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Tax Forms 2010

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Tax Forms 2010

Tax forms 2010 7. Tax forms 2010   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Tax forms 2010 For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Tax forms 2010 There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Tax forms 2010 However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Tax forms 2010 See Contributions , later. Tax forms 2010 This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Tax forms 2010 What is the tax benefit of the Coverdell ESA. Tax forms 2010   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Tax forms 2010   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Tax forms 2010 See Tax-Free Distributions , later. Tax forms 2010    Table 7-1 summarizes the main features of the Coverdell ESA. Tax forms 2010 Table 7-1. Tax forms 2010 Coverdell ESA at a Glance Do not rely on this table alone. Tax forms 2010 It provides only general highlights. Tax forms 2010 See the text for definitions of terms in bold type and for more complete explanations. Tax forms 2010 Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Tax forms 2010 Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Tax forms 2010 Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Tax forms 2010 Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Tax forms 2010 Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Tax forms 2010 What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Tax forms 2010 When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Tax forms 2010 To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Tax forms 2010 The document creating and governing the account must be in writing and must satisfy the following requirements. Tax forms 2010 The trustee or custodian must be a bank or an entity approved by the IRS. Tax forms 2010 The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Tax forms 2010 The contribution is in cash. Tax forms 2010 The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Tax forms 2010 The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Tax forms 2010 Money in the account cannot be invested in life insurance contracts. Tax forms 2010 Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Tax forms 2010 The balance in the account generally must be distributed within 30 days after the earlier of the following events. Tax forms 2010 The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Tax forms 2010 The beneficiary's death. Tax forms 2010 Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Tax forms 2010 For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Tax forms 2010 Designated beneficiary. Tax forms 2010   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Tax forms 2010 Contributions to a qualified tuition program (QTP). Tax forms 2010   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Tax forms 2010 In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Tax forms 2010 See chapter 8, Qualified Tuition Program . Tax forms 2010 Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Tax forms 2010 Eligible postsecondary school. Tax forms 2010   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Tax forms 2010 S. Tax forms 2010 Department of Education. Tax forms 2010 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Tax forms 2010 The educational institution should be able to tell you if it is an eligible educational institution. Tax forms 2010   Certain educational institutions located outside the United States also participate in the U. Tax forms 2010 S. Tax forms 2010 Department of Education's Federal Student Aid (FSA) programs. Tax forms 2010 Eligible elementary or secondary school. Tax forms 2010   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Tax forms 2010 Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Tax forms 2010 As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Tax forms 2010 The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Tax forms 2010 Tuition and fees. Tax forms 2010 Books, supplies, and equipment. Tax forms 2010 Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Tax forms 2010 Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Tax forms 2010 The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Tax forms 2010 The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Tax forms 2010 The actual amount charged if the student is residing in housing owned or operated by the school. Tax forms 2010 Half-time student. Tax forms 2010   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Tax forms 2010 Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Tax forms 2010 As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Tax forms 2010 There are special rules for computer-related expenses. Tax forms 2010 The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Tax forms 2010 Tuition and fees. Tax forms 2010 Books, supplies, and equipment. Tax forms 2010 Academic tutoring. Tax forms 2010 Special needs services for a special needs beneficiary. Tax forms 2010 The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Tax forms 2010 Room and board. Tax forms 2010 Uniforms. Tax forms 2010 Transportation. Tax forms 2010 Supplementary items and services (including extended day programs). Tax forms 2010 The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Tax forms 2010 (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Tax forms 2010 ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Tax forms 2010 For individuals filing joint returns, that amount is $220,000. Tax forms 2010 Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Tax forms 2010 There is no requirement that an organization's income be below a certain level. Tax forms 2010 Contributions must meet all of the following requirements. Tax forms 2010 They must be in cash. Tax forms 2010 They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Tax forms 2010 They must be made by the due date of the contributor's tax return (not including extensions). Tax forms 2010 Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Tax forms 2010 Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Tax forms 2010 Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Tax forms 2010 When contributions considered made. Tax forms 2010   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Tax forms 2010 They must be made by the due date (not including extensions) for filing your return for the preceding year. Tax forms 2010   