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Freetaxusa2010

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Freetaxusa2010

Freetaxusa2010 5. Freetaxusa2010   Wages, Salaries, and Other Earnings Table of Contents Reminder Introduction Useful Items - You may want to see: Employee CompensationBabysitting. Freetaxusa2010 Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Reminder Foreign income. Freetaxusa2010   If you are a U. Freetaxusa2010 S. Freetaxusa2010 citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U. Freetaxusa2010 S. Freetaxusa2010 law. Freetaxusa2010 This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. Freetaxusa2010 This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). Freetaxusa2010 If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. Freetaxusa2010 For details, see Publication 54, Tax Guide for U. Freetaxusa2010 S. Freetaxusa2010 Citizens and Resident Aliens Abroad. Freetaxusa2010 Introduction This chapter discusses compensation received for services as an employee, such as wages, salaries, and fringe benefits. Freetaxusa2010 The following topics are included. Freetaxusa2010 Bonuses and awards. Freetaxusa2010 Special rules for certain employees. Freetaxusa2010 Sickness and injury benefits. Freetaxusa2010 The chapter explains what income is included in the employee's gross income and what is not included. Freetaxusa2010 Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income Employee Compensation This section discusses various types of employee compensation including fringe benefits, retirement plan contributions, stock options, and restricted property. Freetaxusa2010 Form W-2. Freetaxusa2010    If you are an employee, you should receive Form W-2 from your employer showing the pay you received for your services. Freetaxusa2010 Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you do not receive a Form W-2. Freetaxusa2010   If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. Freetaxusa2010 These wages must be included on line 7 of Form 1040. Freetaxusa2010 See Form 8919 for more information. Freetaxusa2010 Childcare providers. Freetaxusa2010    If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. Freetaxusa2010 If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Freetaxusa2010 You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. Freetaxusa2010 Babysitting. Freetaxusa2010   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Freetaxusa2010 Miscellaneous Compensation This section discusses different types of employee compensation. Freetaxusa2010 Advance commissions and other earnings. Freetaxusa2010   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. Freetaxusa2010    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. Freetaxusa2010 If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. Freetaxusa2010 See Repayments in chapter 12. Freetaxusa2010 Allowances and reimbursements. Freetaxusa2010    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463. Freetaxusa2010 If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. Freetaxusa2010 Back pay awards. Freetaxusa2010    Include in income amounts you are awarded in a settlement or judgment for back pay. Freetaxusa2010 These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. Freetaxusa2010 They should be reported to you by your employer on Form W-2. Freetaxusa2010 Bonuses and awards. Freetaxusa2010   Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. Freetaxusa2010 These include prizes such as vacation trips for meeting sales goals. Freetaxusa2010 If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. Freetaxusa2010 However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. Freetaxusa2010 Employee achievement award. Freetaxusa2010   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. Freetaxusa2010 However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Freetaxusa2010 Your employer can tell you whether your award is a qualified plan award. Freetaxusa2010 Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. Freetaxusa2010   However, the exclusion does not apply to the following awards: A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. Freetaxusa2010 A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. Freetaxusa2010 Example. Freetaxusa2010 Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Freetaxusa2010 Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. Freetaxusa2010 However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 – $1,600) in his income. Freetaxusa2010 Differential wage payments. Freetaxusa2010   This is any payment made to you by an employer for any period during which you are, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages you would have received from the employer during that period. Freetaxusa2010 These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. Freetaxusa2010 The payments are reported as wages on Form W-2. Freetaxusa2010 Government cost-of-living allowances. Freetaxusa2010   Most payments received by U. Freetaxusa2010 S. Freetaxusa2010 Government civilian employees for working abroad are taxable. Freetaxusa2010 However, certain cost-of-living allowances are tax free. Freetaxusa2010 Publication 516, U. Freetaxusa2010 S. Freetaxusa2010 Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. Freetaxusa2010 Nonqualified deferred compensation plans. Freetaxusa2010   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. Freetaxusa2010 This amount is shown on Form W-2, box 12, using code Y. Freetaxusa2010 This amount is not included in your income. Freetaxusa2010   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. Freetaxusa2010 This amount is included in your wages shown on Form W-2, box 1. Freetaxusa2010 It is also shown on Form W-2, box 12, using code Z. Freetaxusa2010 Note received for services. Freetaxusa2010    If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. Freetaxusa2010 When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Freetaxusa2010 Do not include that part again in your income. Freetaxusa2010 Include the rest of the payment in your income in the year of payment. Freetaxusa2010   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. Freetaxusa2010 Severance pay. Freetaxusa2010   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Freetaxusa2010 Accrued leave payment. Freetaxusa2010    If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. Freetaxusa2010   