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Irs Gov Freefile

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Irs Gov Freefile

Irs gov freefile 1. Irs gov freefile   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Irs gov freefile Amount realized on a recourse debt. Irs gov freefile Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Irs gov freefile S. Irs gov freefile Individual Income Tax Return 1040X Amended U. Irs gov freefile S. Irs gov freefile Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Irs gov freefile However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Irs gov freefile See chapter 5 for information about getting publications and forms. Irs gov freefile Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Irs gov freefile An exchange is a transfer of property for other property or services. Irs gov freefile The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Irs gov freefile Sale or lease. Irs gov freefile    Some agreements that seem to be leases may really be conditional sales contracts. Irs gov freefile The intention of the parties to the agreement can help you distinguish between a sale and a lease. Irs gov freefile   There is no test or group of tests to prove what the parties intended when they made the agreement. Irs gov freefile You should consider each agreement based on its own facts and circumstances. Irs gov freefile For more information, see chapter 3 in Publication 535, Business Expenses. Irs gov freefile Cancellation of a lease. Irs gov freefile    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Irs gov freefile Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Irs gov freefile Copyright. Irs gov freefile    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Irs gov freefile It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Irs gov freefile Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Irs gov freefile   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Irs gov freefile For more information, see Section 1231 Gains and Losses in chapter 3. Irs gov freefile Easement. Irs gov freefile   The amount received for granting an easement is subtracted from the basis of the property. Irs gov freefile If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Irs gov freefile If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Irs gov freefile   Any amount received that is more than the basis to be reduced is a taxable gain. Irs gov freefile The transaction is reported as a sale of property. Irs gov freefile   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Irs gov freefile However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Irs gov freefile   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Irs gov freefile Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Irs gov freefile See Gain or Loss From Condemnations, later. Irs gov freefile Property transferred to satisfy debt. Irs gov freefile   A transfer of property to satisfy a debt is an exchange. Irs gov freefile Note's maturity date extended. Irs gov freefile   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Irs gov freefile Also, it is not considered a closed and completed transaction that would result in a gain or loss. Irs gov freefile However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Irs gov freefile Each case must be determined by its own facts. Irs gov freefile For more information, see Regulations section 1. Irs gov freefile 1001-3. Irs gov freefile Transfer on death. Irs gov freefile   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Irs gov freefile No taxable gain or deductible loss results from the transfer. Irs gov freefile Bankruptcy. Irs gov freefile   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Irs gov freefile Consequently, the transfer generally does not result in gain or loss. Irs gov freefile For more information, see Publication 908, Bankruptcy Tax Guide. Irs gov freefile Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Irs gov freefile A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Irs gov freefile A loss is the adjusted basis of the property that is more than the amount you realize. Irs gov freefile   Table 1-1. Irs gov freefile How To Figure Whether You Have a Gain or Loss IF your. Irs gov freefile . Irs gov freefile . Irs gov freefile THEN you have a. Irs gov freefile . Irs gov freefile . Irs gov freefile Adjusted basis is more than the amount realized, Loss. Irs gov freefile Amount realized is more than the adjusted basis, Gain. Irs gov freefile Basis. Irs gov freefile   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Irs gov freefile The basis of property you buy is usually its cost. Irs gov freefile However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Irs gov freefile See Basis Other Than Cost in Publication 551, Basis of Assets. Irs gov freefile Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Irs gov freefile See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Irs gov freefile Adjusted basis. Irs gov freefile   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Irs gov freefile Increases include costs of any improvements having a useful life of more than 1 year. Irs gov freefile Decreases include depreciation and casualty losses. Irs gov freefile For more details and additional examples, see Adjusted Basis in Publication 551. Irs gov freefile Amount realized. Irs gov freefile   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Irs gov freefile The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Irs gov freefile Fair market value. Irs gov freefile   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Irs gov freefile If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Irs gov freefile If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Irs gov freefile Example. Irs gov freefile You used a building in your business that cost you $70,000. Irs gov freefile You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Irs gov freefile You sold the building for $100,000 plus property having an FMV of $20,000. Irs gov freefile The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Irs gov freefile The selling expenses were $4,000. Irs gov freefile Your gain on the sale is figured as follows. Irs gov freefile Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Irs gov freefile   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Irs gov freefile Recognized gains must be included in gross income. Irs gov freefile Recognized losses are deductible from gross income. Irs gov freefile However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Irs gov freefile See Nontaxable Exchanges, later. Irs gov freefile Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Irs gov freefile Interest in property. Irs gov freefile   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Irs gov freefile If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Irs gov freefile Your basis in the property is disregarded. Irs gov freefile This rule does not apply if all interests in the property are disposed of at the same time. Irs gov freefile Example 1. Irs gov freefile Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Irs gov freefile You decide to sell your life interest in the farm. Irs gov freefile The entire amount you receive is a recognized gain. Irs gov freefile Your basis in the farm is disregarded. Irs gov freefile Example 2. Irs gov freefile The facts are the same as in Example 1, except that your brother joins you in selling the farm. Irs gov freefile The entire interest in the property is sold, so your basis in the farm is not disregarded. Irs gov freefile Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Irs gov freefile Canceling a sale of real property. Irs gov freefile   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Irs gov freefile If the buyer returns the property in the year of sale, no gain or loss is recognized. Irs gov freefile This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Irs gov freefile If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Irs gov freefile When the property is returned in a later year, you acquire a new basis in the property. Irs gov freefile That basis is equal to the amount you pay to the buyer. Irs gov freefile Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Irs gov freefile You have a gain if the amount realized is more than your adjusted basis in the property. Irs gov freefile However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Irs gov freefile Bargain sales to charity. Irs gov freefile   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Irs gov freefile If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Irs gov freefile The adjusted basis of the part sold is figured as follows. Irs gov freefile Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Irs gov freefile This allocation rule does not apply if a charitable contribution deduction is not allowable. Irs gov freefile   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Irs gov freefile Example. Irs gov freefile You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Irs gov freefile Your adjusted basis in the property is $4,000. Irs gov freefile Your gain on the sale is $1,200, figured as follows. Irs gov freefile Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Irs gov freefile You must subtract depreciation you took or could have taken from the basis of the business or rental part. Irs gov freefile However, see the special rule below for a home used partly for business or rental. Irs gov freefile You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Irs gov freefile Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Irs gov freefile Any gain on the personal part of the property is a capital gain. Irs gov freefile You cannot deduct