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Www myfreetaxes com 2. Www myfreetaxes com   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Www myfreetaxes com You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Www myfreetaxes com This chapter discusses accounting methods. Www myfreetaxes com For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Www myfreetaxes com Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Www myfreetaxes com Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Www myfreetaxes com Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Www myfreetaxes com A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Www myfreetaxes com An item considered material for financial statement purposes is generally also considered material for income tax purposes. Www myfreetaxes com See Publication 538 for more information. Www myfreetaxes com You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Www myfreetaxes com If you later want to change your accounting method, you generally must get IRS approval. Www myfreetaxes com How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Www myfreetaxes com Types of accounting methods. Www myfreetaxes com   Generally, you can use any of the following accounting methods. Www myfreetaxes com Each method is discussed in detail below. Www myfreetaxes com Cash method. Www myfreetaxes com Accrual method. Www myfreetaxes com Special methods of accounting for certain items of income and expenses. Www myfreetaxes com Combination (hybrid) method using elements of two or more of the above. Www myfreetaxes com Business and other items. Www myfreetaxes com   You can account for business and personal items using different accounting methods. Www myfreetaxes com For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Www myfreetaxes com Two or more businesses. Www myfreetaxes com   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Www myfreetaxes com Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Www myfreetaxes com Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Www myfreetaxes com However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Www myfreetaxes com See Accrual Method Required , later. Www myfreetaxes com Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Www myfreetaxes com Items of income include money received as well as property or services received. Www myfreetaxes com If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Www myfreetaxes com See chapter 3 for information on how to report farm income on your income tax return. Www myfreetaxes com Constructive receipt. Www myfreetaxes com   Income is constructively received when an amount is credited to your account or made available to you without restriction. Www myfreetaxes com You do not need to have possession of the income for it to be treated as income for the tax year. Www myfreetaxes com If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Www myfreetaxes com Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Www myfreetaxes com Direct payments and counter-cyclical payments. Www myfreetaxes com   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Www myfreetaxes com Delaying receipt of income. Www myfreetaxes com   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Www myfreetaxes com You must report the income in the year the money or property is received or made available to you without restriction. Www myfreetaxes com Example. Www myfreetaxes com Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Www myfreetaxes com She was told in December that her payment was available. Www myfreetaxes com She requested not to be paid until January 2014. Www myfreetaxes com However, she must still include this payment in her 2013 income because it was made available to her in 2013. Www myfreetaxes com Debts paid by another person or canceled. Www myfreetaxes com   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Www myfreetaxes com If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Www myfreetaxes com See Cancellation of Debt in chapter 3. Www myfreetaxes com Deferred payment contract. Www myfreetaxes com   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Www myfreetaxes com However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Www myfreetaxes com Example. Www myfreetaxes com You are a farmer who uses the cash method and a calendar tax year. Www myfreetaxes com You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Www myfreetaxes com You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Www myfreetaxes com However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Www myfreetaxes com Repayment of income. Www myfreetaxes com   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Www myfreetaxes com If the repayment is more than $3,000, a special rule applies. Www myfreetaxes com For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Www myfreetaxes com Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Www myfreetaxes com This includes business expenses for which you contest liability. Www myfreetaxes com However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Www myfreetaxes com See chapter 4 for information on how to deduct farm business expenses on your income tax return. Www myfreetaxes com Prepayment. Www myfreetaxes com   Generally, you cannot deduct expenses paid in advance. Www myfreetaxes com This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Www myfreetaxes com Example. Www myfreetaxes com On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Www myfreetaxes com In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Www myfreetaxes com In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Www myfreetaxes com An exception applies if the expense qualifies for the 12-month rule. Www myfreetaxes com See Publication 538 for more information and examples. Www myfreetaxes com See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Www myfreetaxes com Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Www myfreetaxes com The purpose of an accrual method of accounting is to correctly match income and expenses. Www myfreetaxes com Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Www myfreetaxes com See Accrual Method Required and Farm Inventory , later. Www myfreetaxes com Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Www myfreetaxes com Under this rule, include an amount in income on