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. Freetaxusa2010 You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Freetaxusa2010 Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on the return and the wages on your Forms W-2. Freetaxusa2010 Outplacement services. Freetaxusa2010   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. Freetaxusa2010    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). Freetaxusa2010 Sick pay. Freetaxusa2010   Pay you receive from your employer while you are sick or injured is part of your salary or wages. Freetaxusa2010 In addition, you must include in your income sick pay benefits received from any of the following payers: A welfare fund. Freetaxusa2010 A state sickness or disability fund. Freetaxusa2010 An association of employers or employees. Freetaxusa2010 An insurance company, if your employer paid for the plan. Freetaxusa2010 However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. Freetaxusa2010 For more information, see Publication 525. Freetaxusa2010 Social security and Medicare taxes paid by employer. Freetaxusa2010   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. Freetaxusa2010 The payment also is treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Freetaxusa2010 However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Freetaxusa2010 Stock appreciation rights. Freetaxusa2010   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. Freetaxusa2010 When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. Freetaxusa2010 You include the cash payment in your income in the year you use the right. Freetaxusa2010 Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Freetaxusa2010 Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. Freetaxusa2010 Accounting period. Freetaxusa2010   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Freetaxusa2010 Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Freetaxusa2010 The general rule: benefits are reported for a full calendar year (January 1–December 31). Freetaxusa2010 The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. Freetaxusa2010 For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. Freetaxusa2010  Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. Freetaxusa2010   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). Freetaxusa2010 Form W-2. Freetaxusa2010   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips, and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Freetaxusa2010 Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). Freetaxusa2010 However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). Freetaxusa2010 Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. Freetaxusa2010 Benefits you receive from the plan may be taxable, as explained later under Sickness and Injury Benefits . Freetaxusa2010 For information on the items covered in this section, other than Long-term care coverage, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Freetaxusa2010 Long-term care coverage. Freetaxusa2010    Contributions by your employer to provide coverage for long-term care services generally are not included in your income. Freetaxusa2010 However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. Freetaxusa2010 This amount will be reported as wages in box 1 of your Form W-2. Freetaxusa2010   Contributions you make to the plan are discussed in Publication 502, Medical and Dental Expenses. Freetaxusa2010 Archer MSA contributions. Freetaxusa2010    Contributions by your employer to your Archer MSA generally are not included in your income. Freetaxusa2010 Their total will be reported in box 12 of Form W-2 with code R. Freetaxusa2010 You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Freetaxusa2010 File the form with your return. Freetaxusa2010 Health flexible spending arrangement (health FSA). Freetaxusa2010   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. Freetaxusa2010 Note. Freetaxusa2010 Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. Freetaxusa2010 The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. Freetaxusa2010 For more information, see Notice 2012-40, 2012-26 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 1046, available at www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2012-26 IRB/ar09. Freetaxusa2010 html. Freetaxusa2010 Health reimbursement arrangement (HRA). Freetaxusa2010   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. Freetaxusa2010 Health savings accounts (HSA). Freetaxusa2010   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Freetaxusa2010 Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Freetaxusa2010 Contributions made by your employer are not included in your income. Freetaxusa2010 Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Freetaxusa2010 Distributions not used for qualified medical expenses are included in your income. Freetaxusa2010 See Publication 969 for the requirements of an HSA. Freetaxusa2010   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Freetaxusa2010 The contributions are treated as a distribution of money and are not included in the partner's gross income. Freetaxusa2010 Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. Freetaxusa2010 In both situations, the partner can deduct the contribution made to the partner's HSA. Freetaxusa2010   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. Freetaxusa2010 The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Freetaxusa2010 Qualified HSA funding distribution. Freetaxusa2010   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. Freetaxusa2010 See Publication 590 for the requirements for these qualified HSA funding distributions. Freetaxusa2010 Failure to maintain eligibility. Freetaxusa2010   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. Freetaxusa2010 If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. Freetaxusa2010 This income is also subject to an additional 10% tax. Freetaxusa2010 Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. Freetaxusa2010 See the Instructions for Form 8839, Qualified Adoption Expenses, for more information. Freetaxusa2010 Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. Freetaxusa2010 They also are included as social security and Medicare wages in boxes 3 and 5. Freetaxusa2010 However, they are not included as wages in box 1. Freetaxusa2010 To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. Freetaxusa2010 File the form with your return. Freetaxusa2010 