a loss on the personal part. Irs gov freefile Home used partly for business or rental. Irs gov freefile    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Irs gov freefile See Property Used Partly for Business or Rental, in Publication 523. Irs gov freefile Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Irs gov freefile You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Irs gov freefile However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Irs gov freefile Figure the loss you can deduct as follows. Irs gov freefile Use the lesser of the property's adjusted basis or fair market value at the time of the change. Irs gov freefile Add to (1) the cost of any improvements and other increases to basis since the change. Irs gov freefile Subtract from (2) depreciation and any other decreases to basis since the change. Irs gov freefile Subtract the amount you realized on the sale from the result in (3). Irs gov freefile If the amount you realized is more than the result in (3), treat this result as zero. Irs gov freefile The result in (4) is the loss you can deduct. Irs gov freefile Example. Irs gov freefile You changed your main home to rental property 5 years ago. Irs gov freefile At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Irs gov freefile This year, you sold the property for $55,000. Irs gov freefile You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Irs gov freefile Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Irs gov freefile Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Irs gov freefile   If you have a gain on the sale, you generally must recognize the full amount of the gain. Irs gov freefile You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Irs gov freefile   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Irs gov freefile However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Irs gov freefile   For more information, see Business Use or Rental of Home in Publication 523. Irs gov freefile In addition, special rules apply if the home sold was acquired in a like-kind exchange. Irs gov freefile See Special Situations in Publication 523. Irs gov freefile Also see Like-Kind Exchanges, later. Irs gov freefile Abandonments The abandonment of property is a disposition of property. Irs gov freefile You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Irs gov freefile Generally, abandonment is not treated as a sale or exchange of the property. Irs gov freefile If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Irs gov freefile If your adjusted basis is more than the amount you realize (if any), then you have a loss. Irs gov freefile Loss from abandonment of business or investment property is deductible as a loss. Irs gov freefile A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Irs gov freefile This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Irs gov freefile If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Irs gov freefile The abandonment loss is deducted in the tax year in which the loss is sustained. Irs gov freefile If the abandoned property is secured by debt, special rules apply. Irs gov freefile The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Irs gov freefile For more information, including examples, see chapter 3 of Publication 4681. Irs gov freefile You cannot deduct any loss from abandonment of your home or other property held for personal use only. Irs gov freefile Cancellation of debt. Irs gov freefile   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Irs gov freefile This income is separate from any loss realized from abandonment of the property. Irs gov freefile   You must report this income on your tax return unless one of the following applies. Irs gov freefile The cancellation is intended as a gift. Irs gov freefile The debt is qualified farm debt. Irs gov freefile The debt is qualified real property business debt. Irs gov freefile You are insolvent or bankrupt. Irs gov freefile The debt is qualified principal residence indebtedness. Irs gov freefile File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Irs gov freefile For more information, including other exceptions and exclusion, see Publication 4681. Irs gov freefile Forms 1099-A and 1099-C. Irs gov freefile   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Irs gov freefile However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Irs gov freefile The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Irs gov freefile For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Irs gov freefile Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Irs gov freefile The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Irs gov freefile This is true even if you voluntarily return the property to the lender. Irs gov freefile You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Irs gov freefile Buyer's (borrower's) gain or loss. Irs gov freefile   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Irs gov freefile The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Irs gov freefile See Gain or Loss From Sales and Exchanges, earlier. Irs gov freefile You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Irs gov freefile Amount realized on a nonrecourse debt. Irs gov freefile   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Irs gov freefile The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Irs gov freefile Example 1. Irs gov freefile Chris bought a new car for $15,000. Irs gov freefile He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Irs gov freefile Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Irs gov freefile The credit company repossessed the car because he stopped making loan payments. Irs gov freefile The balance due after taking into account the payments Chris made was $10,000. Irs gov freefile The fair market value of the car when repossessed was $9,000. Irs gov freefile The amount Chris realized on the repossession is $10,000. Irs gov freefile That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Irs gov freefile Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Irs gov freefile He has a $5,000 nondeductible loss. Irs gov freefile Example 2. Irs gov freefile Abena paid $200,000 for her home. Irs gov freefile She paid $15,000 down and borrowed the remaining $185,000 from a bank. Irs gov freefile Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Irs gov freefile The bank foreclosed on the loan because Abena stopped making payments. Irs gov freefile When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Irs gov freefile The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Irs gov freefile She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Irs gov freefile She has a $5,000 realized gain. Irs gov freefile Amount realized on a recourse debt. Irs gov freefile   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Irs gov freefile You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Irs gov freefile The amount realized does not include the canceled debt that is your income from cancellation of debt. Irs gov freefile See Cancellation of debt, below. Irs gov freefile Seller's (lender's) gain or loss on repossession. Irs gov freefile   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Irs gov freefile For more information, see Repossession in Publication 537. Irs gov freefile    Table 1-2. Irs gov freefile Worksheet for Foreclosures and Repossessions Part 1. Irs gov freefile Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Irs gov freefile Complete this part only  if you were personally liable for the debt. Irs gov freefile Otherwise,  go to Part 2. Irs gov freefile   1. Irs gov freefile Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Irs gov freefile Enter the fair market value of the transferred property   3. Irs gov freefile Ordinary income from cancellation of debt upon foreclosure or    repossession. Irs gov freefile * Subtract line 2 from line 1. Irs gov freefile   If less than zero, enter zero   Part 2. Irs gov freefile Figure your gain or loss from foreclosure or repossession. Irs gov freefile   4. Irs gov freefile If you completed Part 1, enter the smaller of line 1 or line 2. Irs gov freefile   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Irs gov freefile Enter any proceeds you received from the foreclosure sale   6. Irs gov freefile Add lines 4 and 5   7. Irs gov freefile Enter the adjusted basis of the transferred property   8. Irs gov freefile Gain or loss from foreclosure or repossession. Irs gov freefile Subtract line 7  from line 6   * The income may not be taxable. Irs gov freefile See Cancellation of debt. Irs gov freefile Cancellation of debt. Irs gov freefile   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Irs gov freefile This income is separate from any gain or loss realized from the foreclosure or repossession. Irs gov freefile Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Irs gov freefile    You can use Table 1-2 to figure your income from cancellation of debt. Irs gov freefile   You must report this income on your tax return unless one of the following applies. Irs gov freefile The cancellation is intended as a gift. Irs gov freefile The debt is qualified farm debt. Irs gov freefile The debt is qualified real property business debt. Irs gov freefile You are insolvent or bankrupt. Irs gov freefile The debt is qualified principal residence indebtedness. Irs gov freefile File Form 982 to report the income exclusion. Irs gov freefile Example 1. Irs gov freefile Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Irs gov freefile In this case, the amount he realizes is $9,000. Irs gov freefile This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Irs gov freefile Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Irs