59½ may be subject to an additional 10% tax on early distributions. Free state tax e-filing However, this additional tax does not apply in certain situations, including any of the following. Free state tax e-filing You receive the distribution and separate from government service during or after the calendar year in which you reach age 55. Free state tax e-filing You choose to receive your account balance in monthly payments based on your life expectancy. Free state tax e-filing You are totally and permanently disabled. Free state tax e-filing You receive amounts from your Roth contributions since that represents a return of your cost (after-tax money). Free state tax e-filing The earnings may be subject to the 10% tax depending on whether you met certain conditions. Free state tax e-filing See Roth TSP balance , earlier. Free state tax e-filing   For more information, see Tax on Early Distributions in Publication 575. Free state tax e-filing Outstanding loan. Free state tax e-filing   If the TSP declares a distribution from your account because money you borrowed has not been repaid when you separate from government service, your account is reduced and the amount of the distribution (your unpaid loan balance and any unpaid interest), from traditional contributions and its earnings, is taxed in the year declared. Free state tax e-filing The distribution also may be subject to the additional 10% tax on early distributions. Free state tax e-filing However, the tax will be deferred if you make a rollover contribution to a traditional IRA or other qualified plan equal to the declared distribution amount. Free state tax e-filing See Rollover Rules , later. Free state tax e-filing   If you withdraw any money from your TSP account in that same year, the TSP must withhold income tax of 20% of the total of the declared distribution and the amount withdrawn. Free state tax e-filing However, no withholding is required for portions of the distribution that is from Roth contributions and its earnings, if certain conditions are met. Free state tax e-filing See Roth TSP balance , earlier. Free state tax e-filing More information. Free state tax e-filing   For more information about the TSP, see Summary of the Thrift Savings Plan, distributed to all federal employees. Free state tax e-filing Also, see Important Tax Information About Payments From Your TSP Account and Special Tax Withholding Rules for Thrift Savings Plan Payments to Nonresident Aliens, which are available from your agency personnel office or from the TSP by calling 1-TSP-YOU-FIRST (1-877-968-3778) and for participants who are deaf, hard of hearing, or have a speech disability, call 1-TSP-THRIFT5 (1-877-847-4385). Free state tax e-filing    The above documents are also available on the TSP website at www. Free state tax e-filing tsp. Free state tax e-filing gov. Free state tax e-filing Select “Forms & Publications. Free state tax e-filing ” Rollover Rules Generally, a rollover is a tax-free withdrawal of cash or other assets from one qualified retirement plan or traditional IRA and its reinvestment in another qualified retirement plan or traditional IRA. Free state tax e-filing You do not include the amount rolled over in your income, and you cannot take a deduction for it. Free state tax e-filing The amount rolled over is taxed later as the new program pays that amount to you. Free state tax e-filing If you roll over amounts into a traditional IRA, later distributions of these amounts from the traditional IRA do not qualify for the capital gain or the 10-year tax option. Free state tax e-filing However, capital gain treatment or the 10-year tax option will be restored if the traditional IRA contains only amounts rolled over from a qualified plan and these amounts are rolled over from the traditional IRA into a qualified retirement plan. Free state tax e-filing To qualify for the capital gain treatment or 10-year tax option, the plan participant must have been born before January 2, 1936. Free state tax e-filing You can also roll over a distribution from a qualified retirement plan into a Roth IRA. Free state tax e-filing Although the transfer of a distribution into a Roth IRA is considered a rollover for Roth IRA purposes, it is not a tax-free transfer unless you are rolling over amounts from Roth contributions and its earnings. Free state tax e-filing See Rollovers to Roth IRAs , later, for more information. Free state tax e-filing Qualified retirement plan. Free state tax e-filing   For this purpose, a qualified retirement plan generally is: A qualified employee plan, A qualified employee annuity, A tax-sheltered annuity plan (403(b) plan), or An eligible state or local government section 457 deferred compensation plan. Free state tax e-filing The CSRS, FERS, and TSP are considered qualified retirement plans. Free state tax e-filing Distributions eligible for rollover treatment. Free state tax e-filing   If you receive a refund of your CSRS or FERS contributions when you leave government service, you can roll over any interest you receive on the contributions. Free state tax e-filing You cannot roll over any part of your CSRS or FERS annuity