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Tax forms 2010 Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Tax forms 2010 Limit for each designated beneficiary. Tax forms 2010   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Tax forms 2010 This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Tax forms 2010 Rollovers are discussed under Rollovers and Other Transfers , later. Tax forms 2010 Example. Tax forms 2010 When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Tax forms 2010 In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Tax forms 2010 For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Tax forms 2010 Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Tax forms 2010 These contributions could be put into any of Maria's Coverdell ESA accounts. Tax forms 2010 Limit for each contributor. Tax forms 2010   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Tax forms 2010 This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Tax forms 2010 Example. Tax forms 2010 The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Tax forms 2010 If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Tax forms 2010 Reduced limit. Tax forms 2010   Your contribution limit may be reduced. Tax forms 2010 If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Tax forms 2010 If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Tax forms 2010 Table 7-2. Tax forms 2010 Coverdell ESA Contributions at a Glance Do not rely on this table alone. Tax forms 2010 It provides only general highlights. Tax forms 2010 See the text for more complete explanations. Tax forms 2010 Question Answer Are contributions deductible? No. Tax forms 2010 What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Tax forms 2010 What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Tax forms 2010 What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Tax forms 2010 Can contributions other than cash be made to a Coverdell ESA? No. Tax forms 2010 When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Tax forms 2010 Modified adjusted gross income (MAGI). Tax forms 2010   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Tax forms 2010 MAGI when using Form 1040A. Tax forms 2010   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Tax forms 2010 MAGI when using Form 1040. Tax forms 2010   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Tax forms 2010 MAGI when using Form 1040NR. Tax forms 2010   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Tax forms 2010 MAGI when using Form 1040NR-EZ. Tax forms 2010   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Tax forms 2010   If you have any of these adjustments, you can use Worksheet 7-1. Tax forms 2010 MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Tax forms 2010 Worksheet 7-1. Tax forms 2010 MAGI for a Coverdell ESA 1. Tax forms 2010 Enter your adjusted gross income  (Form 1040, line 38)   1. Tax forms 2010   2. Tax forms 2010 Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Tax forms 2010       3. Tax forms 2010 Enter your foreign housing deduction (Form 2555, line 50)   3. Tax forms 2010         4. Tax forms 2010 Enter the amount of income from Puerto Rico you are excluding   4. Tax forms 2010       5. Tax forms 2010 Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Tax forms 2010       6. Tax forms 2010 Add lines 2, 3, 4, and 5   6. Tax forms 2010   7. Tax forms 2010 Add lines 1 and 6. Tax forms 2010 This is your  modified adjusted gross income   7. Tax forms 2010   Figuring the limit. Tax forms 2010    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Tax forms 2010 The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Tax forms 2010 The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Tax forms 2010 Subtract the result from $2,000. Tax forms 2010 This is the amount you can contribute for each beneficiary. Tax forms 2010 You can use Worksheet 7-2. Tax forms 2010 Coverdell ESA Contribution Limit to figure the limit on contributions. Tax forms 2010    Worksheet 7-2. Tax forms 2010 Coverdell ESA Contribution Limit 1. Tax forms 2010 Maximum contribution   1. Tax forms 2010 $2,000 2. Tax forms 2010 Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Tax forms 2010   3. Tax forms 2010 Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Tax forms 2010   4. Tax forms 2010 Subtract line 3 from line 2. Tax forms 2010 If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Tax forms 2010   5. Tax forms 2010 Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Tax forms 2010     Note. Tax forms 2010 If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Tax forms 2010 You are not allowed to contribute to a Coverdell ESA for 2013. Tax forms 2010       6. Tax forms 2010 Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Tax forms 2010 . Tax forms 2010 7. Tax forms 2010 Multiply line 1 by line 6   7. Tax forms 2010   8. Tax forms 2010 Subtract line 7 from line 1   8. Tax forms 2010   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Tax forms 2010 Example. Tax forms 2010 Paul, who is single, had a MAGI of $96,500 for 2013. Tax forms 2010 Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Tax forms 2010 Worksheet 7-2. Tax forms 2010 Coverdell ESA Contribution Limit—Illustrated 1. Tax forms 2010 Maximum contribution   1. Tax forms 2010 $2,000 2. Tax forms 2010 Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Tax forms 2010 96,500 3. Tax forms 2010 Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Tax forms 2010 95,000 4. Tax forms 2010 Subtract line 3 from line 2. Tax forms 2010 If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Tax forms 2010 1,500 5. Tax forms 2010 Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Tax forms 2010 15,000   Note. Tax forms 2010 If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Tax forms 2010 You are not allowed to  contribute to a Coverdell ESA for 2013. Tax forms 2010       6. Tax forms 2010 Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Tax forms 2010 . Tax forms 2010 100 7. Tax forms 2010 Multiply line 1 by line 6   7. Tax forms 2010 200 8. Tax forms 2010 Subtract line 7 from line 1   8. Tax forms 2010 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Tax forms 2010 Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Tax forms 2010 Excess contributions are the total of the following two amounts. Tax forms 2010 Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Tax forms 2010 Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Tax forms 2010 Exceptions. Tax forms 2010   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Tax