gov freefile He has a $6,000 nondeductible loss. Irs gov freefile He also is treated as receiving ordinary income from cancellation of debt. Irs gov freefile That income is $1,000 ($10,000 − $9,000). Irs gov freefile This is the part of the canceled debt not included in the amount realized. Irs gov freefile Example 2. Irs gov freefile Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Irs gov freefile In this case, the amount she realizes is $170,000. Irs gov freefile This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Irs gov freefile Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Irs gov freefile She has a $5,000 nondeductible loss. Irs gov freefile She also is treated as receiving ordinary income from cancellation of debt. Irs gov freefile (The debt is not exempt from tax as discussed under Cancellation of debt, above. Irs gov freefile ) That income is $10,000 ($180,000 − $170,000). Irs gov freefile This is the part of the canceled debt not included in the amount realized. Irs gov freefile Forms 1099-A and 1099-C. Irs gov freefile   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Irs gov freefile However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Irs gov freefile The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Irs gov freefile For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Irs gov freefile Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Irs gov freefile Involuntary conversions are also called involuntary exchanges. Irs gov freefile Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Irs gov freefile You report the gain or deduct the loss on your tax return for the year you realize it. Irs gov freefile You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Irs gov freefile However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Irs gov freefile Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Irs gov freefile Your basis for the new property is the same as your basis for the converted property. Irs gov freefile This means that the gain is deferred until a taxable sale or exchange occurs. Irs gov freefile If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Irs gov freefile This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Irs gov freefile If you have a gain or loss from the destruction or theft of property, see Publication 547. Irs gov freefile Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Irs gov freefile The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Irs gov freefile The owner receives a condemnation award (money or property) in exchange for the property taken. Irs gov freefile A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Irs gov freefile Example. Irs gov freefile A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Irs gov freefile After the local government took action to condemn your property, you went to court to keep it. Irs gov freefile But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Irs gov freefile This is a condemnation of private property for public use. Irs gov freefile Threat of condemnation. Irs gov freefile   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Irs gov freefile You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Irs gov freefile   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Irs gov freefile If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Irs gov freefile Reports of condemnation. Irs gov freefile   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Irs gov freefile You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Irs gov freefile If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Irs gov freefile Example. Irs gov freefile Your property lies along public utility lines. Irs gov freefile The utility company has the authority to condemn your property. Irs gov freefile The company informs you that it intends to acquire your property by negotiation or condemnation. Irs gov freefile A threat of condemnation exists when you receive the notice. Irs gov freefile Related property voluntarily sold. Irs gov freefile   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Irs gov freefile A substantial economic relationship exists if together the properties were one economic unit. Irs gov freefile You also must show that the condemned property could not reasonably or adequately be replaced. Irs gov freefile You can elect to postpone reporting the gain by buying replacement property. Irs gov freefile See Postponement of Gain, later. Irs gov freefile Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Irs gov freefile If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Irs gov freefile You can postpone reporting gain from a condemnation if you buy replacement property. Irs gov freefile If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Irs gov freefile See Postponement of Gain, later. Irs gov freefile If your net condemnation award is less than your adjusted basis, you have a loss. Irs gov freefile If your loss is from property you held for personal use, you cannot deduct it. Irs gov freefile You must report any deductible loss in the tax year it happened. Irs gov freefile You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Irs gov freefile Main home condemned. Irs gov freefile   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Irs gov freefile You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Irs gov freefile For information on this exclusion, see Publication 523. Irs gov freefile If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Irs gov freefile See Postponement of Gain, later. Irs gov freefile Table 1-3. Irs gov freefile Worksheet for Condemnations Part 1. Irs gov freefile Gain from severance damages. Irs gov freefile  If you did not receive severance damages, skip Part 1 and go to Part 2. Irs gov freefile   1. Irs gov freefile Enter gross severance damages received   2. Irs gov freefile Enter your expenses in getting severance damages   3. Irs gov freefile Subtract line 2 from line 1. Irs gov freefile If less than zero, enter -0-   4. Irs gov freefile Enter any special assessment on remaining property taken out of your award   5. Irs gov freefile Net severance damages. Irs gov freefile Subtract line 4 from line 3. Irs gov freefile If less than zero, enter -0-   6. Irs gov freefile Enter the adjusted basis of the remaining property   7. Irs gov freefile Gain from severance damages. Irs gov freefile Subtract line 6 from line 5. Irs gov freefile If less than zero, enter -0-   8. Irs gov freefile Refigured adjusted basis of the remaining property. Irs gov freefile Subtract line 5 from line 6. Irs gov freefile If less than zero, enter -0-   Part 2. Irs gov freefile Gain or loss from condemnation award. Irs gov freefile   9. Irs gov freefile Enter the gross condemnation award received   10. Irs gov freefile Enter your expenses in getting the condemnation award   11. Irs gov freefile If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Irs gov freefile If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Irs gov freefile Otherwise, enter -0-   12. Irs gov freefile Add lines 10 and 11   13. Irs gov freefile Net condemnation award. Irs gov freefile Subtract line 12 from line 9   14. Irs gov freefile Enter the adjusted basis of the condemned property   15. Irs gov freefile Gain from condemnation award. Irs gov freefile If line 14 is more than line 13, enter -0-. Irs gov freefile Otherwise, subtract line 14 from  line 13 and skip line 16   16. Irs gov freefile Loss from condemnation award. Irs gov freefile Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Irs gov freefile )   Part 3. Irs gov freefile Postponed gain from condemnation. Irs gov freefile  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Irs gov freefile )   17. Irs gov freefile If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Irs gov freefile Otherwise, enter -0-   18. Irs gov freefile If line 15 is more than zero, enter the amount from line 13. Irs gov freefile Otherwise, enter -0-   19. Irs gov freefile Add lines 17 and 18. Irs gov freefile If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Irs gov freefile Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Irs gov freefile Subtract line 20 from line 19. Irs gov freefile If less than zero, enter -0-   22. Irs gov freefile If you completed Part 1, add lines 7 and 15. Irs gov freefile Otherwise, enter the amount from line 15. Irs gov freefile If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Irs gov freefile Recognized gain. Irs gov freefile Enter the smaller of line 21 or line 22. Irs gov freefile   24. Irs gov freefile Postponed gain. Irs gov freefile Subtract line 23 from line 22. Irs gov freefile If less than zero, enter -0-   Condemnation award. Irs gov freefile   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Irs gov freefile The award is also the amount you are paid for the sale of your property under threat of condemnation. Irs gov freefile Payment of your debts. Irs gov freefile   Amounts taken out of the award to pay your debts are considered paid to you. Irs gov freefile Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Irs gov freefile Example. Irs gov freefile The state condemned your property for public use. Irs gov freefile The award was set at $200,000. Irs gov freefile The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Irs gov freefile You are considered to have received the entire $200,000 as a condemnation award. Irs gov freefile Interest on award. Irs gov freefile   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Irs gov freefile You must report the interest separately as ordinary income. Irs gov freefile Payments to relocate. Irs gov freefile   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Irs gov freefile Do not include them in your income. Irs