De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Freetaxusa2010 In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. Freetaxusa2010 Holiday gifts. Freetaxusa2010   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. Freetaxusa2010 However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. Freetaxusa2010 Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. Freetaxusa2010 For more information, see Publication 970, Tax Benefits for Education. Freetaxusa2010 Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. Freetaxusa2010 However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. Freetaxusa2010 For exceptions, see Entire cost excluded , and Entire cost taxed , later. Freetaxusa2010 If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Freetaxusa2010 Also, it is shown separately in box 12 with code C. Freetaxusa2010 Group-term life insurance. Freetaxusa2010   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. Freetaxusa2010 Permanent benefits. Freetaxusa2010   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Freetaxusa2010 Your employer should be able to tell you the amount to include in your income. Freetaxusa2010 Accidental death benefits. Freetaxusa2010   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. Freetaxusa2010 Former employer. Freetaxusa2010   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Freetaxusa2010 Also, it is shown separately in box 12 with code C. Freetaxusa2010 Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. Freetaxusa2010 You must pay these taxes with your income tax return. Freetaxusa2010 Include them on line 60, Form 1040, and follow the instructions for line 60. Freetaxusa2010 For more information, see the Instructions for Form 1040. Freetaxusa2010 Two or more employers. Freetaxusa2010   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. Freetaxusa2010 If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. Freetaxusa2010 You must figure how much to include in your income. Freetaxusa2010 Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. Freetaxusa2010 Figuring the taxable cost. Freetaxusa2010   Use the following worksheet to figure the amount to include in your income. Freetaxusa2010     Worksheet 5-1. Freetaxusa2010 Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Freetaxusa2010 Enter the total amount of your insurance coverage from your employer(s) 1. Freetaxusa2010   2. Freetaxusa2010 Limit on exclusion for employer-provided group-term life insurance coverage 2. Freetaxusa2010 50,000 3. Freetaxusa2010 Subtract line 2 from line 1 3. Freetaxusa2010   4. Freetaxusa2010 Divide line 3 by $1,000. Freetaxusa2010 Figure to the nearest tenth 4. Freetaxusa2010   5. Freetaxusa2010 Go to Table 5-1. Freetaxusa2010 Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Freetaxusa2010   6. Freetaxusa2010 Multiply line 4 by line 5 6. Freetaxusa2010   7. Freetaxusa2010 Enter the number of full months of coverage at this cost. Freetaxusa2010 7. Freetaxusa2010   8. Freetaxusa2010 Multiply line 6 by line 7 8. Freetaxusa2010   9. Freetaxusa2010 Enter the premiums you paid per month 9. Freetaxusa2010       10. Freetaxusa2010 Enter the number of months you paid the premiums 10. Freetaxusa2010       11. Freetaxusa2010 Multiply line 9 by line 10. Freetaxusa2010 11. Freetaxusa2010   12. Freetaxusa2010 Subtract line 11 from line 8. Freetaxusa2010 Include this amount in your income as wages 12. Freetaxusa2010      Table 5-1. Freetaxusa2010 Cost of $1,000 of Group-Term Life Insurance for One Month Age Cost Under 25 $. Freetaxusa2010 05 25 through 29 . Freetaxusa2010 06 30 through 34 . Freetaxusa2010 08 35 through 39 . Freetaxusa2010 09 40 through 44 . Freetaxusa2010 10 45 through 49 . Freetaxusa2010 15 50 through 54 . Freetaxusa2010 23 55 through 59 . Freetaxusa2010 43 60 through 64 . Freetaxusa2010 66 65 through 69 1. Freetaxusa2010 27 70 and older 2. Freetaxusa2010 06 Example. Freetaxusa2010 You are 51 years old and work for employers A and B. Freetaxusa2010 Both employers provide group-term life insurance coverage for you for the entire year. Freetaxusa2010 Your coverage is $35,000 with employer A and $45,000 with employer B. Freetaxusa2010 You pay premiums of $4. Freetaxusa2010 15 a month under the employer B group plan. Freetaxusa2010 You figure the amount to include in your income as shown in Worksheet 5-1. Freetaxusa2010 Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated, later. Freetaxusa2010 Worksheet 5-1. Freetaxusa2010 Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated 1. Freetaxusa2010 Enter the total amount of your insurance coverage from your employer(s) 1. Freetaxusa2010 80,000 2. Freetaxusa2010 Limit on exclusion for employer-provided group-term life insurance coverage 2. Freetaxusa2010 50,000 3. Freetaxusa2010 Subtract line 2 from line 1 3. Freetaxusa2010 30,000 4. Freetaxusa2010 Divide line 3 by $1,000. Freetaxusa2010 Figure to the nearest tenth 4. Freetaxusa2010 30. Freetaxusa2010 0 5. Freetaxusa2010 Go to Table 5-1. Freetaxusa2010 Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Freetaxusa2010 . Freetaxusa2010 23 6. Freetaxusa2010 Multiply line 4 by line 5 6. Freetaxusa2010 6. Freetaxusa2010 90 7. Freetaxusa2010 Enter the number of full months of coverage at this cost. Freetaxusa2010 7. Freetaxusa2010 12 8. Freetaxusa2010 Multiply line 6 by line 7 8. Freetaxusa2010 82. Freetaxusa2010 80 9. Freetaxusa2010 Enter the premiums you paid per month 9. Freetaxusa2010 4. Freetaxusa2010 15     10. Freetaxusa2010 Enter the number of months you paid the premiums 10. Freetaxusa2010 12     11. Freetaxusa2010 Multiply line 9 by line 10. Freetaxusa2010 11. Freetaxusa2010 49. Freetaxusa2010 80 12. Freetaxusa2010 Subtract line 11 from line 8. Freetaxusa2010 Include this amount in your income as wages 12. Freetaxusa2010 33. Freetaxusa2010 00 Entire cost excluded. Freetaxusa2010   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. Freetaxusa2010 You are permanently and totally disabled and have ended your employment. Freetaxusa2010 Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. Freetaxusa2010 A charitable organization (defined in chapter 24) to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. Freetaxusa2010 (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. Freetaxusa2010 ) The plan existed on January 1, 1984, and You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. Freetaxusa2010 Entire cost taxed. Freetaxusa2010   