the earliest of the following dates. Www myfreetaxes com When you receive payment. Www myfreetaxes com When the income amount is due to you. Www myfreetaxes com When you earn the income. Www myfreetaxes com When title passes. Www myfreetaxes com If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Www myfreetaxes com Inventory. Www myfreetaxes com   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Www myfreetaxes com An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Www myfreetaxes com See Publication 538 for more information. Www myfreetaxes com Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Www myfreetaxes com Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Www myfreetaxes com The all-events test has been met. Www myfreetaxes com This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Www myfreetaxes com Economic performance has occurred. Www myfreetaxes com Economic performance. Www myfreetaxes com   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Www myfreetaxes com If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Www myfreetaxes com If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Www myfreetaxes com Example. Www myfreetaxes com Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Www myfreetaxes com She entered into a contract with ABC Farm Consulting in 2012. Www myfreetaxes com The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Www myfreetaxes com It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Www myfreetaxes com Jane paid ABC Farm Consulting $2,000 in December 2012. Www myfreetaxes com Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Www myfreetaxes com Economic performance for Jane's liability in the contract occurs as the services are provided. Www myfreetaxes com Jane incurs the $2,000 cost in 2013. Www myfreetaxes com An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Www myfreetaxes com For more information, see Economic Performance in Publication 538. Www myfreetaxes com Special rule for related persons. Www myfreetaxes com   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Www myfreetaxes com Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Www myfreetaxes com For more information, see Internal Revenue Code section 267. Www myfreetaxes com Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Www myfreetaxes com A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Www myfreetaxes com A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Www myfreetaxes com A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Www myfreetaxes com A tax shelter. Www myfreetaxes com Note. Www myfreetaxes com Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Www myfreetaxes com Family corporation. Www myfreetaxes com   A family corporation is generally a corporation that meets one of the following ownership requirements. Www myfreetaxes com Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Www myfreetaxes com Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Www myfreetaxes com Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Www myfreetaxes com For more information on family corporations, see Internal Revenue Code section 447. Www myfreetaxes com Tax shelter. Www myfreetaxes com   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Www myfreetaxes com Its principal purpose is the avoidance or evasion of federal income tax. Www myfreetaxes com It is a farming syndicate. Www myfreetaxes com A farming syndicate is an entity that meets either of the following tests. Www myfreetaxes com Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Www myfreetaxes com More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Www myfreetaxes com   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Www myfreetaxes com   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Www myfreetaxes com Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Www myfreetaxes com This record should show the actual count or measurement of the inventory. Www myfreetaxes com It should also show all factors that enter into its valuation, including quality and weight, if applicable. Www myfreetaxes com Hatchery business. Www myfreetaxes com   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Www myfreetaxes com Products held for sale. Www myfreetaxes com   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Www myfreetaxes com , must be included in inventory. Www myfreetaxes com Supplies. Www myfreetaxes com   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Www myfreetaxes com Deduct the cost of supplies in the year used or consumed in operations. Www myfreetaxes com Do not include incidental supplies in inventory as these are deductible in the year of purchase. Www myfreetaxes com Livestock. Www myfreetaxes com   Livestock held primarily for sale must be included in inventory. Www myfreetaxes com Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Www myfreetaxes com See also Unit-livestock-price method , later. Www myfreetaxes com If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Www myfreetaxes com Growing crops. Www myfreetaxes com   Generally, growing crops are not required to be included in inventory. Www myfreetaxes com However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Www myfreetaxes com See Uniform capitalization rules below. Www myfreetaxes com Also see Uniform Capitalization Rules in  chapter 6. Www myfreetaxes com Items to include in inventory. Www myfreetaxes com   Your inventory should include all items held for sale, or for use as feed, seed, etc. Www myfreetaxes com , whether raised or purchased, that are unsold at the end of the year. Www myfreetaxes com Uniform capitalization rules. Www myfreetaxes com   The following applies if you are required to use an accrual method of accounting. Www myfreetaxes com The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Www myfreetaxes com The costs of animals are subject to the uniform capitalization rules. Www myfreetaxes com Inventory valuation methods. Www myfreetaxes com   The following methods, described below, are those generally available for valuing inventory. Www myfreetaxes com The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Www myfreetaxes com Cost. Www myfreetaxes com Lower of cost or market. Www myfreetaxes com Farm-price method. Www myfreetaxes com Unit-livestock-price method. Www myfreetaxes com Cost and lower of cost or market