payments. Free state tax e-filing   You can roll over a distribution of any part of your TSP account balance except: A distribution of your account balance that you choose to receive in monthly payments over: Your life expectancy, The joint life expectancies of you and your beneficiary, or A period of 10 years or more, A required minimum distribution generally beginning at age 70½, A declared distribution because of an unrepaid loan, if you have not separated from government service (see Outstanding loan under Thrift Savings Plan, earlier), or A hardship distribution. Free state tax e-filing   In addition, a distribution to your beneficiary generally is not treated as an eligible rollover distribution. Free state tax e-filing However, see Qualified domestic relations order (QDRO) and Rollovers by surviving spouse , and Rollovers by nonspouse beneficiary , later. Free state tax e-filing Direct rollover option. Free state tax e-filing   You can choose to have the OPM or TSP transfer any part of an eligible rollover distribution directly to another qualified retirement plan that accepts rollover distributions or to a traditional IRA or Roth IRA. Free state tax e-filing   There is an automatic rollover requirement for mandatory distributions. Free state tax e-filing A mandatory distribution is a distribution made without your consent and before you reach age 62 or normal retirement age, whichever is later. Free state tax e-filing The automatic rollover requirement applies if the distribution is more than $1,000 and is an eligible rollover distribution. Free state tax e-filing You can choose to have the distribution paid directly to you or rolled over directly to your traditional or Roth IRA or another qualified retirement plan. Free state tax e-filing If you do not make this choice, OPM will automatically roll over the distribution into an IRA of a designated trustee or issuer. Free state tax e-filing No tax withheld. Free state tax e-filing   If you choose the direct rollover option or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Free state tax e-filing However, if the rollover is to a Roth IRA, you may want to choose to have tax withheld since any amount rolled over is generally included in income. Free state tax e-filing Any part of the eligible rollover distribution paid to you is subject to withholding at a 20% rate. Free state tax e-filing Direct roll over amounts from Roth contributions and its earnings do not have tax withheld because you already paid tax on those amounts. Free state tax e-filing Payment to you option. Free state tax e-filing   If an eligible rollover distribution is paid to you, the OPM or TSP must withhold 20% for income tax even if you plan to roll over the distribution to another qualified retirement plan, traditional or Roth IRA. Free state tax e-filing However, the full amount is treated as distributed to you even though you actually receive only 80%. Free state tax e-filing You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional IRA. Free state tax e-filing Rollovers to Roth IRAs are generally included in income. Free state tax e-filing Eligible rollover distributions that are from Roth contributions do not have tax withheld because you already paid tax on those amounts. Free state tax e-filing If you leave government service before the calendar year in which you reach age 55 and are under age 59½ when a distribution is paid to you, you may have to pay an additional 10% tax on any part, including any tax withheld, that you do not roll over. Free state tax e-filing However, distributions from Roth contributions will not be subject to the 10% additional tax because it is a return of your cost (after-tax money). Free state tax e-filing Earnings from those contributions may be subject to the 10% additional tax if certain conditions are not met. Free state tax e-filing See Roth TSP balance , earlier. Free state tax e-filing Also, see Tax on Early Distributions in Publication 575. Free state tax e-filing Exception to withholding. Free state tax e-filing   Withholding from an eligible rollover distribution paid to you is not required if the distributions for your tax year total less than $200. Free state tax e-filing Partial rollovers. Free state tax e-filing   A lump-sum distribution may qualify for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. Free state tax e-filing See Lump-Sum Distributions in Publication 575. Free state tax e-filing However, if you roll over any part of the distribution, the part you keep does not qualify for this special tax treatment. Free state tax e-filing Rolling over more than amount received. Free state tax e-filing   If you want to roll over more of an eligible rollover distribution than the amount you received after income tax was withheld, you will have to add funds from some other source (such as your savings or borrowed amounts). Free state tax e-filing Example. Free state tax e-filing You left government service at age 53. Free state tax e-filing On February 1, 2013, you receive an eligible rollover distribution of $10,000 from you
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Understanding Your CP75C Notice