forms 2010   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Tax forms 2010 You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Tax forms 2010 Box 2 of that form will show the amount of earnings on your excess contributions. Tax forms 2010 Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Tax forms 2010 See Instructions for Recipient on the back of copy B of your Form 1099-Q. Tax forms 2010 Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Tax forms 2010 For more information, see Taxable Distributions , later. Tax forms 2010   The excise tax does not apply to any rollover contribution. Tax forms 2010 Note. Tax forms 2010 Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Tax forms 2010 Example. Tax forms 2010 In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Tax forms 2010 Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Tax forms 2010 In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Tax forms 2010 Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Tax forms 2010 (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Tax forms 2010 Figuring and reporting the additional tax. Tax forms 2010   You figure this excise tax in Part V of Form 5329. Tax forms 2010 Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Tax forms 2010 Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Tax forms 2010 The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Tax forms 2010 Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Tax forms 2010 This age limitation does not apply if the new beneficiary is a special needs beneficiary. Tax forms 2010 An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Tax forms 2010 Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Tax forms 2010 These are not taxable distributions. Tax forms 2010 Members of the beneficiary's family. Tax forms 2010   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Tax forms 2010 Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Tax forms 2010 Brother, sister, stepbrother, or stepsister. Tax forms 2010 Father or mother or ancestor of either. Tax forms 2010 Stepfather or stepmother. Tax forms 2010 Son or daughter of a brother or sister. Tax forms 2010 Brother or sister of father or mother. Tax forms 2010 Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Tax forms 2010 The spouse of any individual listed above. Tax forms 2010 First cousin. Tax forms 2010 Example. Tax forms 2010 When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Tax forms 2010 He wanted to give this money to his younger sister, who was still in high school. Tax forms 2010 In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Tax forms 2010 Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Tax forms 2010 This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Tax forms 2010 Military death gratuity. Tax forms 2010   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Tax forms 2010 Such payments are made to an eligible survivor upon the death of a member of the armed forces. Tax forms 2010 The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Tax forms 2010   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Tax forms 2010 The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Tax forms 2010   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Tax forms 2010 See Distributions , later. Tax forms 2010 The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Tax forms 2010 Changing the Designated Beneficiary The designated beneficiary can be changed. Tax forms 2010 See Members of the beneficiary's family , earlier. Tax forms 2010 There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Tax forms 2010 Example. Tax forms 2010 Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Tax forms 2010 Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Tax forms 2010 Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Tax forms 2010 After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Tax forms 2010 Example. Tax forms 2010 In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Tax forms 2010 In this process, the account was transferred into her name. Tax forms 2010 Peg now treats the funds in this Coverdell ESA as if she were the original owner. Tax forms 2010 Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Tax forms 2010 Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Tax forms 2010 See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Tax forms 2010 Table 7-3. Tax forms 2010 Coverdell ESA Distributions at a Glance Do not rely on this table alone. Tax forms 2010 It provides only general highlights. Tax forms 2010 See the text for definitions of terms in bold type and for more complete explanations. Tax forms 2010 Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Tax forms 2010 After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Tax forms 2010 Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Tax forms 2010 Also, certain transfers to members of the beneficiary's family are permitted. Tax forms 2010 Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Tax forms 2010 Adjusted qualified education expenses. Tax forms 2010   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Tax forms 2010 Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax forms 2010 The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Tax forms 2010 Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Tax forms 2010 Do not report tax-free distributions (including qualifying rollovers) on your tax return. Tax forms 2010 Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Tax forms 2010 Excess distribution. Tax forms 2010   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Tax forms 2010 Earnings and basis. Tax forms 2010   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Tax forms 2010 The amount of your gross distribution will be shown in box 1. Tax forms 2010 For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Tax forms 2010 This will be shown in the blank box below boxes 5 and 6. Tax forms 2010   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Tax forms 2010 Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Tax forms 2010 Figure the taxable portion for 2013 as shown in the following steps. Tax forms 2010 Multiply the total amount distributed by a fraction. Tax forms 2010 The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Tax forms 2010 Subtract the amount figured in (1) from the total amount distributed during 2013. Tax forms 2010 The result is the amount of earnings included in the distribution(s). Tax forms 2010 Multiply the