methods. Www myfreetaxes com   See Publication 538 for information on these valuation methods. Www myfreetaxes com If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Www myfreetaxes com However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Www myfreetaxes com Farm-price method. Www myfreetaxes com   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Www myfreetaxes com Market price is the current price at the nearest market in the quantities you usually sell. Www myfreetaxes com Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Www myfreetaxes com If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Www myfreetaxes com Unit-livestock-price method. Www myfreetaxes com   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Www myfreetaxes com You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Www myfreetaxes com The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Www myfreetaxes com Unit prices and classifications are subject to approval by the IRS on examination of your return. Www myfreetaxes com You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Www myfreetaxes com IRS approval is not required for these adjustments. Www myfreetaxes com Any other changes in unit prices or classifications do require IRS approval. Www myfreetaxes com   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Www myfreetaxes com This method accounts only for the increase in cost of raising an animal to maturity. Www myfreetaxes com It does not provide for any decrease in the animal's market value after it reaches maturity. Www myfreetaxes com Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Www myfreetaxes com   Do not include sold or lost animals in the year-end inventory. Www myfreetaxes com If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Www myfreetaxes com The animals on hand at the end of the year are considered those most recently acquired. Www myfreetaxes com   You must include in inventory all livestock purchased primarily for sale. Www myfreetaxes com You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Www myfreetaxes com However, you must be consistent from year to year, regardless of the method you have chosen. Www myfreetaxes com You cannot change your method without obtaining approval from the IRS. Www myfreetaxes com   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Www myfreetaxes com If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Www myfreetaxes com However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Www myfreetaxes com This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Www myfreetaxes com It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Www myfreetaxes com Uniform capitalization rules. Www myfreetaxes com   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Www myfreetaxes com This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Www myfreetaxes com Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Www myfreetaxes com Example 1. Www myfreetaxes com You are a farmer who uses an accrual method of accounting. Www myfreetaxes com You keep your books on the calendar year basis. Www myfreetaxes com You sell grain in December 2013 but you are not paid until January 2014. Www myfreetaxes com Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Www myfreetaxes com Example 2. Www myfreetaxes com Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Www myfreetaxes com Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Www myfreetaxes com Deduct the costs of producing the grain in the year you pay for them. Www myfreetaxes com Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Www myfreetaxes com Crop method. Www myfreetaxes com   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Www myfreetaxes com You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Www myfreetaxes com Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Www myfreetaxes com    See chapter 4 for details on deducting the costs of operating a farm. Www myfreetaxes com Also see Regulations section 1. Www myfreetaxes com 162-12. Www myfreetaxes com Other special methods. Www myfreetaxes com   Other special methods of accounting apply to the following items. Www myfreetaxes com Amortization, see chapter 7. Www myfreetaxes com Casualties, see chapter 11. Www myfreetaxes com Condemnations, see chapter 11. Www myfreetaxes com Depletion, see chapter 7. Www myfreetaxes com Depreciation, see chapter 7. Www myfreetaxes com Farm business expenses, see chapter 4. Www myfreetaxes com Farm income, see chapter 3. Www myfreetaxes com Installment sales, see chapter 10. Www myfreetaxes com Soil and water conservation expenses, see chapter 5. Www myfreetaxes com Thefts, see chapter 11. Www myfreetaxes com Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Www myfreetaxes com However, the following restrictions apply. Www myfreetaxes com If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Www myfreetaxes com If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Www myfreetaxes com Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Www myfreetaxes com Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Www myfreetaxes com You may also have to pay a fee. Www myfreetaxes com To obtain approval, you must generally file Form 3115. Www myfreetaxes com There are instances when you can obtain automatic consent to change certain methods of accounting. Www myfreetaxes com See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Www myfreetaxes com For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Www myfreetaxes com Also see Publication 538. Www myfreetaxes com Prev  Up  Next   Home   More Online Publications