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply: The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. Freetaxusa2010 You are a key employee and your employer's plan discriminates in favor of key employees. Freetaxusa2010 Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Freetaxusa2010 Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. Freetaxusa2010 You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Freetaxusa2010 Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. Freetaxusa2010 A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. Freetaxusa2010 Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. Freetaxusa2010 However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. Freetaxusa2010 Exclusion limit. Freetaxusa2010   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. Freetaxusa2010   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. Freetaxusa2010   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. Freetaxusa2010   If the benefits have a value that is more than these limits, the excess must be included in your income. Freetaxusa2010 You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. Freetaxusa2010 Commuter highway vehicle. Freetaxusa2010   This is a highway vehicle that seats at least six adults (not including the driver). Freetaxusa2010 At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). Freetaxusa2010 Transit pass. Freetaxusa2010   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. Freetaxusa2010 Qualified parking. Freetaxusa2010   This is parking provided to an employee at or near the employer's place of business. Freetaxusa2010 It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. Freetaxusa2010 It does not include parking at or near the employee's home. Freetaxusa2010 Qualified bicycle commuting. Freetaxusa2010   This is reimbursement based on the number of qualified bicycle commuting months for the year. Freetaxusa2010 A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. Freetaxusa2010 The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Freetaxusa2010 Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. Freetaxusa2010 (Your employer can tell you whether your retirement plan is qualified. Freetaxusa2010 ) However, the cost of life insurance coverage included in the plan may have to be included. Freetaxusa2010 See Group-Term Life Insurance , earlier, under Fringe Benefits. Freetaxusa2010 If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. Freetaxusa2010 However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. Freetaxusa2010 For information on distributions from retirement plans, see Publication 575, Pension and Annuity Income (or Publication 721, Tax Guide to U. Freetaxusa2010 S. Freetaxusa2010 Civil Service Retirement Benefits, if you are a federal employee or retiree). Freetaxusa2010 Elective deferrals. Freetaxusa2010   If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. Freetaxusa2010 The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. Freetaxusa2010 An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. Freetaxusa2010 However, it is included in wages subject to social security and Medicare taxes. Freetaxusa2010   Elective deferrals include elective contributions to the following retirement plans. Freetaxusa2010 Cash or deferred arrangements (section 401(k) plans). Freetaxusa2010 The Thrift Savings Plan for federal employees. Freetaxusa2010 Salary reduction simplified employee pension plans (SARSEP). Freetaxusa2010 Savings incentive match plans for employees (SIMPLE plans). Freetaxusa2010 Tax-sheltered annuity plans (403(b) plans). Freetaxusa2010 Section 501(c)(18)(D) plans. Freetaxusa2010 Section 457 plans. Freetaxusa2010 Qualified automatic contribution arrangements. Freetaxusa2010   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. Freetaxusa2010 You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. Freetaxusa2010 The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. Freetaxusa2010   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. Freetaxusa2010 Overall limit on deferrals. Freetaxusa2010   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3) and (5) above. Freetaxusa2010 The limit for SIMPLE plans is $12,000. Freetaxusa2010 The limit for section 501(c)(18)(D) plans is the lesser of $7,000 or 25% of your compensation. Freetaxusa2010 The limit for section 457 plans is the lesser of your includible compensation or $17,500. Freetaxusa2010 Amounts deferred under specific plan limits are part of the overall limit on deferrals. Freetaxusa2010 Designated Roth contributions. Freetaxusa2010   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Freetaxusa2010 Designated Roth contributions are treated as elective deferrals, except that they are included in income. Freetaxusa2010 Excess deferrals. Freetaxusa2010   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. Freetaxusa2010 However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Freetaxusa2010   If you set aside more than the limit, the excess generally must be included in your income for that year, unless you have an excess deferral of a designated Roth contribution. Freetaxusa2010 See Publication 525 for a discussion of the tax treatment of excess deferrals. Freetaxusa2010 Catch-up contributions. Freetaxusa2010   You may be allowed catch-up contributions (additional elective deferral) if you are age 50 or older by the end of your tax year. Freetaxusa2010 Stock Options If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option. Freetaxusa2010 However, if your option is a statutory stock option, you will not have any income until you sell or exchange your stock. Freetaxusa2010 Your employer can tell you which kind of option you hold. Freetaxusa2010 For more information, see Publication 525. Freetaxusa2010 Restricted Property In most cases, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. Freetaxusa2010 However, if you receive stock or other property that has certain restrictions that affect its value, you do not include the value of the property in your income until it has substantially vested. Freetaxusa2010 (You can choose to include the value of the property in your income in the year it is transferred to you. Freetaxusa2010 ) For more information, see Restricted Property in Publication 525. Freetaxusa2010 Dividends received on restricted stock. Freetaxusa2010   Dividends you receive on restricted stock are treated as compensation and not as