amount of earnings figured in (2) by a fraction. Tax forms 2010 The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Tax forms 2010 Subtract the amount figured in (3) from the amount figured in (2). Tax forms 2010 The result is the amount the beneficiary must include in income. Tax forms 2010 The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Tax forms 2010 Example. Tax forms 2010 You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Tax forms 2010 There were no contributions in 2013. Tax forms 2010 This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Tax forms 2010 The value (balance) of your account on December 31, 2013, was $950. Tax forms 2010 You had $700 of adjusted qualified education expenses (AQEE) for the year. Tax forms 2010 Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Tax forms 2010   1. Tax forms 2010 $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Tax forms 2010 $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Tax forms 2010 $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Tax forms 2010 $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Tax forms 2010 Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Tax forms 2010 Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Tax forms 2010 Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Tax forms 2010 This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Tax forms 2010 Example. Tax forms 2010 Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Tax forms 2010 He paid his college expenses from the following sources. Tax forms 2010     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Tax forms 2010 Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Tax forms 2010 Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Tax forms 2010     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Tax forms 2010 The balance in Derek's account was $1,800 on December 31, 2013. Tax forms 2010 Prior to 2013, $2,100 had been contributed to this account. Tax forms 2010 Contributions for 2013 totaled $400. Tax forms 2010 Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Tax forms 2010   1. Tax forms 2010 $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Tax forms 2010 $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Tax forms 2010 $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Tax forms 2010 $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Tax forms 2010 This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Tax forms 2010 Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Tax forms 2010 The following two examples illustrate possible allocations. Tax forms 2010 Example 1. Tax forms 2010 In 2013, Beatrice graduated from high school and began her first semester of college. Tax forms 2010 That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Tax forms 2010 To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Tax forms 2010 No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Tax forms 2010 She did not receive any tax-free educational assistance in 2013. Tax forms 2010 Beatrice must allocate her total qualified education expenses between the two distributions. Tax forms 2010 Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Tax forms 2010 The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Tax forms 2010 Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Tax forms 2010 She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Tax forms 2010 Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Tax forms 2010 (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Tax forms 2010 ) Example 2. Tax forms 2010 Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Tax forms 2010 In this case, she allocates her qualified education expenses as follows. Tax forms 2010 Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Tax forms 2010 Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Tax forms 2010   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Tax forms 2010 See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Tax forms 2010   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Tax forms 2010 The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Tax forms 2010 However, you do not have to allocate your expenses in the same way. Tax forms 2010 You can use any reasonable method. Tax forms 2010 Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Tax forms 2010 You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Tax forms 2010 Your basis is the total amount of contributions to that Coverdell ESA. Tax forms 2010 You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Tax forms 2010 If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Tax forms 2010 ) from all such accounts in order to determine your taxable earnings for the year. Tax forms 2010 By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Tax forms 2010 For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Tax forms 2010 Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Tax forms 2010 Exceptions. Tax forms 2010   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Tax forms 2010 Made because the designated beneficiary is disabled. Tax forms 2010 A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Tax forms 2010 A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Tax forms 2010 Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax forms 2010 Made on account of the attendance of the designated beneficiary at a U. Tax forms 2010 S. Tax forms 2010 military academy (such as the USMA at West Point). Tax forms 2010 This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Tax forms 2010 S. Tax forms 2010 Code) attributable to such attendance. Tax forms 2010 Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Tax forms 2010 Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Tax forms 2010 The distributed earnings must be included in gross income for the year in which the excess contribution was made. Tax forms 2010 Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Tax forms 2010 Figuring the additional tax. Tax forms 2010    Use Part II of Form 5329, to figure any additional tax. Tax forms 2010 Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Tax forms 2010 When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Tax forms 2010 The designated beneficiary reaches age 30. Tax forms 2010 In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Tax forms 2010 However, this rule does not apply if the beneficiary is a special needs beneficiary. Tax forms 2010 The designated beneficiary dies before reaching age 30. Tax forms 2010 In