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Www myfreetaxes com 12. Www myfreetaxes com   Other Income Table of Contents Introduction Useful Items - You may want to see: Bartering Canceled DebtsInterest included in canceled debt. Www myfreetaxes com Exceptions Host or Hostess Life Insurance ProceedsSurviving spouse. Www myfreetaxes com Endowment Contract Proceeds Accelerated Death Benefits Public Safety Officer Killed in the Line of Duty Partnership Income S Corporation Income RecoveriesItemized Deduction Recoveries Rents from Personal Property RepaymentsMethod 1. Www myfreetaxes com Method 2. Www myfreetaxes com RoyaltiesDepletion. Www myfreetaxes com Coal and iron ore. Www myfreetaxes com Sale of property interest. Www myfreetaxes com Part of future production sold. Www myfreetaxes com Unemployment BenefitsTypes of unemployment compensation. Www myfreetaxes com Governmental program. Www myfreetaxes com Repayment of unemployment compensation. Www myfreetaxes com Tax withholding. Www myfreetaxes com Repayment of benefits. Www myfreetaxes com Welfare and Other Public Assistance Benefits Other IncomeEmotional distress. Www myfreetaxes com Deduction for costs involved in unlawful discrimination suits. Www myfreetaxes com Energy conservation measure. Www myfreetaxes com Dwelling unit. Www myfreetaxes com Current income required to be distributed. Www myfreetaxes com Current income not required to be distributed. Www myfreetaxes com How to report. Www myfreetaxes com Losses. Www myfreetaxes com Grantor trust. Www myfreetaxes com Nonemployee compensation. Www myfreetaxes com Corporate director. Www myfreetaxes com Personal representatives. Www myfreetaxes com Manager of trade or business for bankruptcy estate. Www myfreetaxes com Notary public. Www myfreetaxes com Election precinct official. Www myfreetaxes com Difficulty-of-care payments. Www myfreetaxes com Maintaining space in home. Www myfreetaxes com Reporting taxable payments. Www myfreetaxes com Lotteries and raffles. Www myfreetaxes com Form W-2G. Www myfreetaxes com Reporting winnings and recordkeeping. Www myfreetaxes com Inherited pension or IRA. Www myfreetaxes com Employee awards or bonuses. Www myfreetaxes com Pulitzer, Nobel, and similar prizes. Www myfreetaxes com Payment for services. Www myfreetaxes com VA payments. Www myfreetaxes com Prizes. Www myfreetaxes com Strike and lockout benefits. Www myfreetaxes com Introduction You must include on your return all items of income you receive in the form of money, property, and services unless the tax law states that you do not include them. Www myfreetaxes com Some items, however, are only partly excluded from income. Www myfreetaxes com This chapter discusses many kinds of income and explains whether they are taxable or nontaxable. Www myfreetaxes com Income that is taxable must be reported on your tax return and is subject to tax. Www myfreetaxes com Income that is nontaxable may have to be shown on your tax return but is not taxable. Www myfreetaxes com This chapter begins with discussions of the following income items. Www myfreetaxes com Bartering. Www myfreetaxes com Canceled debts. Www myfreetaxes com Sales parties at which you are the host or hostess. Www myfreetaxes com Life insurance proceeds. Www myfreetaxes com Partnership income. Www myfreetaxes com S Corporation income. Www myfreetaxes com Recoveries (including state income tax refunds). Www myfreetaxes com Rents from personal property. Www myfreetaxes com Repayments. Www myfreetaxes com Royalties. Www myfreetaxes com Unemployment benefits. Www myfreetaxes com Welfare and other public assistance benefits. Www myfreetaxes com These discussions are followed by brief discussions of other income items. Www myfreetaxes com Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 544 Sales and Other Dispositions of Assets 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Bartering Bartering is an exchange of property or services. Www myfreetaxes com You must include in your income, at the time received, the fair market value of property or services you receive in bartering. Www myfreetaxes com If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise. Www myfreetaxes com Generally, you report this income on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Www myfreetaxes com However, if the barter involves an exchange of something other than services, such as in Example 3 below, you may have to use another form or schedule instead. Www myfreetaxes com Example 1. Www myfreetaxes com You are a self-employed attorney who performs legal services for a client, a small corporation. Www myfreetaxes com The corporation gives you shares of its stock as payment for your services. Www myfreetaxes com You must include the fair market value of the shares in your income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) in the year you receive them. Www myfreetaxes com Example 2. Www myfreetaxes com You are self-employed and a member of a barter club. Www myfreetaxes com The club uses “credit units” as a means of exchange. Www myfreetaxes com It adds credit units to your account for goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. Www myfreetaxes com The club subtracts credit units from your account when you receive goods or services from other members. Www myfreetaxes com You must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year. Www myfreetaxes com Example 3. Www myfreetaxes com You own a small apartment building. Www myfreetaxes com In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. Www myfreetaxes com You must report as rental income on Schedule E (Form 1040), Supplemental Income and Loss, the fair market value of the artwork, and the artist must report as income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) the fair rental value of the apartment. Www myfreetaxes com Form 1099-B from barter exchange. Www myfreetaxes com   If you exchanged property or services through a barter exchange, Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a similar statement from the barter exchange should be sent to you by February 18, 2014. Www myfreetaxes com It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2013. Www myfreetaxes com The IRS also will receive a copy of Form 1099-B. Www myfreetaxes com Canceled Debts In most cases, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. Www myfreetaxes com You have no income from the canceled debt if it is intended as a gift to you. Www myfreetaxes com A debt includes any indebtedness for which you are liable or which attaches to property you hold. Www myfreetaxes com If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. Www myfreetaxes com If it is a business debt, report the amount on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you are a farmer). Www myfreetaxes com Form 1099-C. Www myfreetaxes com   If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. Www myfreetaxes com The amount of the canceled debt is shown in box 2. Www myfreetaxes com Interest included in canceled debt. Www myfreetaxes com   If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will