You were banned from claiming the Earned Income Credit (EIC) in a prior tax year due to your intentional disregard of the rules or a fraudulent claim. Since your ban is still in effect, we disallowed the EIC for your current tax year.


What you need to do

  • You don’t need to take further action.

You may want to

  • Review this notice with your tax preparer.
  • Review the rules for claiming EIC
  • Call us for assistance at the toll-free telephone number listed in the top right corner of your notice

Answers to Common Questions

What do I need to send?
If you believe we incorrectly applied the ban, you must provide documentation to show that you didn't intentionally disregard the EIC rules for the year we imposed the ban.

Can I file my tax return while I am being audited?
Yes, you should continue to file all required tax returns before the due date to avoid additional penalties and interest.


Tips for next year

If you are banned from claiming the EIC, you won’t be allowed to claim the credit until the year stated on your notice.

Page Last Reviewed or Updated: 07-Mar-2014

How to get help

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

The Free State Tax E-filing

Free state tax e-filing 2. Free state tax e-filing   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Free state tax e-filing You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Free state tax e-filing This chapter discusses accounting methods. Free state tax e-filing For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free state tax e-filing Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Free state tax e-filing Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Free state tax e-filing Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Free state tax e-filing A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Free state tax e-filing An item considered material for financial statement purposes is generally also considered material for income tax purposes. Free state tax e-filing See Publication 538 for more information. Free state tax e-filing You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Free state tax e-filing If you later want to change your accounting method, you generally must get IRS approval. Free state tax e-filing How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Free state tax e-filing Types of accounting methods. Free state tax e-filing   Generally, you can use any of the following accounting methods. Free state tax e-filing Each method is discussed in detail below. Free state tax e-filing Cash method. Free state tax e-filing Accrual method. Free state tax e-filing Special methods of accounting for certain items of income and expenses. Free state tax e-filing Combination (hybrid) method using elements of two or more of the above. Free state tax e-filing Business and other items. Free state tax e-filing   You can account for business and personal items using different accounting methods. Free state tax e-filing For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Free state tax e-filing Two or more businesses. Free state tax e-filing   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Free state tax e-filing Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Free state tax e-filing Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Free state tax e-filing However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Free state tax e-filing See Accrual Method Required , later. Free state tax e-filing Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Free state tax e-filing Items of income include money received as well as property or services received. Free state tax e-filing If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Free state tax e-filing See chapter 3 for information on how to report farm income on your income tax return. Free state tax e-filing Constructive receipt. Free state tax e-filing   Income is constructively received when an amount is credited to your account or made available to you without restriction. Free state tax e-filing You do not need to have possession of the income for it to be treated as income for the tax year. Free state tax e-filing If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Free state tax e-filing Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Free state tax e-filing Direct payments and counter-cyclical payments. Free state tax e-filing   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Free state tax e-filing Delaying receipt of income. Free state tax e-filing   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Free state tax e-filing You must report the income in the year the money or property is received or made available to you without restriction. Free state tax e-filing Example. Free state tax e-filing Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Free state tax e-filing She was told in December that her payment was available. Free state tax e-filing She requested not to be paid until January 2014. Free state tax e-filing However, she must still include this payment in her 2013 income because it was made available to her in 2013. Free state tax e-filing Debts paid by another person or canceled. Free state tax e-filing   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Free state tax e-filing If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Free state tax e-filing See Cancellation of Debt in chapter 3. Free state tax e-filing Deferred payment contract. Free state tax e-filing   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Free state tax e-filing However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Free state tax e-filing Example. Free state tax e-filing You are a farmer who uses the cash method and a calendar tax year. Free state tax e-filing You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Free state tax e-filing You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Free state tax e-filing However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Free state tax e-filing Repayment of income. Free state tax e-filing   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Free state tax e-filing If the repayment is more than $3,000, a special rule applies. Free state tax e-filing For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Free state tax e-filing Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Free state tax e-filing This includes business expenses for which you contest liability. Free state tax e-filing However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Free state tax e-filing See chapter 4 for information on how to deduct farm business expenses on your income tax return. Free state tax e-filing Prepayment. Free state tax e-filing   Generally, you cannot deduct expenses paid in advance. Free state tax e-filing This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free