this case, the remaining assets must generally be distributed within 30 days after the date of death. Tax forms 2010 Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Tax forms 2010 (“Family member” was defined earlier under Rollovers . Tax forms 2010 ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Tax forms 2010 This age limitation does not apply if the new beneficiary is a special needs beneficiary. Tax forms 2010 There are no tax consequences as a result of the transfer. Tax forms 2010 How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Tax forms 2010 You determine these earnings as shown in the following two steps. Tax forms 2010 Multiply the amount distributed by a fraction. Tax forms 2010 The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Tax forms 2010 Subtract the amount figured in (1) from the total amount distributed during 2013. Tax forms 2010 The result is the amount of earnings included in the distribution. Tax forms 2010 For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Tax forms 2010 The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Tax forms 2010 Worksheet 7-3 Instructions. Tax forms 2010 Coverdell ESA—Taxable Distributions and Basis Line G. Tax forms 2010 Enter the total distributions received from all Coverdell ESAs during 2013. Tax forms 2010 Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Tax forms 2010 Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Tax forms 2010 Line 2. Tax forms 2010 Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Tax forms 2010   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Tax forms 2010 For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Tax forms 2010 For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Tax forms 2010 You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Tax forms 2010 Line 4. Tax forms 2010 Enter the total distributions received from this Coverdell ESA in 2013. Tax forms 2010 Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Tax forms 2010   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Tax forms 2010 Line 7. Tax forms 2010 Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Tax forms 2010 A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Tax forms 2010   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Tax forms 2010 An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Tax forms 2010 Worksheet 7-3. Tax forms 2010 Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Tax forms 2010 • • • Complete Part I, lines A through H, on only one worksheet. Tax forms 2010  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Tax forms 2010  Complete Part III, the Summary (line 16), on only one worksheet. Tax forms 2010 Part I. Tax forms 2010 Qualified Education Expenses (Complete for total expenses)       A. Tax forms 2010 Enter your total qualified education expenses for 2013   A. Tax forms 2010   B. Tax forms 2010 Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Tax forms 2010         C. Tax forms 2010 Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Tax forms 2010 Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Tax forms 2010         D. Tax forms 2010 Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Tax forms 2010         E. Tax forms 2010 Add lines B, C, and D   D. Tax forms 2010   F. Tax forms 2010 Subtract line E from line A. Tax forms 2010 This is your adjusted qualified education expense for 2013   E. Tax forms 2010   G. Tax forms 2010 Enter your total distributions from all Coverdell ESAs during 2013. Tax forms 2010 Do not include rollovers  or the return of excess contributions (see instructions)   F. Tax forms 2010   H. Tax forms 2010 Divide line F by line G. Tax forms 2010 Enter the result as a decimal (rounded to at least 3 places). Tax forms 2010 If the  result is 1. Tax forms 2010 000 or more, enter 1. Tax forms 2010 000   G. Tax forms 2010 . Tax forms 2010 Part II. Tax forms 2010 Taxable Distributions and Basis (Complete separately for each account) 1. Tax forms 2010 Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Tax forms 2010 Do not include rollovers or the return of excess contributions   1. Tax forms 2010   2. Tax forms 2010 Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Tax forms 2010   3. Tax forms 2010 Add lines 1 and 2   3. Tax forms 2010   4. Tax forms 2010 Enter the total distributions from this Coverdell ESA during 2013. Tax forms 2010 Do not include rollovers  or the return of excess contributions (see instructions)   4. Tax forms 2010   5. Tax forms 2010 Multiply line 4 by line H. Tax forms 2010 This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Tax forms 2010         6. Tax forms 2010 Subtract line 5 from line 4   6. Tax forms 2010         7. Tax forms 2010 Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Tax forms 2010         8. Tax forms 2010 Add lines 4 and 7   8. Tax forms 2010         9. Tax forms 2010 Divide line 3 by line 8. Tax forms 2010 Enter the result as a decimal (rounded to  at least 3 places). Tax forms 2010 If the result is 1. Tax forms 2010 000 or more, enter 1. Tax forms 2010 000   9. Tax forms 2010 . Tax forms 2010       10. Tax forms 2010 Multiply line 4 by line 9. Tax forms 2010 This is the amount of basis allocated to your  distributions, and is tax free   10. Tax forms 2010     Note. Tax forms 2010 If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Tax forms 2010       11. Tax forms 2010 Subtract line 10 from line 4   11. Tax forms 2010   12. Tax forms 2010 Divide line 5 by line 4. Tax forms 2010 Enter the result as a decimal (rounded to  at least 3 places). Tax forms 2010 If the result is 1. Tax forms 2010 000 or more, enter 1. Tax forms 2010 000   12. Tax forms 2010 . Tax forms 2010       13. Tax forms 2010 Multiply line 11 by line 12. Tax forms 2010 This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Tax forms 2010   14. Tax forms 2010 Subtract line 13 from line 11. Tax forms 2010 This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Tax forms 2010   15. Tax forms 2010 Subtract line 10 from line 3. Tax forms 2010 This is your basis in this Coverdell ESA as of December 31, 2013   15. Tax forms 2010   Part III. Tax forms 2010 Summary (Complete only once)       16. Tax forms 2010 Taxable amount. Tax forms 2010 Add together all amounts on line 14 for all your Coverdell ESAs. Tax forms 2010 Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Tax forms 2010   Prev  Up  Next   Home   More Online Publications
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Understanding Your CP515 Business Notice