be shown in box 3. Www myfreetaxes com Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible when you paid it. Www myfreetaxes com See Deductible debt under Exceptions, later. Www myfreetaxes com   If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. Www myfreetaxes com If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3). Www myfreetaxes com Discounted mortgage loan. Www myfreetaxes com   If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. Www myfreetaxes com You must include the canceled amount in your income. Www myfreetaxes com Mortgage relief upon sale or other disposition. Www myfreetaxes com   If you are personally liable for a mortgage (recourse debt), and you are relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the fair market value of the property. Www myfreetaxes com To the extent the mortgage discharge exceeds the fair market value of the property, it is income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt , later. Www myfreetaxes com Report any income from discharge of indebtedness on nonbusiness debt that does not qualify for exclusion as other income on Form 1040, line 21. Www myfreetaxes com    You may be able to exclude part of the mortgage relief on your principal residence. Www myfreetaxes com See Excluded debt, later. Www myfreetaxes com   If you are not personally liable for a mortgage (nonrecourse debt), and you are relieved of the mortgage when you dispose of the property (such as through foreclosure), that relief is included in the amount you realize. Www myfreetaxes com You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Www myfreetaxes com Report any gain on nonbusiness property as a capital gain. Www myfreetaxes com   See Publication 4681 for more information. Www myfreetaxes com Stockholder debt. Www myfreetaxes com   If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that is generally dividend income to you. Www myfreetaxes com For more information, see Publication 542, Corporations. Www myfreetaxes com   If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. Www myfreetaxes com This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled. Www myfreetaxes com Repayment of canceled debt. Www myfreetaxes com   If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. Www myfreetaxes com You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. Www myfreetaxes com The statute of limitations generally does not end until 3 years after the due date of your original return. Www myfreetaxes com Exceptions There are several exceptions to the inclusion of canceled debt in income. Www myfreetaxes com These are explained next. Www myfreetaxes com Student loans. Www myfreetaxes com   Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers. Www myfreetaxes com   You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. Www myfreetaxes com To qualify, the loan must have been made by: The Federal Government, a state or local government, or an instrumentality, agency, or subdivision thereof, A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law, or An educational institution: Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or As part of a program of the institution designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt organization described in section 501(c)(3). Www myfreetaxes com   A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a qualified tax-exempt organization under its program designed as described in (3)(b) above. Www myfreetaxes com Education loan repayment assistance. Www myfreetaxes com   Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program), a state education loan repayment program eligible for funds under the Public Health Service Act, or any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas are not taxable. Www myfreetaxes com    The provision relating to the “other state loan repayment or loan forgiveness program” was added to this exclusion for amounts received in tax years beginning after December 31, 2008. Www myfreetaxes com If you included these amounts in income in 2010, 2011, or 2012, you should file an amended tax return to exclude this income. Www myfreetaxes com See Form 1040X and its instructions for details on filing. Www myfreetaxes com Deductible debt. Www myfreetaxes com   You do not have income from the cancellation of a debt if your payment of the debt would be deductible. Www myfreetaxes com This exception applies only if you use the cash method of accounting. Www myfreetaxes com For more information, see chapter 5 of Publication 334, Tax Guide for Small Business. Www myfreetaxes com Price reduced after purchase. Www myfreetaxes com   In most cases, if the seller reduces the amount of debt you owe for property you purchased, you do not have income from the reduction. Www myfreetaxes com The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property. Www myfreetaxes com Excluded debt. Www myfreetaxes com   Do not include a canceled debt in your gross income in the following situations. Www myfreetaxes com The debt is canceled in a bankruptcy case under title 11 of the U. Www myfreetaxes com S. Www myfreetaxes com Code. Www myfreetaxes com See Publication 908, Bankruptcy Tax Guide. Www myfreetaxes com The debt is canceled when you are insolvent. Www myfreetaxes com However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent. Www myfreetaxes com See Publication 908. Www myfreetaxes com The debt is qualified farm debt and is canceled by a qualified person. Www myfreetaxes com See chapter 3 of Publication 225, Farmer's Tax Guide. Www myfreetaxes com The debt is qualified real property business debt. Www myfreetaxes com See chapter 5 of Publication 334. Www myfreetaxes com The cancellation is intended as a gift. Www myfreetaxes com The debt is qualified principal residence indebtedness. Www myfreetaxes com See Publication 525 for additional information. Www myfreetaxes com Host or Hostess If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. Www myfreetaxes com You must report this item as income at its fair market value. Www myfreetaxes com Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. Www myfreetaxes com These expenses are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party. Www myfreetaxes com For more information about the 50% limit for meal and entertainment expenses, see chapter 26. Www myfreetaxes com Life Insurance