gov freefile Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Irs gov freefile Net condemnation award. Irs gov freefile   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Irs gov freefile If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Irs gov freefile This is discussed later under Special assessment taken out of award. Irs gov freefile Severance damages. Irs gov freefile    Severance damages are not part of the award paid for the property condemned. Irs gov freefile They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Irs gov freefile   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Irs gov freefile Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Irs gov freefile   The contracting parties should agree on the specific amount of severance damages in writing. Irs gov freefile If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Irs gov freefile   You cannot make a completely new allocation of the total award after the transaction is completed. Irs gov freefile However, you can show how much of the award both parties intended for severance damages. Irs gov freefile The severance damages part of the award is determined from all the facts and circumstances. Irs gov freefile Example. Irs gov freefile You sold part of your property to the state under threat of condemnation. Irs gov freefile The contract you and the condemning authority signed showed only the total purchase price. Irs gov freefile It did not specify a fixed sum for severance damages. Irs gov freefile However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Irs gov freefile You may treat this part as severance damages. Irs gov freefile Treatment of severance damages. Irs gov freefile   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Irs gov freefile Use them to reduce the basis of the remaining property. Irs gov freefile If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Irs gov freefile   If your net severance damages are more than the basis of your retained property, you have a gain. Irs gov freefile You may be able to postpone reporting the gain. Irs gov freefile See Postponement of Gain, later. Irs gov freefile    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Irs gov freefile Net severance damages. Irs gov freefile   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Irs gov freefile You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Irs gov freefile The balance is your net severance damages. Irs gov freefile Expenses of obtaining a condemnation award and severance damages. Irs gov freefile   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Irs gov freefile Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Irs gov freefile If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Irs gov freefile Example. Irs gov freefile You receive a condemnation award and severance damages. Irs gov freefile One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Irs gov freefile You had legal expenses for the entire condemnation proceeding. Irs gov freefile You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Irs gov freefile You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Irs gov freefile Special assessment retained out of award. Irs gov freefile   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Irs gov freefile An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Irs gov freefile Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Irs gov freefile   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Irs gov freefile Example. Irs gov freefile To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Irs gov freefile You were awarded $5,000 for this and spent $300 to get the award. Irs gov freefile Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Irs gov freefile The city then paid you only $4,300. Irs gov freefile Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Irs gov freefile If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Irs gov freefile The net award would not change, even if you later paid the assessment from the amount you received. Irs gov freefile Severance damages received. Irs gov freefile   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Irs gov freefile Any balance of the special assessment is used to reduce the condemnation award. Irs gov freefile Example. Irs gov freefile You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Irs gov freefile You spent $300 to obtain the severance damages. Irs gov freefile A special assessment of $800 was retained out of the award. Irs gov freefile The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Irs gov freefile Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Irs gov freefile Part business or rental. Irs gov freefile   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Irs gov freefile Figure your gain or loss separately because gain or loss on each part may be treated differently. Irs gov freefile   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Irs gov freefile Example. Irs gov freefile You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Irs gov freefile You rented half the building and lived in the other half. Irs gov freefile You paid $25,000 for the building and spent an additional $1,000 for a new roof. Irs gov freefile You claimed allowable depreciation of $4,600 on the rental half. Irs gov freefile You spent $200 in legal expenses to obtain the condemnation award. Irs gov freefile Figure your gain or loss as follows. Irs gov freefile     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Irs gov freefile Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Irs gov freefile Your basis for the new property is the same as your basis for the old. Irs gov freefile Money or unlike property received. Irs gov freefile   You ordinarily must report the gain if you receive money or unlike property. Irs gov freefile You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Irs gov freefile You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Irs gov freefile See Controlling interest in a corporation, later. Irs gov freefile   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Irs gov freefile If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Irs gov freefile   The basis of the replacement property is its cost, reduced by the postponed gain. Irs gov freefile Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Irs gov freefile See Controlling interest in a corporation, later. Irs gov freefile You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Irs gov freefile Postponing gain on severance damages. Irs gov freefile   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Irs gov freefile See Treatment of severance damages, earlier. Irs gov freefile You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Irs gov freefile   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Irs gov freefile If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Irs gov freefile   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Irs gov freefile Postponing gain on the sale of related property. Irs gov freefile   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Irs gov freefile You must meet the requirements explained earlier under Related property voluntarily sold. Irs gov freefile You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Irs gov freefile Buying replacement property from a related person. Irs gov freefile   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Irs gov freefile For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Irs gov freefile   This rule applies to the following taxpayers. Irs gov freefile C corporations. Irs gov freefile Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Irs gov freefile All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Irs gov freefile   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Irs gov freefile If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Irs gov freefile If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Irs gov freefile Exception. Irs gov freefile   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Irs gov freefile Advance payment. Irs gov freefile   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Irs gov freefile Replacement property. Irs gov freefile   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Irs gov freefile You do not have to use the actual funds from the condemnation award to acquire the replacement property. Irs gov freefile Property you acquire by gift or inheritance does not qualify as replacement property. Irs gov freefile Similar or related in service or use. Irs gov freefile   Your replacement property must be similar or related in service or use to the property it replaces. Irs gov freefile   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Irs gov freefile For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Irs gov freefile Owner-user. Irs gov freefile   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Irs gov freefile Example. Irs gov freefile Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Irs gov freefile Your replacement property is not similar or related in service or use to the condemned property. Irs gov freefile To be similar or related in service or use, your replacement property must also be used by you as your home. Irs gov freefile Owner-investor. Irs gov freefile   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Irs gov freefile You decide this by determining all the following information. Irs gov freefile Whether the properties are of similar service to you. Irs gov freefile The nature of the business risks connected with the properties. Irs gov freefile What the properties demand of you in the way of management, service, and relations to your tenants. Irs gov freefile Example. Irs gov freefile You owned land and a