You received this reminder notice because our records indicate you didn't file a business tax return.


What you need to do

  • File your required business return immediately.
  • If eligible, file your return electronically with all required schedules, using your e-file provider, or
  • File a paper return with all required schedules
  • Complete the Response form enclosed with your notice and mail it to us, using the enclosed envelope:
    • To explain why you are filing late.
    • To explain why you don’t think you need to file.
    • If you already filed and it's been more than four weeks, or if you used a different name or employer ID number (EIN) than shown on the notice when filing.
  • If you filed within the last four weeks using the same name and EIN shown on the notice, you may disregard this notice.

You may want to...

  • Review Tax Information for Businesses which provides information regarding various business filing issues.
  • Review your records and ensure all returns are filed timely.

Answers to Common Questions

Why did I receive multiple CP 515 notices?
If your business hasn't filed tax returns, a notice will be generated and mailed for each tax form and tax period the IRS shows as delinquent.

I have never had employees and or filed this return previously so why did I receive a notice requesting me to file?
When you apply for an employer identification number, filing requirements are established requiring specific types of returns to be filed (e.g. Form 940, Employer's Annual Federal Unemployment Tax Return; Form 941, Employer's Quarterly Federal Tax Return; Form 1120, U.S. Corporation Income Tax Return, etc.). When the return isn't filed, the IRS considers it to be delinquent and generates a notice requesting the return be filed.

Do I still need to file a tax return even if I had no employees or business activity during the tax period(s) in question?
If you had no employees or business activity during a tax period, you aren't required to file a return for that tax period. You still need to respond to this notice. 

If you made Federal Tax Deposits or other payments or credits for the tax period, you must file a signed return showing the payments to get a refund.


Tips for next year

File all required returns by the appropriate due date.


  • Understanding your notice

    Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

    Notice CP515B, Page 1

    Notice CP515B, Page 2

    Notice CP515B, Page 3

    Notice CP515B, Page 4

    Notice CP515B, Page 5

Page Last Reviewed or Updated: 10-Jan-2014

Printable samples of this notice (PDF)

 

 