Proceeds Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. Www myfreetaxes com This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. Www myfreetaxes com However, interest income received as a result of life insurance proceeds may be taxable. Www myfreetaxes com Proceeds not received in installments. Www myfreetaxes com   If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. Www myfreetaxes com If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death. Www myfreetaxes com Proceeds received in installments. Www myfreetaxes com   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. Www myfreetaxes com   To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Www myfreetaxes com Include anything over this excluded part in your income as interest. Www myfreetaxes com Surviving spouse. Www myfreetaxes com   If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. Www myfreetaxes com If you remarry, you can continue to take the exclusion. Www myfreetaxes com Surrender of policy for cash. Www myfreetaxes com   If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Www myfreetaxes com In most cases, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income. Www myfreetaxes com    You should receive a Form 1099-R showing the total proceeds and the taxable part. Www myfreetaxes com Report these amounts on lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A. Www myfreetaxes com More information. Www myfreetaxes com   For more information, see Life Insurance Proceeds in Publication 525. Www myfreetaxes com Endowment Contract Proceeds An endowment contract is a policy under which you are paid a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Www myfreetaxes com Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. Www myfreetaxes com To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Www myfreetaxes com Include the part of the lump sum payment that is more than your cost in your income. Www myfreetaxes com Accelerated Death Benefits Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded from income if the insured is terminally or chronically ill. Www myfreetaxes com Viatical settlement. Www myfreetaxes com   This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. Www myfreetaxes com A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code. Www myfreetaxes com Exclusion for terminal illness. Www myfreetaxes com    Accelerated death benefits are fully excludable if the insured is a terminally ill individual. Www myfreetaxes com This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification. Www myfreetaxes com Exclusion for chronic illness. Www myfreetaxes com    If the insured is a chronically ill individual who is not terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Www myfreetaxes com Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. Www myfreetaxes com This limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. Www myfreetaxes com For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits in Publication 525. Www myfreetaxes com Exception. Www myfreetaxes com   The exclusion does not apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured: Is a director, officer, or employee of the person, or Has a financial interest in the person's business. Www myfreetaxes com Form 8853. Www myfreetaxes com   To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. Www myfreetaxes com You do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred. Www myfreetaxes com Public Safety Officer Killed in the Line of Duty If you are a survivor of a public safety officer who was killed in the line of duty, you may be able to exclude from income certain amounts you receive. Www myfreetaxes com For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. Www myfreetaxes com For more information, see Publication 559, Survivors, Executors, and Administrators. Www myfreetaxes com Partnership Income A partnership generally is not a taxable entity. Www myfreetaxes com The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items. Www myfreetaxes com Schedule K-1 (Form 1065). Www myfreetaxes com    Although a partnership generally pays no tax, it must file an information return on Form 1065, U. Www myfreetaxes com S. Www myfreetaxes com Return of Partnership Income, and send Schedule K-1 (Form 1065) to each partner. Www myfreetaxes com In addition, the partnership will send each partner a copy of the Partner's Instructions for Schedule K-1 (Form 1065) to help each partner report his or her share of the partnership's income, deductions, credits, and tax preference items. Www myfreetaxes com Keep Schedule K-1 (Form 1065) for your records. Www myfreetaxes com Do not attach it to your Form 1040, unless you are specifically required to do so. Www myfreetaxes com For more information on partnerships, see Publication 541, Partnerships. Www myfreetaxes com Qualified joint venture. Www myfreetaxes com   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Www myfreetaxes com To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Www myfreetaxes com For further information on how to make the election and which schedule(s) to file, see the instructions for your individual tax return. Www myfreetaxes com S Corporation Income In most cases, an S corporation does not pay tax on its income. Www myfreetaxes com Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's pro rata share. Www myfreetaxes com Schedule K-1 (Form 1120S). Www myfreetaxes com   An S corporation must file a return on Form 1120S, U. Www myfreetaxes com S. Www myfreetaxes com Income Tax Return for an S Corporation, and send Schedule K-1 (Form 1120S) to each shareholder. Www myfreetaxes com In addition, the S corporation will send each shareholder a copy of the Shareholder's Instructions for Schedule K-1 (Form 1120S) to help each shareholder report his or her share of the S corporation's income, losses, credits, and deductions. Www myfreetaxes com Keep Schedule K-1 (Form 1120S) for your records. Www myfreetaxes com Do not attach it to your Form 1040, unless you are specifically required to do so. Www myfreetaxes com For more information on S corporations and their shareholders, see the Instructions for Form 1120S. Www myfreetaxes com Recoveries A recovery is a return of an amount you deducted or took a credit for in an earlier year. Www myfreetaxes com The most common recoveries are refunds, reimbursements, and