building you rented to a manufacturing company. Irs gov freefile The building was condemned. Irs gov freefile During the replacement period, you had a new building built on other land you already owned. Irs gov freefile You rented out the new building for use as a wholesale grocery warehouse. Irs gov freefile The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Irs gov freefile Your management activities. Irs gov freefile The amount and kind of services you provide to your tenants. Irs gov freefile The nature of your business risks connected with the properties. Irs gov freefile Leasehold replaced with fee simple property. Irs gov freefile   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Irs gov freefile   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Irs gov freefile A leasehold is property held under a lease, usually for a term of years. Irs gov freefile Outdoor advertising display replaced with real property. Irs gov freefile   You can elect to treat an outdoor advertising display as real property. Irs gov freefile If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Irs gov freefile For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Irs gov freefile   You can make this election only if you did not claim a section 179 deduction for the display. Irs gov freefile You cannot cancel this election unless you get the consent of the IRS. Irs gov freefile   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Irs gov freefile Substituting replacement property. Irs gov freefile   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Irs gov freefile But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Irs gov freefile Controlling interest in a corporation. Irs gov freefile   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Irs gov freefile You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Irs gov freefile Basis adjustment to corporation's property. Irs gov freefile   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Irs gov freefile You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Irs gov freefile   Allocate this reduction to the following classes of property in the order shown below. Irs gov freefile Property that is similar or related in service or use to the condemned property. Irs gov freefile Depreciable property not reduced in (1). Irs gov freefile All other property. Irs gov freefile If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Irs gov freefile The reduced basis of any single property cannot be less than zero. Irs gov freefile Main home replaced. Irs gov freefile   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Irs gov freefile The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Irs gov freefile   You must reduce the basis of your replacement property by the postponed gain. Irs gov freefile Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Irs gov freefile Example. Irs gov freefile City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Irs gov freefile The city paid you a condemnation award of $400,000. Irs gov freefile Your adjusted basis in the property was $80,000. Irs gov freefile You realize a gain of $320,000 ($400,000 − $80,000). Irs gov freefile You purchased a new home for $100,000. Irs gov freefile You can exclude $250,000 of the realized gain from your gross income. Irs gov freefile The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Irs gov freefile You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Irs gov freefile The remaining $20,000 of realized gain is postponed. Irs gov freefile Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Irs gov freefile Replacement period. Irs gov freefile   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Irs gov freefile This is the replacement period. Irs gov freefile   The replacement period for a condemnation begins on the earlier of the following dates. Irs gov freefile The date on which you disposed of the condemned property. Irs gov freefile The date on which the threat of condemnation began. Irs gov freefile   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Irs gov freefile However, see the exceptions below. Irs gov freefile Three-year replacement period for certain property. Irs gov freefile   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Irs gov freefile However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Irs gov freefile Five-year replacement period for certain property. Irs gov freefile   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Irs gov freefile Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Irs gov freefile Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Irs gov freefile Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Irs gov freefile Extended replacement period for taxpayers affected by other federally declared disasters. Irs gov freefile    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Irs gov freefile For more information visit www. Irs gov freefile irs. Irs gov freefile gov/uac/Tax-Relief-in-Disaster-Situations. Irs gov freefile Weather-related sales of livestock in an area eligible for federal assistance. Irs gov freefile   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Irs gov freefile    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Irs gov freefile See Notice 2006-82. Irs gov freefile You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Irs gov freefile irs. Irs gov freefile gov/irb/2006-39_IRB/ar13. Irs gov freefile html. Irs gov freefile    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Irs gov freefile If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Irs gov freefile You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Irs gov freefile irs. Irs gov freefile gov/irb/2013-45_IRB/ar04. Irs gov freefile html. Irs gov freefile The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Irs gov freefile Determining when gain is realized. Irs gov freefile   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Irs gov freefile If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Irs gov freefile   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Irs gov freefile A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Irs gov freefile   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Irs gov freefile All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Irs gov freefile All or part of the award is actually or constructively received. Irs gov freefile For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Irs gov freefile Replacement property bought before the condemnation. Irs gov freefile   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Irs gov freefile Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Irs gov freefile Example. Irs gov freefile On April 3, 2012, city authorities notified you that your property would be condemned. Irs gov freefile On June 5, 2012, you acquired property to replace the property to be condemned. Irs gov freefile You still had the new property when the city took possession of your old property on September 4, 2013. Irs gov freefile You have made a replacement within the replacement period. Irs gov freefile Extension. Irs gov freefile   You can request an extension of the replacement period from the IRS director for your area. Irs gov freefile You should apply before the end of the replacement period. Irs gov freefile Your request should explain in detail why you need an extension. Irs gov freefile The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Irs gov freefile An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Irs gov freefile   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Irs gov freefile Extensions are usually limited to a period of 1 year or less. Irs gov freefile The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Irs gov freefile If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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Free Tax Return Preparation for Qualifying Taxpayers

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $52,000 or less, persons with disabilities, the elderly and limited English speaking taxpayers who need assistance in preparing their own tax returns. IRS-certified volunteers provide free basic income tax return preparation with electronic filing to qualified individuals.

In addition to VITA, the Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older, specializing in questions about pensions and retirement-related issues unique to seniors. The IRS-certified volunteers who provide tax counseling are often retired individuals associated with non-profit organizations that receive grants from the IRS.

Find a VITA or TCE Site Near You

VITA and TCE sites are generally located at community and neighborhood centers, libraries, schools, shopping malls and other convenient locations across the country. To locate the nearest VITA or TCE site near you, use the VITA Locator Tool or call 800-906-9887.

At select tax sites, taxpayers also have an option to prepare their own basic federal and state tax return for free using Web-based tax preparation software with an IRS-certified volunteer to help guide you through the process. This option is only available at locations that list “Self-Prep” in the site listing.

Please note that when using the locator tool, you will exit IRS.gov and open Google Maps if you need directions to a specific location.

Find an AARP TCE Tax-Aide Site Near You

A majority of the TCE sites are operated by the AARP Foundation’s Tax Aide program. To locate the nearest AARP TCE Tax-Aide site between January and April use the AARP Site Locator Tool or call 888-227-7669.

Before going to a VITA or TCE site, check out the What to Bring page to ensure you have all the required documents and information our volunteers will need to help you. 