state tax e-filing Example. Free state tax e-filing On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Free state tax e-filing In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Free state tax e-filing In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Free state tax e-filing An exception applies if the expense qualifies for the 12-month rule. Free state tax e-filing See Publication 538 for more information and examples. Free state tax e-filing See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Free state tax e-filing Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Free state tax e-filing The purpose of an accrual method of accounting is to correctly match income and expenses. Free state tax e-filing Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Free state tax e-filing See Accrual Method Required and Farm Inventory , later. Free state tax e-filing Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Free state tax e-filing Under this rule, include an amount in income on the earliest of the following dates. Free state tax e-filing When you receive payment. Free state tax e-filing When the income amount is due to you. Free state tax e-filing When you earn the income. Free state tax e-filing When title passes. Free state tax e-filing If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Free state tax e-filing Inventory. Free state tax e-filing   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Free state tax e-filing An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Free state tax e-filing See Publication 538 for more information. Free state tax e-filing Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Free state tax e-filing Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Free state tax e-filing The all-events test has been met. Free state tax e-filing This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Free state tax e-filing Economic performance has occurred. Free state tax e-filing Economic performance. Free state tax e-filing   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Free state tax e-filing If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Free state tax e-filing If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free state tax e-filing Example. Free state tax e-filing Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Free state tax e-filing She entered into a contract with ABC Farm Consulting in 2012. Free state tax e-filing The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Free state tax e-filing It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Free state tax e-filing Jane paid ABC Farm Consulting $2,000 in December 2012. Free state tax e-filing Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Free state tax e-filing Economic performance for Jane's liability in the contract occurs as the services are provided. Free state tax e-filing Jane incurs the $2,000 cost in 2013. Free state tax e-filing An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Free state tax e-filing For more information, see Economic Performance in Publication 538. Free state tax e-filing Special rule for related persons. Free state tax e-filing   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Free state tax e-filing Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Free state tax e-filing For more information, see Internal Revenue Code section 267. Free state tax e-filing Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Free state tax e-filing A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Free state tax e-filing A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Free state tax e-filing A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Free state tax e-filing A tax shelter. Free state tax e-filing Note. Free state tax e-filing Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Free state tax e-filing Family corporation. Free state tax e-filing   A family corporation is generally a corporation that meets one of the following ownership requirements. Free state tax e-filing Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Free state tax e-filing Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Free state tax e-filing Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Free state tax e-filing For more information on family corporations, see Internal Revenue Code section 447. Free state tax e-filing Tax shelter. Free state tax e-filing   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Free state tax e-filing Its principal purpose is the avoidance or evasion of federal income tax. Free state tax e-filing It is a farming syndicate. Free state tax e-filing A farming syndicate is an entity that meets either of the following tests. Free state tax e-filing Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Free state tax e-filing More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Free state tax e-filing   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Free state tax e-filing   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Free state tax e-filing Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Free state tax e-filing This record should show the actual count or measurement of the inventory. Free state tax e-filing It should also show all factors that enter into its valuation, including quality and weight, if applicable. Free state tax e-filing Hatchery business. Free state tax e-filing   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Free state tax e-filing Products held for sale. Free state tax e-filing   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Free state tax e-filing , must be included in inventory. Free state tax e-filing Supplies. Free state tax e-filing   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Free state tax e-filing Deduct the cost of supplies in the year used or consumed in operations. Free state tax e-filing Do not include incidental supplies in inventory as these are deductible in the year of purchase. Free state tax e-filing Livestock. Free state tax e-filing   Livestock held primarily for sale must be included in inventory. Free state tax e-filing Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Free state tax e-filing See also Unit-livestock-price method , later. Free state tax e-filing If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Free state tax e-filing Growing crops. Free state tax e-filing   Generally, growing crops are not required to be included in inventory. Free state tax e-filing However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Free state tax e-filing See Uniform capitalization rules below. Free state tax e-filing Also see Uniform Capitalization Rules in  chapter 6. Free state tax e-filing Items to include in inventory. Free state tax e-filing   Your inventory should include all items held for sale, or for use as feed, seed, etc. Free