rebates of deductions itemized on Schedule A (Form 1040). Www myfreetaxes com You also may have recoveries of non-itemized deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a tax credit. Www myfreetaxes com Tax benefit rule. Www myfreetaxes com   You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. Www myfreetaxes com For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year. Www myfreetaxes com For more information, see Publication 525. Www myfreetaxes com Federal income tax refund. Www myfreetaxes com   Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from income. Www myfreetaxes com State tax refund. Www myfreetaxes com   If you received a state or local income tax refund (or credit or offset) in 2013, you generally must include it in income if you deducted the tax in an earlier year. Www myfreetaxes com The payer should send Form 1099-G, Certain Government Payments, to you by January 31, 2014. Www myfreetaxes com The IRS also will receive a copy of the Form 1099-G. Www myfreetaxes com If you file Form 1040, use the State and Local Income Tax Refund Worksheet in the 2013 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income. Www myfreetaxes com See Publication 525 for when you must use another worksheet. Www myfreetaxes com   If you could choose to deduct for a tax year either: State and local income taxes, or State and local general sales taxes, then the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you did not choose to deduct for that year. Www myfreetaxes com For examples, see Publication 525. Www myfreetaxes com Mortgage interest refund. Www myfreetaxes com    If you received a refund or credit in 2013 of mortgage interest paid in an earlier year, the amount should be shown in box 3 of your Form 1098, Mortgage Interest Statement. Www myfreetaxes com Do not subtract the refund amount from the interest you paid in 2013. Www myfreetaxes com You may have to include it in your income under the rules explained in the following discussions. Www myfreetaxes com Interest on recovery. Www myfreetaxes com   Interest on any of the amounts you recover must be reported as interest income in the year received. Www myfreetaxes com For example, report any interest you received on state or local income tax refunds on Form 1040, line 8a. Www myfreetaxes com Recovery and expense in same year. Www myfreetaxes com   If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and is not reported as income. Www myfreetaxes com Recovery for 2 or more years. Www myfreetaxes com   If you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate, on a pro rata basis, the recovered amount between the years in which you paid it. Www myfreetaxes com This allocation is necessary to determine the amount of recovery from any earlier years and to determine the amount, if any, of your allowable deduction for this item for the current year. Www myfreetaxes com For information on how to compute the allocation, see Recoveries in Publication 525. Www myfreetaxes com Itemized Deduction Recoveries If you recover any amount that you deducted in an earlier year on Schedule A (Form 1040), you generally must include the full amount of the recovery in your income in the year you receive it. Www myfreetaxes com Where to report. Www myfreetaxes com   Enter your state or local income tax refund on Form 1040, line 10, and the total of all other recoveries as other income on Form 1040, line 21. Www myfreetaxes com You cannot use Form 1040A or Form 1040EZ. Www myfreetaxes com Standard deduction limit. Www myfreetaxes com   You generally are allowed to claim the standard deduction if you do not itemize your deductions. Www myfreetaxes com Only your itemized deductions that are more than your standard deduction are subject to the recovery rule (unless you are required to itemize your deductions). Www myfreetaxes com If your total deductions on the earlier year return were not more than your income for that year, include in your income this year the lesser of: Your recoveries, or The amount by which your itemized deductions exceeded the standard deduction. Www myfreetaxes com Example. Www myfreetaxes com For 2012, you filed a joint return. Www myfreetaxes com Your taxable income was $60,000 and you were not entitled to any tax credits. Www myfreetaxes com Your standard deduction was $11,900, and you had itemized deductions of $14,000. Www myfreetaxes com In 2013, you received the following recoveries for amounts deducted on your 2012 return: Medical expenses $200 State and local income tax refund 400 Refund of mortgage interest 325 Total recoveries $925 None of the recoveries were more than the deductions taken for 2012. Www myfreetaxes com The difference between the state and local income tax you deducted and your local general sales tax was more than $400. Www myfreetaxes com Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($14,000 − 11,900 = $2,100), so you must include your total recoveries in your income for 2013. Www myfreetaxes com Report the state and local income tax refund of $400 on Form 1040, line 10, and the balance of your recoveries, $525, on Form 1040, line 21. Www myfreetaxes com Standard deduction for earlier years. Www myfreetaxes com   To determine if amounts recovered in 2013 must be included in your income, you must know the standard deduction for your filing status for the year the deduction was claimed. Www myfreetaxes com Look in the instructions for your tax return from prior years to locate the standard deduction for the filing status for that prior year. Www myfreetaxes com Example. Www myfreetaxes com You filed a joint return on Form 1040 for 2012 with taxable income of $45,000. Www myfreetaxes com Your itemized deductions were $12,350. Www myfreetaxes com The standard deduction that you could have claimed was $11,900. Www myfreetaxes com In 2013, you recovered $2,100 of your 2012 itemized deductions. Www myfreetaxes com None of the recoveries were more than the actual deductions for 2012. Www myfreetaxes com Include $450 of the recoveries in your 2013 income. Www myfreetaxes com This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($12,350 − $11,900 = $450). Www myfreetaxes com Recovery limited to deduction. Www myfreetaxes com   You do not include in your income any amount of your recovery that is more than the amount you deducted in the earlier year. Www