Page Last Reviewed or Updated: 25-Mar-2014

The Irs Gov Freefile

Irs gov freefile 10. Irs gov freefile   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Irs gov freefile Individual retirement arrangements (IRAs). Irs gov freefile Civil service retirement benefits. Irs gov freefile Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Irs gov freefile How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Irs gov freefile Exclusion not limited to cost. Irs gov freefile Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Irs gov freefile Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Irs gov freefile However, these distributions are taken into account when determining the modified adjusted gross income threshold. Irs gov freefile Distributions from a nonqualified retirement plan are included in net investment income. Irs gov freefile See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Irs gov freefile Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Irs gov freefile For more information, see Designated Roth accounts discussed later. Irs gov freefile Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. Irs gov freefile What is not covered in this chapter. Irs gov freefile   The following topics are not discussed in this chapter. Irs gov freefile The General Rule. Irs gov freefile   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Irs gov freefile For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Irs gov freefile For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Irs gov freefile Individual retirement arrangements (IRAs). Irs gov freefile   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Irs gov freefile Civil service retirement benefits. Irs gov freefile    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Irs gov freefile S. Irs gov freefile Civil Service Retirement Benefits. Irs gov freefile Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Irs gov freefile Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Irs gov freefile S. Irs gov freefile Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Irs gov freefile 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Irs gov freefile   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Irs gov freefile Elective deferrals that are designated as Roth contributions are included in your income. Irs gov freefile However, qualified distributions are not included in your income. Irs gov freefile See Publication 575 for more information. Irs gov freefile In-plan rollovers to designated Roth accounts. Irs gov freefile   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Irs gov freefile The rollover of any untaxed amounts must be included in income. Irs gov freefile See Publication 575 for more information. Irs gov freefile More than one program. Irs gov freefile   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Irs gov freefile Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Irs gov freefile Section 457 deferred compensation plans. Irs gov freefile    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Irs gov freefile If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Irs gov freefile You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Irs gov freefile You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Irs gov freefile   Your 457(b) plan may have a designated Roth account option. Irs gov freefile If so, you may be able to roll over amounts to the designated Roth account or make contributions. Irs gov freefile Elective deferrals to a designated Roth account are included in your income. Irs gov freefile Qualified distributions from a designated Roth account are not subject to tax. Irs gov freefile   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Irs gov freefile For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Irs gov freefile   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Irs gov freefile Disability pensions. Irs gov freefile   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Irs gov freefile You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Irs gov freefile Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Irs gov freefile    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Irs gov freefile For information on the credit for the elderly or the disabled, see chapter 33. Irs gov freefile   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Irs gov freefile Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Irs gov freefile    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Irs gov freefile For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Irs gov freefile   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Irs gov freefile Retired public safety officers. Irs gov freefile   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. Irs gov freefile See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Irs gov freefile Railroad retirement benefits. Irs gov freefile   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. Irs gov freefile For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Irs gov freefile For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Irs gov freefile Withholding and estimated tax. Irs gov freefile   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. Irs gov freefile You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Irs gov freefile If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Irs gov freefile   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Irs gov freefile Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Irs gov freefile See Direct rollover option under Rollovers, later. Irs gov freefile   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Irs gov freefile Qualified plans for self-employed individuals. Irs gov freefile   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Irs gov freefile R. Irs gov freefile 10 plans. Irs gov freefile Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Irs gov freefile They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Irs gov freefile    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Irs gov freefile If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. Irs gov freefile For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Irs gov freefile Purchased annuities. Irs gov freefile   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. Irs gov freefile For more information about the General Rule, get Publication 939. Irs gov freefile Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Irs gov freefile Loans. Irs gov freefile   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Irs gov freefile This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. Irs gov freefile This means that you must include in income all or part of the amount borrowed. Irs gov freefile Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. Irs gov freefile For details, see Loans Treated as Distributions in Publication 575. Irs gov freefile For information on the deductibility of interest, see chapter 23. Irs gov freefile Tax-free exchange. Irs gov freefile   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. Irs gov freefile However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. Irs gov freefile See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Irs gov freefile How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Irs gov freefile If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Irs gov freefile If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Irs gov freefile If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Irs gov freefile More than one annuity. Irs gov freefile   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Irs gov freefile If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. Irs gov freefile Joint return. Irs gov freefile   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Irs gov freefile Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Irs gov freefile Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Irs gov freefile This includes the amounts your employer contributed that were taxable to you when paid. Irs gov freefile Cost does not include any amounts you deducted or were excluded from your income. Irs gov freefile From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. Irs gov freefile Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Irs gov freefile Designated Roth accounts. Irs gov freefile   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Irs gov freefile Your cost will also include any in-plan Roth rollovers you included in income. Irs gov freefile Foreign employment contributions. Irs gov freefile   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Irs gov freefile See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Irs gov freefile Taxation of Periodic Payments Fully taxable payments. Irs gov freefile   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. Irs gov freefile You must report them on your income tax return. Irs gov freefile Partly taxable payments. Irs gov freefile   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. Irs gov freefile The rest of the amount you receive is generally taxable. Irs gov freefile You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Irs gov freefile Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Irs gov freefile   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Irs gov freefile Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. Irs gov freefile   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Irs gov freefile   If your annuity is paid under a qualified plan and 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. Irs gov freefile Exclusion limit. Irs gov freefile   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Irs gov freefile Once your annuity starting date is determined, it does not change. Irs gov freefile If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Irs gov freefile That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Irs gov freefile Exclusion limited to cost. Irs gov freefile   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Irs gov freefile Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Irs gov freefile This deduction is not subject to the 2%-of-adjusted-gross-income limit. Irs gov freefile Exclusion not limited to cost. Irs gov freefile   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Irs gov freefile If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Irs gov freefile The total exclusion may be more than your cost. Irs gov freefile Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Irs gov freefile For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Irs gov freefile For any other annuity, this number is the number of monthly annuity payments under the contract. Irs gov freefile Who must use the Simplified Method. Irs gov freefile   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. Irs gov freefile Guaranteed payments. Irs gov freefile   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Irs gov freefile If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Irs gov freefile How to use the Simplified Method. Irs gov freefile    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Irs gov freefile Single-life annuity. Irs gov freefile    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Irs gov freefile Enter on line 3 the number shown for your age at the annuity starting date. Irs gov freefile Multiple-lives annuity. Irs