state tax e-filing , whether raised or purchased, that are unsold at the end of the year. Free state tax e-filing Uniform capitalization rules. Free state tax e-filing   The following applies if you are required to use an accrual method of accounting. Free state tax e-filing The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Free state tax e-filing The costs of animals are subject to the uniform capitalization rules. Free state tax e-filing Inventory valuation methods. Free state tax e-filing   The following methods, described below, are those generally available for valuing inventory. Free state tax e-filing The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Free state tax e-filing Cost. Free state tax e-filing Lower of cost or market. Free state tax e-filing Farm-price method. Free state tax e-filing Unit-livestock-price method. Free state tax e-filing Cost and lower of cost or market methods. Free state tax e-filing   See Publication 538 for information on these valuation methods. Free state tax e-filing If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Free state tax e-filing However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Free state tax e-filing Farm-price method. Free state tax e-filing   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Free state tax e-filing Market price is the current price at the nearest market in the quantities you usually sell. Free state tax e-filing Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Free state tax e-filing If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Free state tax e-filing Unit-livestock-price method. Free state tax e-filing   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Free state tax e-filing You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Free state tax e-filing The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Free state tax e-filing Unit prices and classifications are subject to approval by the IRS on examination of your return. Free state tax e-filing You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Free state tax e-filing IRS approval is not required for these adjustments. Free state tax e-filing Any other changes in unit prices or classifications do require IRS approval. Free state tax e-filing   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Free state tax e-filing This method accounts only for the increase in cost of raising an animal to maturity. Free state tax e-filing It does not provide for any decrease in the animal's market value after it reaches maturity. Free state tax e-filing Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Free state tax e-filing   Do not include sold or lost animals in the year-end inventory. Free state tax e-filing If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Free state tax e-filing The animals on hand at the end of the year are considered those most recently acquired. Free state tax e-filing   You must include in inventory all livestock purchased primarily for sale. Free state tax e-filing You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Free state tax e-filing However, you must be consistent from year to year, regardless of the method you have chosen. Free state tax e-filing You cannot change your method without obtaining approval from the IRS. Free state tax e-filing   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Free state tax e-filing If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Free state tax e-filing However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Free state tax e-filing This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Free state tax e-filing It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Free state tax e-filing Uniform capitalization rules. Free state tax e-filing   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Free state tax e-filing This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Free state tax e-filing Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Free state tax e-filing Example 1. Free state tax e-filing You are a farmer who uses an accrual method of accounting. Free state tax e-filing You keep your books on the calendar year basis. Free state tax e-filing You sell grain in December 2013 but you are not paid until January 2014. Free state tax e-filing Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Free state tax e-filing Example 2. Free state tax e-filing Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Free state tax e-filing Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Free state tax e-filing Deduct the costs of producing the grain in the year you pay for them. Free state tax e-filing Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Free state tax e-filing Crop method. Free state tax e-filing   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Free state tax e-filing You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Free state tax e-filing Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Free state tax e-filing    See chapter 4 for details on deducting the costs of operating a farm. Free state tax e-filing Also see Regulations section 1. Free state tax e-filing 162-12. Free state tax e-filing Other special methods. Free state tax e-filing   Other special methods of accounting apply to the following items. Free state tax e-filing Amortization, see chapter 7. Free state tax e-filing Casualties, see chapter 11. Free state tax e-filing Condemnations, see chapter 11. Free state tax e-filing Depletion, see chapter 7. Free state tax e-filing Depreciation, see chapter 7. Free state tax e-filing Farm business expenses, see chapter 4. Free state tax e-filing Farm income, see chapter 3. Free state tax e-filing Installment sales, see chapter 10. Free state tax e-filing Soil and water conservation expenses, see chapter 5. Free state tax e-filing Thefts, see chapter 11. Free state tax e-filing Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Free state tax e-filing However, the following restrictions apply. Free state tax e-filing If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Free state tax e-filing If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Free state tax e-filing Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Free state tax e-filing Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Free state tax e-filing You may also have to pay a fee. Free state tax e-filing To obtain approval, you must generally file Form 3115. Free state tax e-filing There are instances when you can obtain automatic consent to change certain methods of accounting. Free state tax e-filing See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Free state tax e-filing For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Free state tax e-filing Also see Publication 538. Free state tax e-filing Prev  Up  Next   Home   More Online Publications