How to get help

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

The Tax Forms 2010

Tax forms 2010 2. Tax forms 2010   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Tax forms 2010 How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Tax forms 2010 Deferral percentage. Tax forms 2010 Employee compensation. Tax forms 2010 Compensation of self-employed individuals. Tax forms 2010 Choice not to treat deferrals as compensation. Tax forms 2010 Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Tax forms 2010 Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Tax forms 2010 S. Tax forms 2010 Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Tax forms 2010 Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Tax forms 2010 A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Tax forms 2010 SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Tax forms 2010 A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Tax forms 2010 Eligible employee. Tax forms 2010   An eligible employee is an individual who meets all the following requirements. Tax forms 2010 Has reached age 21. Tax forms 2010 Has worked for you in at least 3 of the last 5 years. Tax forms 2010 Has received at least $550 in compensation from you in 2013. Tax forms 2010 This amount remains the same in 2014. Tax forms 2010    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Tax forms 2010 Excludable employees. Tax forms 2010   The following employees can be excluded from coverage under a SEP. Tax forms 2010 Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Tax forms 2010 Nonresident alien employees who have received no U. Tax forms 2010 S. Tax forms 2010 source wages, salaries, or other personal services compensation from you. Tax forms 2010 For more information about nonresident aliens, see Publication 519, U. Tax forms 2010 S. Tax forms 2010 Tax Guide for Aliens. Tax forms 2010 Setting Up a SEP There are three basic steps in setting up a SEP. Tax forms 2010 You must execute a formal written agreement to provide benefits to all eligible employees. Tax forms 2010 You must give each eligible employee certain information about the SEP. Tax forms 2010 A SEP-IRA must be set up by or for each eligible employee. Tax forms 2010 Many financial institutions will help you set up a SEP. Tax forms 2010 Formal written agreement. Tax forms 2010   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Tax forms 2010 You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Tax forms 2010 However, see When not to use Form 5305-SEP, below. Tax forms 2010   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Tax forms 2010 Keep the original form. Tax forms 2010 Do not file it with the IRS. Tax forms 2010 Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Tax forms 2010 See the Form 5305-SEP instructions for details. Tax forms 2010 If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Tax forms 2010 When not to use Form 5305-SEP. Tax forms 2010   You cannot use Form 5305-SEP if any of the following apply. Tax forms 2010 You currently maintain any other qualified retirement plan other than another SEP. Tax forms 2010 You have any eligible employees for whom IRAs have not been set up. Tax forms 2010 You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Tax forms 2010 You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Tax forms 2010 An affiliated service group described in section 414(m). Tax forms 2010 A controlled group of corporations described in section 414(b). Tax forms 2010 Trades or businesses under common control described in section 414(c). Tax forms 2010 You do not pay the cost of the SEP contributions. Tax forms 2010 Information you must give to employees. Tax forms 2010   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Tax forms 2010 An IRS model SEP is not considered adopted until you give each employee this information. Tax forms 2010 Setting up the employee's SEP-IRA. Tax forms 2010   A SEP-IRA must be set up by or for each eligible employee. Tax forms 2010 SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Tax forms 2010 You send SEP contributions to the financial institution where the SEP-IRA is maintained. Tax forms 2010 Deadline for setting up a SEP. Tax forms 2010   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Tax forms 2010 Credit for startup costs. Tax forms 2010   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Tax forms 2010 For more information, see Credit for startup costs under Reminders, earlier. Tax forms 2010 How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Tax forms 2010 If you are self-employed, you can contribute to your own SEP-IRA. Tax forms 2010 Contributions must be in the form of money (cash, check, or money order). Tax forms 2010 You cannot contribute property. Tax forms 2010 However, participants may be able to transfer or roll over certain property from one retirement plan to another. Tax forms 2010 See Publication 590 for more information about rollovers. Tax forms 2010 You do not have to make contributions every year. Tax forms 2010 But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Tax forms 2010 When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Tax forms 2010 Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Tax forms 2010 A SEP-IRA cannot be a Roth IRA. Tax forms 2010 Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Tax forms 2010 Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Tax forms 2010 If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Tax forms 2010 Participants age 70½ or over must take required minimum distributions. Tax forms 2010 Time limit for making contributions. Tax forms 2010   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Tax forms 2010 Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Tax forms 2010 Compensation generally does not include your contributions to the SEP. Tax forms 2010 The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Tax forms 2010 Example. Tax forms 2010 Your employee, Mary Plant, earned $21,000 for 2013. Tax forms 2010 The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Tax forms 2010 Contributions for yourself. Tax forms 2010   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Tax forms 2010 However, special rules apply when figuring your maximum deductible contribution. Tax forms 2010 See Deduction Limit for Self-Employed Individuals , later. Tax forms 2010 Annual compensation limit. Tax forms 2010   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Tax forms 2010 However, $51,000 is the maximum contribution for an eligible employee. Tax forms 2010 These limits are $260,000 and $52,000, respectively, in 2014. Tax forms 2010 Example. Tax forms 2010 Your employee, Susan Green, earned $210,000 for 2013. Tax forms 2010 Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Tax forms 2010 More than one plan. Tax forms 2010   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Tax forms 2010 When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Tax forms 2010 Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Tax forms 2010 Tax treatment of excess contributions. Tax forms 2010   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Tax forms 2010 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Tax forms 2010 $51,000. Tax forms 2010 Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Tax forms 2010 For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Tax forms 2010 Reporting on Form W-2. Tax forms 2010   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Tax forms 2010 Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Tax forms 2010 If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Tax forms 2010 Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Tax forms 2010 Your contributions (including any excess contributions carryover). Tax forms 2010 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Tax forms 2010 In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Tax forms 2010 Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Tax forms 2010 When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Tax