gov freefile   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Irs gov freefile Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Irs gov freefile   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Irs gov freefile Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Irs gov freefile    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Irs gov freefile Example. Irs gov freefile Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Irs gov freefile Bill's annuity starting date is January 1, 2013. Irs gov freefile The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Irs gov freefile Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Irs gov freefile Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Irs gov freefile Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Irs gov freefile Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. Irs gov freefile His completed worksheet is shown in Worksheet 10-A. Irs gov freefile Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Irs gov freefile Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Irs gov freefile The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Irs gov freefile If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Irs gov freefile This deduction is not subject to the 2%-of-adjusted- gross-income limit. Irs gov freefile Worksheet 10-A. Irs gov freefile Simplified Method Worksheet for Bill Smith 1. Irs gov freefile Enter the total pension or annuity payments received this year. Irs gov freefile Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Irs gov freefile 14,400 2. Irs gov freefile Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Irs gov freefile See Cost (Investment in the Contract) , earlier 2. Irs gov freefile 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). Irs gov freefile Otherwise, go to line 3. Irs gov freefile         3. Irs gov freefile Enter the appropriate number from Table 1 below. Irs gov freefile But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Irs gov freefile 310     4. Irs gov freefile Divide line 2 by the number on line 3 4. Irs gov freefile 100     5. Irs gov freefile Multiply line 4 by the number of months for which this year's payments were made. Irs gov freefile If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Irs gov freefile Otherwise, go to line 6 5. Irs gov freefile 1,200     6. Irs gov freefile Enter any amounts previously recovered tax free in years after 1986. Irs gov freefile This is the amount shown on line 10 of your worksheet for last year 6. Irs gov freefile -0-     7. Irs gov freefile Subtract line 6 from line 2 7. Irs gov freefile 31,000     8. Irs gov freefile Enter the smaller of line 5 or line 7 8. Irs gov freefile 1,200 9. Irs gov freefile Taxable amount for year. Irs gov freefile Subtract line 8 from line 1. Irs gov freefile Enter the result, but not less than zero. Irs gov freefile Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Irs gov freefile 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Irs gov freefile If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. Irs gov freefile     10. Irs gov freefile Was your annuity starting date before 1987? □ Yes. Irs gov freefile STOP. Irs gov freefile Do not complete the rest of this worksheet. Irs gov freefile  ☑ No. Irs gov freefile Add lines 6 and 8. Irs gov freefile This is the amount you have recovered tax free through 2013. Irs gov freefile You will need this number if you need to fill out this worksheet next year 10. Irs gov freefile 1,200 11. Irs gov freefile Balance of cost to be recovered. Irs gov freefile Subtract line 10 from line 2. Irs gov freefile If zero, you will not have to complete this worksheet next year. Irs gov freefile The payments you receive next year will generally be fully taxable 11. Irs gov freefile 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Irs gov freefile . Irs gov freefile . Irs gov freefile before November 19, 1996, enter on line 3. Irs gov freefile . Irs gov freefile . Irs gov freefile after November 18, 1996, enter on line 3. Irs gov freefile . Irs gov freefile . Irs gov freefile 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. Irs gov freefile . Irs gov freefile . Irs gov freefile   THEN enter on line 3. Irs gov freefile . Irs gov freefile . Irs gov freefile 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Irs gov freefile Who must use the General Rule. Irs gov freefile   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Irs gov freefile Annuity starting before November 19, 1996. Irs gov freefile   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Irs gov freefile You also had to use it for any fixed-period annuity. Irs gov freefile If you did not have to use the General Rule, you could have chosen to use it. Irs gov freefile If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Irs gov freefile   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Irs gov freefile Who cannot use the General Rule. Irs gov freefile   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Irs gov freefile See Who must use the Simplified Method , earlier. Irs gov freefile More information. Irs gov freefile   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Irs gov freefile Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Irs gov freefile They include all payments other than periodic payments and corrective distributions. Irs gov freefile Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. Irs gov freefile Corrective distributions of excess plan contributions. Irs gov freefile   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Irs gov freefile To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Irs gov freefile For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Irs gov freefile Figuring the taxable amount of nonperiodic payments. Irs gov freefile   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Irs gov freefile If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Irs gov freefile If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Irs gov freefile Annuity starting date. Irs gov freefile   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Irs gov freefile Distribution on or after annuity starting date. Irs gov freefile   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. Irs gov freefile Distribution before annuity starting date. Irs gov freefile   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. Irs gov freefile You exclude from your gross income the part that you allocate to the cost. Irs gov freefile You include the remainder in your gross income. Irs gov freefile   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Irs gov freefile This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Irs gov freefile    Distributions from nonqualified plans are subject to the net investment income tax. Irs gov freefile See the Instructions for Form 8960. Irs gov freefile   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Irs gov freefile Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Irs gov freefile If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Irs gov freefile A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Irs gov freefile A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. Irs gov freefile The participant's entire balance from a plan does not include certain forfeited amounts. Irs gov freefile It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Irs gov freefile For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. Irs gov freefile If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Irs gov freefile The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Irs gov freefile The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Irs gov freefile You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Irs gov freefile Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Irs gov freefile The tax figured on Form 4972 is added to the regular tax figured on your other income. Irs gov freefile This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. Irs gov freefile How to treat the distribution. Irs gov freefile   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Irs gov freefile Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. Irs gov freefile Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Irs gov freefile Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Irs gov freefile Roll over all or part of the distribution. Irs gov freefile See Rollovers , later. Irs gov freefile No tax is currently due on the part rolled over. Irs gov freefile Report any part not rolled over as ordinary income. Irs gov freefile Report the entire taxable part of the distribution as ordinary income on your tax return. Irs gov freefile   The first three options are explained in the following discussions. Irs gov freefile Electing optional lump-sum treatment. Irs gov freefile   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Irs gov freefile If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Irs gov freefile Taxable and tax-free parts of the distribution. Irs gov freefile    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Irs gov freefile You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Irs gov freefile Cost. Irs gov freefile   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. Irs gov freefile You must reduce this cost by amounts previously distributed tax free. Irs gov freefile Net unrealized appreciation (NUA). Irs gov freefile   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. Irs gov freefile (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Irs gov freefile ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. Irs gov freefile The amount treated as capital gain is taxed at a 20% rate. Irs gov freefile You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Irs gov freefile Complete Part II of Form 4972 to choose the 20% capital gain election. Irs gov freefile For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Irs gov freefile 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. Irs gov freefile You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Irs gov freefile You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Irs gov freefile The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. Irs gov freefile You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. Irs gov freefile Complete Part III of Form 4972 to choose the 10-year tax option. Irs gov freefile You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Irs gov freefile Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Irs gov freefile Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. Irs gov freefile For this purpose, the following plans are qualified retirement plans. Irs gov freefile A qualified employee plan. Irs gov freefile A qualified employee annuity. Irs gov freefile A tax-sheltered annuity plan (403(b) plan). Irs gov freefile An eligible state or local government section 457 deferred compensation plan. Irs gov freefile Eligible rollover distributions. Irs gov freefile   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Irs gov freefile For information about exceptions to eligible rollover distributions, see Publication 575. Irs gov freefile Rollover of nontaxable amounts. Irs gov freefile   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. Irs gov freefile The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. Irs gov freefile   