dividend income. Freetaxusa2010 Your employer should include these payments on your Form W-2. Freetaxusa2010 Stock you chose to include in income. Freetaxusa2010   Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends. Freetaxusa2010 Report them on your return as dividends. Freetaxusa2010 For a discussion of dividends, see chapter 8. Freetaxusa2010    For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Publication 525. Freetaxusa2010 Special Rules for Certain Employees This section deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers. Freetaxusa2010 Clergy Generally, if you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Freetaxusa2010 , in addition to your salary. Freetaxusa2010 If the offering is made to the religious institution, it is not taxable to you. Freetaxusa2010 If you are a member of a religious organization and you give your outside earnings to the religious organization, you still must include the earnings in your income. Freetaxusa2010 However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Freetaxusa2010 See chapter 24. Freetaxusa2010 Pension. Freetaxusa2010    A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. Freetaxusa2010 It must be reported on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Freetaxusa2010 Housing. Freetaxusa2010    Special rules for housing apply to members of the clergy. Freetaxusa2010 Under these rules, you do not include in your income the rental value of a home (including utilities) or a designated housing allowance provided to you as part of your pay. Freetaxusa2010 However, the exclusion cannot be more than the reasonable pay for your service. Freetaxusa2010 If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. Freetaxusa2010 The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. Freetaxusa2010 However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you are subject to the self-employment tax. Freetaxusa2010 For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Freetaxusa2010 Members of Religious Orders If you are a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order. Freetaxusa2010 Services performed for the order. Freetaxusa2010   If you are performing the services as an agent of the order in the exercise of duties required by the order, do not include in your income the amounts turned over to the order. Freetaxusa2010   If your order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to be performing the services as an agent of the order. Freetaxusa2010 Any wages you earn as an agent of an order that you turn over to the order are not included in your income. Freetaxusa2010 Example. Freetaxusa2010 You are a member of a church order and have taken a vow of poverty. Freetaxusa2010 You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. Freetaxusa2010 You are a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. Freetaxusa2010 However, you remain under the general direction and control of the order. Freetaxusa2010 You are considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order are not included in your income. Freetaxusa2010 Services performed outside the order. Freetaxusa2010   If you are directed to work outside the order, your services are not an exercise of duties required by the order unless they meet both of the following requirements: They are the kind of services that are ordinarily the duties of members of the order. Freetaxusa2010 They are part of the duties that you must exercise for, or on behalf of, the religious order as its agent. Freetaxusa2010 If you are an employee of a third party, the services you perform for the third party will not be considered directed or required of you by the order. Freetaxusa2010 Amounts you receive for these services are included in your income, even if you have taken a vow of poverty. Freetaxusa2010 Example. Freetaxusa2010 Mark Brown is a member of a religious order and has taken a vow of poverty. Freetaxusa2010 He renounces all claims to his earnings and turns over his earnings to the order. Freetaxusa2010 Mark is a schoolteacher. Freetaxusa2010 He was instructed by the superiors of the order to get a job with a private tax-exempt school. Freetaxusa2010 Mark became an employee of the school, and, at his request, the school made the salary payments directly to the order. Freetaxusa2010 Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. Freetaxusa2010 The wages Mark earns working for the school are included in his income. Freetaxusa2010 Foreign Employer Special rules apply if you work for a foreign employer. Freetaxusa2010 U. Freetaxusa2010 S. Freetaxusa2010 citizen. Freetaxusa2010   If you are a U. Freetaxusa2010 S. Freetaxusa2010 citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign employer, you must include your salary in your income. Freetaxusa2010 Social security and Medicare taxes. Freetaxusa2010   You are exempt from social security and Medicare employee taxes if you are employed in the United States by an international organization or a foreign government. Freetaxusa2010 However, you must pay self-employment tax on your earnings from services performed in the United States, even though you are not self-employed. Freetaxusa2010 This rule also applies if you are an employee of a qualifying wholly owned instrumentality of a foreign government. Freetaxusa2010 Employees of international organizations or foreign governments. Freetaxusa2010   Your compensation for official services to an international organization is exempt from federal income tax if you are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). Freetaxusa2010   Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true. Freetaxusa2010 You are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). Freetaxusa2010 Your work is like the work done by employees of the United States in foreign countries. Freetaxusa2010 The foreign government gives an equal exemption to employees of the United States in its country. Freetaxusa2010 Waiver of alien status. Freetaxusa2010   If you are an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration and Nationality Act to keep your immigrant status, different rules may apply. Freetaxusa2010 See Foreign Employer in Publication 525. Freetaxusa2010 Employment abroad. Freetaxusa2010   For information on the tax treatment of income earned abroad, see Publication 54. Freetaxusa2010 Military Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. Freetaxusa2010 Allowances