forms 2010 The deduction for the deductible part of your self-employment tax. Tax forms 2010 The deduction for contributions to your own SEP-IRA. Tax forms 2010 The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Tax forms 2010 For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Tax forms 2010 To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Tax forms 2010 Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Tax forms 2010 Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Tax forms 2010 However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Tax forms 2010 If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Tax forms 2010 Excise tax. Tax forms 2010   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Tax forms 2010 For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Tax forms 2010 When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Tax forms 2010 If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Tax forms 2010 If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Tax forms 2010 Example. Tax forms 2010 You are a fiscal year taxpayer whose tax year ends June 30. Tax forms 2010 You maintain a SEP on a calendar year basis. Tax forms 2010 You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Tax forms 2010 Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Tax forms 2010 For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Tax forms 2010 S. Tax forms 2010 Return of Partnership Income; and corporations deduct them on Form 1120, U. Tax forms 2010 S. Tax forms 2010 Corporation Income Tax Return, or Form 1120S, U. Tax forms 2010 S. Tax forms 2010 Income Tax Return for an S Corporation. Tax forms 2010 Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Tax forms 2010 (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Tax forms 2010 , you receive from the partnership. Tax forms 2010 ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Tax forms 2010 Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Tax forms 2010 (See the Caution, next. Tax forms 2010 ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Tax forms 2010 This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Tax forms 2010 You are not allowed to set up a SARSEP after 1996. Tax forms 2010 However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Tax forms 2010 If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Tax forms 2010 Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Tax forms 2010 At least 50% of your employees eligible to participate choose to make elective deferrals. Tax forms 2010 You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Tax forms 2010 The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Tax forms 2010 SARSEP ADP test. Tax forms 2010   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Tax forms 2010 A highly compensated employee is defined in chapter 1. Tax forms 2010 Deferral percentage. Tax forms 2010   The deferral percentage for an employee for a year is figured as follows. Tax forms 2010   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Tax forms 2010 Employee compensation. Tax forms 2010   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Tax forms 2010 Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Tax forms 2010 See Compensation in chapter 1. Tax forms 2010 Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Tax forms 2010 Compensation of self-employed individuals. Tax forms 2010   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Tax forms 2010   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Tax forms 2010 Choice not to treat deferrals as compensation. Tax forms 2010   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Tax forms 2010 Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Tax forms 2010 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Tax forms 2010 $17,500. Tax forms 2010 The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Tax forms 2010 Cash or deferred arrangement (section 401(k) plan). Tax forms 2010 Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Tax forms 2010 SIMPLE IRA plan. Tax forms 2010 In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Tax forms 2010 Catch-up contributions. Tax forms 2010   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Tax forms 2010 The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Tax forms 2010 Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Tax forms 2010 However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Tax forms 2010 The catch-up contribution limit. Tax forms 2010 The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Tax forms 2010   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Tax forms 2010 Overall limit on SEP contributions. Tax forms 2010   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Tax forms 2010 The same rule applies to contributions you make to your own SEP-IRA. Tax forms 2010 See Contribution Limits , earlier. Tax forms 2010 Figuring the elective deferral. Tax forms 2010   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Tax forms 2010 Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Tax forms 2010 However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Tax forms 2010 Excess deferrals. Tax forms 2010   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Tax forms 2010 For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Tax forms 2010 The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Tax forms 2010 See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Tax forms 2010 Excess SEP contributions. Tax forms 2010   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Tax forms 2010 You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Tax forms 2010 If you do not notify them within this time period, you must pay a 10% tax on the excess. Tax forms 2010 For an explanation of the notification requirements, see Rev. Tax forms 2010 Proc. Tax forms 2010 91-44, 1991-2 C. Tax forms 2010 B. Tax forms 2010 733. Tax forms 2010 If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Tax forms 2010 Reporting on Form W-2. Tax forms 2010   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Tax forms 2010 You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Tax forms 2010 You must also include them in box 12. Tax forms 2010 Mark the “Retirement plan” checkbox in box 13. Tax forms 2010 For more information, see the Form W-2 instructions. Tax forms 2010 Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Tax forms 2010 Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Tax forms 2010 Distributions are subject to IRA rules. Tax forms 2010 Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Tax forms 2010 For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Tax forms 2010 Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Tax forms 2010 Making excess contributions. Tax forms 2010 Making early withdrawals. Tax forms 2010 Not making required withdrawals. Tax forms 2010 For information about these taxes, see chapter 1 in Publication 590. Tax forms 2010 Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Tax forms 2010 Prohibited transaction. Tax forms 2010   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Tax forms 2010 In that case, the SEP-IRA will no longer qualify as an IRA. Tax forms 2010 For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Tax forms 2010 Effects on employee. Tax forms 2010   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Tax forms 2010 The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Tax forms 2010 Also, the employee may have to pay the additional tax for making early withdrawals. Tax forms 2010 Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Tax forms 2010 See Setting Up a SEP , earlier. Tax forms 2010 Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Tax forms 2010 You must also give them notice of any excess contributions. Tax forms 2010 For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Tax forms 2010 Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Tax forms 2010 For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Tax forms 2010 Prev  Up  Next   Home   More Online Publications