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. Irs gov freefile   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Irs gov freefile To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Irs gov freefile For more information, see the Form 8606 instructions. Irs gov freefile Direct rollover option. Irs gov freefile   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. Irs gov freefile 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. Irs gov freefile Payment to you option. Irs gov freefile   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Irs gov freefile However, the full amount is treated as distributed to you even though you actually receive only 80%. Irs gov freefile 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 or Roth IRA. Irs gov freefile (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Irs gov freefile )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. Irs gov freefile Time for making rollover. Irs gov freefile   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. Irs gov freefile (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. Irs gov freefile )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Irs gov freefile   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. Irs gov freefile Qualified domestic relations order (QDRO). Irs gov freefile   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. Irs gov freefile If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. Irs gov freefile You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Irs gov freefile See Rollovers in Publication 575 for more information on benefits received under a QDRO. Irs gov freefile Rollover by surviving spouse. Irs gov freefile   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. Irs gov freefile The rollover rules apply to you as if you were the employee. Irs gov freefile You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Irs gov freefile For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Irs gov freefile    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Irs gov freefile However, see Rollovers by nonspouse beneficiary next. Irs gov freefile Rollovers by nonspouse beneficiary. Irs gov freefile   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. Irs gov freefile The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Irs gov freefile The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Irs gov freefile For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Irs gov freefile Retirement bonds. Irs gov freefile   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. Irs gov freefile Designated Roth accounts. Irs gov freefile   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Irs gov freefile If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. Irs gov freefile For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Irs gov freefile In-plan rollovers to designated Roth accounts. Irs gov freefile   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Irs gov freefile The rollover of any untaxed amounts must be included in income. Irs gov freefile See Designated Roth accounts under Rollovers in Publication 575 for more information. Irs gov freefile Rollovers to Roth IRAs. Irs gov freefile   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Irs gov freefile   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. Irs gov freefile You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. Irs gov freefile In addition, the 10% tax on early distributions does not apply. Irs gov freefile More information. Irs gov freefile   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Irs gov freefile Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Irs gov freefile Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. Irs gov freefile These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Irs gov freefile These taxes are discussed in the following sections. Irs gov freefile If you must pay either of these taxes, report them on Form 5329. Irs gov freefile However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Irs gov freefile Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. Irs gov freefile Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Irs gov freefile This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. Irs gov freefile Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. Irs gov freefile This tax applies to the part of the distribution that you must include in gross income. Irs gov freefile For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Irs gov freefile 5% rate on certain early distributions from deferred annuity contracts. Irs gov freefile   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Irs gov freefile A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. Irs gov freefile On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Irs gov freefile Attach an explanation to your return. Irs gov freefile Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Irs gov freefile   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. Irs gov freefile You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. Irs gov freefile The additional tax is figured on Form 5329. Irs gov freefile For more information, see Form 5329 and its instructions. Irs gov freefile For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Irs gov freefile Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Irs gov freefile   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. Irs gov freefile You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. Irs gov freefile The additional tax is figured on Form 5329. Irs gov freefile For more information, see Form 5329 and its instructions. Irs gov freefile For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Irs gov freefile Exceptions to tax. Irs gov freefile    Certain early distributions are excepted from the early distribution tax. Irs gov freefile If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. Irs gov freefile If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Irs gov freefile Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Irs gov freefile On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Irs gov freefile    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Irs gov freefile Enter exception number “12” on line 2. Irs gov freefile General exceptions. Irs gov freefile   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Irs gov freefile Additional exceptions for qualified retirement plans. Irs gov freefile   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. Irs gov freefile 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. Irs gov freefile See Pub. Irs gov freefile 721 for more information on the phased retirement program. Irs gov freefile Qualified public safety employees. Irs gov freefile   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. Irs gov freefile You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. Irs gov freefile Qualified reservist distributions. Irs gov freefile   A qualified reservist distribution is not subject to the additional tax on early distributions. Irs gov freefile A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. Irs gov freefile You must have been ordered or called to active duty after September 11, 2001. Irs gov freefile For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Irs gov freefile Additional exceptions for nonqualified annuity contracts. Irs gov freefile   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). Irs gov freefile Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). Irs gov freefile The payments each year cannot be less than the required minimum distribution. Irs gov freefile Required distributions not made. Irs gov freefile   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. Irs gov freefile The tax equals 50% of the part of the required minimum distribution that was not distributed. Irs gov freefile   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). Irs gov freefile Waiver. Irs gov freefile   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. Irs gov freefile See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Irs gov freefile State insurer delinquency proceedings. Irs gov freefile   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Irs gov freefile If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Irs gov freefile Under certain conditions, you will not have to pay the 50% excise tax. Irs gov freefile Required beginning date. Irs gov freefile   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Irs gov freefile However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. Irs gov freefile   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Irs gov freefile Your required distribution then must be made for 2014 by December 31, 2014. Irs gov freefile 5% owners. Irs gov freefile   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. Irs gov freefile   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. Irs gov freefile Age 70½. Irs gov freefile   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Irs gov freefile   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Irs gov freefile If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Irs gov freefile Required distributions. Irs gov freefile   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). Irs gov freefile Additional information. Irs gov freefile   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Irs gov freefile Form 5329. Irs gov freefile   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Irs gov freefile Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Irs gov freefile However, some special rules apply. Irs gov freefile See Publication 575 for more information. Irs gov freefile Survivors of employees. Irs gov freefile   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. Irs gov freefile You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Irs gov freefile Survivors of retirees. Irs gov freefile   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. Irs gov freefile If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. Irs gov freefile    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. Irs gov freefile The resulting tax-free amount will then remain fixed. Irs gov freefile Any increases in the survivor annuity are fully taxable. Irs gov freefile    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Irs gov freefile This amount remains fixed even if the annuity payments are increased or decreased. Irs gov freefile See Simplified Method , earlier. Irs gov freefile   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Irs gov freefile Estate tax deduction. Irs gov freefile   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. Irs gov freefile You can deduct the part of the total estate tax that was based on the annuity. Irs gov freefile The deceased annuitant must have died after the annuity starting date. Irs gov freefile (For details, see section 1. Irs gov freefile 691(d)-1 of the regulations. Irs gov freefile ) Deduct it in equal amounts over your remaining life expectancy. Irs gov freefile   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. Irs gov freefile   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Irs gov freefile This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Irs gov freefile See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Irs gov freefile Prev  Up  Next   Home   More Online Publications