generally are not taxed. Freetaxusa2010 For more information on the tax treatment of military allowances and benefits, see Publication 3, Armed Forces' Tax Guide. Freetaxusa2010 Differential wage payments. Freetaxusa2010   Any payments made to you by an employer during the time you are performing service in the uniformed services are treated as compensation. Freetaxusa2010 These wages are subject to income tax withholding and are reported on a Form W-2. Freetaxusa2010 See the discussion under Miscellaneous Compensation , earlier. Freetaxusa2010 Military retirement pay. Freetaxusa2010   If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Freetaxusa2010 Do not include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan. Freetaxusa2010   For more detailed discussion of survivor annuities, see chapter 10. Freetaxusa2010 Disability. Freetaxusa2010   If you are retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later. Freetaxusa2010 Veterans' benefits. Freetaxusa2010   Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). Freetaxusa2010 The following amounts paid to veterans or their families are not taxable. Freetaxusa2010 Education, training, and subsistence allowances. Freetaxusa2010 Disability compensation and pension payments for disabilities paid either to veterans or their families. Freetaxusa2010 Grants for homes designed for wheelchair living. Freetaxusa2010 Grants for motor vehicles for veterans who lost their sight or the use of their limbs. Freetaxusa2010 Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death. Freetaxusa2010 Interest on insurance dividends you leave on deposit with the VA. Freetaxusa2010 Benefits under a dependent-care assistance program. Freetaxusa2010 The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001. Freetaxusa2010 Payments made under the compensated work therapy program. Freetaxusa2010 Any bonus payment by a state or political subdivision because of service in a combat zone. Freetaxusa2010 Volunteers The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or similar agency is covered in the following discussions. Freetaxusa2010 Peace Corps. Freetaxusa2010   Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are exempt from tax. Freetaxusa2010 Taxable allowances. Freetaxusa2010   The following allowances must be included in your income and reported as wages: Allowances paid to your spouse and minor children while you are a volunteer leader training in the United States. Freetaxusa2010 Living allowances designated by the Director of the Peace Corps as basic compensation. Freetaxusa2010 These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses. Freetaxusa2010 Leave allowances. Freetaxusa2010 Readjustment allowances or termination payments. Freetaxusa2010 These are considered received by you when credited to your account. Freetaxusa2010 Example. Freetaxusa2010 Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Freetaxusa2010 Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account. Freetaxusa2010 Volunteers in Service to America (VISTA). Freetaxusa2010   If you are a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages. Freetaxusa2010 National Senior Services Corps programs. Freetaxusa2010   Do not include in your income amounts you receive for supportive services or reimbursements for out-of-pocket expenses from the following programs. Freetaxusa2010 Retired Senior Volunteer Program (RSVP). Freetaxusa2010 Foster Grandparent Program. Freetaxusa2010 Senior Companion Program. Freetaxusa2010 Service Corps of Retired Executives (SCORE). Freetaxusa2010   If you receive amounts for supportive services or reimbursements for out-of-pocket expenses from SCORE, do not include these amounts in income. Freetaxusa2010 Volunteer tax counseling. Freetaxusa2010   Do not include in your income any reimbursements you receive for transportation, meals, and other expenses you have in training for, or actually providing, volunteer federal income tax counseling for the elderly (TCE). Freetaxusa2010   You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA) program. Freetaxusa2010 See chapter 24. Freetaxusa2010 Sickness and Injury Benefits This section discusses sickness and injury benefits including disability pensions, long-term care insurance contracts, workers' compensation, and other benefits. Freetaxusa2010 In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. Freetaxusa2010 If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. Freetaxusa2010 However, certain payments may not be taxable to you. Freetaxusa2010 Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. Freetaxusa2010 In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury. Freetaxusa2010 Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established. Freetaxusa2010 Cost paid by you. Freetaxusa2010   If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. Freetaxusa2010 If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. Freetaxusa2010 See Reimbursement in a later year in chapter 21. Freetaxusa2010 Cafeteria plans. Freetaxusa2010   In most cases, if you are covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums was not included in your income, you are not considered to have paid the premiums and you must include any benefits you receive in your income. Freetaxusa2010 If the amount of the premiums was included in your income, you are considered to have paid the premiums, and any benefits you receive are not taxable. Freetaxusa2010 Disability Pensions If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. Freetaxusa2010 You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age. Freetaxusa2010 Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Freetaxusa2010 You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Freetaxusa2010 For information on this credit and the definition of permanent and total disability, see chapter 33. Freetaxusa2010 Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Freetaxusa2010 Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Freetaxusa2010 The rules for reporting pensions are explained in How To Report in chapter 10. Freetaxusa2010 For information on disability payments from a governmental program provided as a substitute for unemployment compensation, see chapter 12. Freetaxusa2010 Retirement and profit-sharing plans. Freetaxusa2010   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. Freetaxusa2010 The payments must be reported as a pension or annuity. Freetaxusa2010 For more information on pensions, see chapter 10. Freetaxusa2010 Accrued leave payment. Freetaxusa2010   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. Freetaxusa2010 The payment is not a disability payment. Freetaxusa2010 Include it in your income in the tax year you receive it. Freetaxusa2010 Military and Government Disability Pensions Certain military and government disability pensions are not taxable. Freetaxusa2010 Service-connected disability. Freetaxusa2010   You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services. Freetaxusa2010 The armed forces of any country. Freetaxusa2010 The National Oceanic and Atmospheric Administration. Freetaxusa2010 The Public Health Service. Freetaxusa2010 The Foreign Service. Freetaxusa2010 Conditions for exclusion. Freetaxusa2010   Do not include the disability payments in your income if any of the following conditions apply. Freetaxusa2010 You were entitled to receive a disability payment before September 25, 1975. Freetaxusa2010 You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975. Freetaxusa2010 You receive the disability payments for a combat-related injury. Freetaxusa2010 This is a personal injury or sickness that Results directly from armed conflict, Takes place while you are engaged in extra-hazardous service, Takes place under conditions simulating war, including training exercises such as maneuvers, or Is caused by an instrumentality of war. Freetaxusa2010 You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Freetaxusa2010 Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA. Freetaxusa2010 Pension based on years of service. Freetaxusa2010   If you receive a disability pension based on years of service, in most cases you must include it in your income. Freetaxusa2010 However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), do not include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. Freetaxusa2010 You must include the rest of your pension in your income. Freetaxusa2010 Retroactive VA determination. Freetaxusa2010   If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. Freetaxusa2010 You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period. Freetaxusa2010 You must include with each Form 1040X a copy of the official VA Determination letter granting the retroactive benefit. Freetaxusa2010 The letter must show the amount withheld and the effective date of the benefit. Freetaxusa2010   If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. Freetaxusa2010 However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you are later given a retroactive disability rating by the VA. Freetaxusa2010 Special statute of limitations. Freetaxusa2010   In most cases, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. Freetaxusa2010 However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination. Freetaxusa2010 This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination. Freetaxusa2010 Example. Freetaxusa2010 You retired in 2007 and receive a pension based on your years of service. Freetaxusa2010 On August 1, 2013, you receive a determination of service-connected disability retroactive to 2007. Freetaxusa2010 Generally, you could claim a refund for the taxes paid on your pension for 2010, 2011, and 2012. Freetaxusa2010 However, under the special limitation period, you can also file a claim for 2009 as long as you file the claim by August 1, 2014. Freetaxusa2010 You cannot file a claim for 2007 and 2008 because those tax years began more than 5 years before the determination. Freetaxusa2010 Terrorist attack or military action. Freetaxusa2010   Do not include in your income disability payments you receive for injuries resulting directly from a terrorist or military action. Freetaxusa2010 Long-Term Care Insurance Contracts Long-term care insurance contracts in most cases are treated as accident and health insurance contracts. Freetaxusa2010 Amounts you receive from them (other than policyholder dividends or premium refunds) in most cases are excludable from income as amounts received for personal injury or sickness. Freetaxusa2010 To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return. Freetaxusa2010 A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. Freetaxusa2010 The contract must: Be guaranteed renewable, Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits, and In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses. Freetaxusa2010 Qualified long-term care services. Freetaxusa2010   Qualified long-term care services are: Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and Required by a chronically ill individual and provided pursuant to a plan of care as prescribed by a licensed health care practitioner. Freetaxusa2010 Chronically ill individual. Freetaxusa2010   A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following: An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Freetaxusa2010 Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. Freetaxusa2010 An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. Freetaxusa2010 Limit on exclusion. Freetaxusa2010   You generally can exclude from gross income up to $320 a day for 2013. Freetaxusa2010 See Limit on exclusion, under Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in Publication 525 for more information. Freetaxusa2010 Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. Freetaxusa2010 The exemption also applies to your survivors. Freetaxusa2010 The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. Freetaxusa2010 If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Freetaxusa2010 For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Freetaxusa2010 Return to work. Freetaxusa2010    If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. Freetaxusa2010 Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. Freetaxusa2010 Railroad sick pay. Freetaxusa2010    Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. Freetaxusa2010 However, do not include them in your income if they are for an on-the-job injury. Freetaxusa2010   If you received income because of a disability, see Disability Pensions , earlier. Freetaxusa2010 Federal Employees' Compensation Act (FECA). Freetaxusa2010   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. Freetaxusa2010 However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Freetaxusa2010 Report this income on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040-EZ. Freetaxusa2010 Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. Freetaxusa2010    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Freetaxusa2010 For a discussion of the taxability of these benefits, see Social security and equivalent railroad retirement benefits under Other Income, in Publication 525. Freetaxusa2010    You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. Freetaxusa2010 It is a miscellaneous deduction subject to the 2%-of-AGI limit on Schedule A (Form 1040). Freetaxusa2010 If you buy back sick leave in the same year you used it, the amount reduces your taxable sick leave pay. Freetaxusa2010 Do not deduct it separately. Freetaxusa2010 Other compensation. Freetaxusa2010   Many other amounts you receive as compensation for sickness or injury are not taxable. Freetaxusa2010 These include the following amounts. Freetaxusa2010 Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments. Freetaxusa2010 Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. Freetaxusa2010 Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. Freetaxusa2010 Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. Freetaxusa2010 This compensation must be based only on the injury and not on the period of your absence from work. Freetaxusa2010 These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. Freetaxusa2010 Reimbursement for medical care. Freetaxusa2010    A reimbursement for medical care is generally not taxable. Freetaxusa2010 However, it may reduce your medical expense deduction. Freetaxusa2010 For more information, see chapter 21. 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Freetaxusa2010 Publication 556 - Introductory Material Table of Contents The IRS Mission Reminders IntroductionOrdering forms and publications. Freetaxusa2010 Tax questions. Freetaxusa2010 Useful Items - You may want to see: The IRS Mission Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Freetaxusa2010 Reminders Penalty for filing erroneous claim for refund or credit. Freetaxusa2010  You may have to pay a penalty if you file an erroneous claim for refund or credit. Freetaxusa2010 See Penalty for erroneous claim for refund, later under Claims for Refund. Freetaxusa2010 Interest and penalties suspended if notice not mailed within 36 months. Freetaxusa2010  If you file your return timely (including extensions), interest and certain penalties will be suspended if the IRS does not mail a notice to you within 36 months. Freetaxusa2010 See Suspension of interest and penalties, later under Examination of Returns. Freetaxusa2010 Fast track mediation. Freetaxusa2010  The IRS offers fast track mediation services to help taxpayers resolve many disputes resulting from: Examinations (audits), Offers in compromise, Trust fund recovery penalties, and Other collection actions. Freetaxusa2010 See Fast track mediation under If You Do Not Agree. Freetaxusa2010 Introduction The Internal Revenue Service (IRS) accepts most federal tax returns as filed. Freetaxusa2010 However, the IRS examines (or audits) some returns to determine if income, expenses, and credits are being reported accurately. Freetaxusa2010 If your return is selected for examination, it does not suggest that you made an error or are dishonest. Freetaxusa2010 Returns are chosen by computerized screening, by random sample, or by an income document matching program. Freetaxusa2010 See Examination selection criteria, later. Freetaxusa2010 You should also know that many examinations result in a refund or acceptance of the tax return without change. Freetaxusa2010 This publication discusses general rules and procedures that the IRS follows in examinations. Freetaxusa2010 It explains what happens during an examination and your appeal rights, both within the IRS and in the federal court system. Freetaxusa2010 It also explains how to file a claim for refund of tax you already paid. Freetaxusa2010 As a taxpayer, you have the right to be treated fairly, professionally, promptly, and courteously by IRS employees. Freetaxusa2010 Publication 1, Your Rights as a Taxpayer, explains your rights when dealing with the IRS. Freetaxusa2010 Comments and suggestions. Freetaxusa2010   We welcome your comments about this publication and your suggestions for future editions. Freetaxusa2010   You can write to us at the following address:  Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Freetaxusa2010 NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Freetaxusa2010 Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Freetaxusa2010   You can send your comments from www. Freetaxusa2010 irs. Freetaxusa2010 gov/formspubs/. Freetaxusa2010 Click on “More Information” and then on “Comment on Tax Forms and Publications. Freetaxusa2010 ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Freetaxusa2010 Ordering forms and publications. Freetaxusa2010   Visit www. Freetaxusa2010 irs. Freetaxusa2010 gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Freetaxusa2010  Internal Revenue Service  1201 N. Freetaxusa2010 Mitsubishi Motorway Bloomington, IL 61704-6613 Tax questions. Freetaxusa2010   If you have a tax question, check the information available on www. Freetaxusa2010 irs. Freetaxusa2010 gov or call 1-800-829-1040. Freetaxusa2010 We cannot answer tax questions sent to either of the above addresses. Freetaxusa2010 Useful Items - You may want to see: Publication 1 Your Rights as a Taxpayer 5 Your Appeal Rights and How To Prepare a Protest If You Don't Agree 547 Casualties, Disasters, and Thefts 594 The IRS Collection Process 910 Guide to Free Tax Services 971 Innocent Spouse Relief 1546 Taxpayer Advocate Service–Your Voice at the IRS 1660 Collection Appeal Rights 3605 Fast Track Mediation 3920 Tax Relief for Victims of Terrorist Attacks 4134 Low Income Taxpayer Clinic List Form (and Instructions) 843 Claim for Refund and Request for Abatement 911 Request for Taxpayer Advocate Service Assistance (and Application for Taxpayer Assistance Order) 1040X Amended U. Freetaxusa2010 S. Freetaxusa2010 Individual Income Tax Return 2848 Power of Attorney and Declaration of Representative 4506 Request for Copy of Tax Return 4506-T Request for Transcript of Tax Return 8379 Injured Spouse Allocation 8857 Request for Innocent Spouse Relief See How To Get Tax Help , near the end of this publication, for information about getting these publications and forms. Freetaxusa2010 Prev  Up  Next   Home   More Online Publications