myfreetaxes com The amount you include in your income is limited to the smaller of: The amount deducted on Schedule A (Form 1040), or The amount recovered. Www myfreetaxes com Example. Www myfreetaxes com During 2012 you paid $1,700 for medical expenses. Www myfreetaxes com From this amount you subtracted $1,500, which was 7. Www myfreetaxes com 5% of your adjusted gross income. Www myfreetaxes com Your actual medical expense deduction was $200. Www myfreetaxes com In 2013, you received a $500 reimbursement from your medical insurance for your 2012 expenses. Www myfreetaxes com The only amount of the $500 reimbursement that must be included in your income for 2013 is $200—the amount actually deducted. Www myfreetaxes com Other recoveries. Www myfreetaxes com   See Recoveries in Publication 525 if: You have recoveries of items other than itemized deductions, or You received a recovery for an item for which you claimed a tax credit (other than investment credit or foreign tax credit) in a prior year. Www myfreetaxes com Rents from Personal Property If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is in most cases determined by: Whether or not the rental activity is a business, and Whether or not the rental activity is conducted for profit. Www myfreetaxes com In most cases, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business. Www myfreetaxes com See Publication 535, Business Expenses, for details on deducting expenses for both business and not-for-profit activities. Www myfreetaxes com Reporting business income and expenses. Www myfreetaxes com    If you are in the business of renting personal property, report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). Www myfreetaxes com The form instructions have information on how to complete them. Www myfreetaxes com Reporting nonbusiness income. Www myfreetaxes com   If you are not in the business of renting personal property, report your rental income on Form 1040, line 21. Www myfreetaxes com List the type and amount of the income on the dotted line next to line 21. Www myfreetaxes com Reporting nonbusiness expenses. Www myfreetaxes com   If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040, line 36. Www myfreetaxes com Also enter the amount and “PPR” on the dotted line next to line 36. Www myfreetaxes com   If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset other income. Www myfreetaxes com See Activity not for profit , under Other Income, later. Www myfreetaxes com Repayments If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Www myfreetaxes com Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Www myfreetaxes com Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction. Www myfreetaxes com Type of deduction. Www myfreetaxes com   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Www myfreetaxes com You generally deduct the repayment on the same form or schedule on which you previously reported it as income. Www myfreetaxes com For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Www myfreetaxes com If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). Www myfreetaxes com If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040). Www myfreetaxes com Repaid social security benefits. Www myfreetaxes com   If you repaid social security benefits or equivalent railroad retirement benefits, see Repayment of benefits in chapter 11. Www myfreetaxes com Repayment of $3,000 or less. Www myfreetaxes com   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Www myfreetaxes com If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 23. Www myfreetaxes com Repayment over $3,000. Www myfreetaxes com   If the amount you repaid was more than $3,000, you can deduct the repayment (as explained under Type of deduction , earlier). Www myfreetaxes com However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. Www myfreetaxes com This means that at the time you included the income, it appeared that you had an unrestricted right to it. Www myfreetaxes com If you qualify for this choice, figure your tax under both methods and compare the results. Www myfreetaxes com Use the method (deduction or credit) that results in less tax. Www myfreetaxes com When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Www myfreetaxes com Each instance of repayment is not considered separately. Www myfreetaxes com Method 1. Www myfreetaxes com   Figure your tax for 2013 claiming a deduction for the repaid amount. Www myfreetaxes com If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28. Www myfreetaxes com Method 2. Www myfreetaxes com   Figure your tax for 2013 claiming a credit for the repaid amount. Www myfreetaxes com Follow these steps. Www myfreetaxes com Figure your tax for 2013 without deducting the repaid amount. Www myfreetaxes com Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Www myfreetaxes com Subtract the tax in (2) from the tax shown on your return for the earlier year. Www myfreetaxes com This is the credit. Www myfreetaxes com Subtract the answer in (3) from the tax for 2013 figured without the deduction (Step 1). Www myfreetaxes com   If method 1 results in less tax, deduct the amount repaid. Www myfreetaxes com If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 71, by adding the amount of the credit to any other credits on this line, and entering “I. Www myfreetaxes com R. Www myfreetaxes com C. Www myfreetaxes com 1341” in the column to the right of line 71. Www myfreetaxes com   An example of this computation can be found in Publication 525. Www myfreetaxes com Repaid wages subject to social security and Medicare taxes. Www myfreetaxes com   If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. Www myfreetaxes com If the employer refuses to refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. Www myfreetaxes com File a claim for refund using Form 843, Claim for Refund and Request for Abatement. Www myfreetaxes com Repaid wages subject to Additional Medicare Tax. Www myfreetaxes com   Employers cannot make an adjustment or file a claim for refund for Additional Medicare Tax withholding when there is a repayment of wages received by an employee in a prior year because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year. Www myfreetaxes com If you had to repay an amount that you included in your wages or compensation in an earlier year, and on which Additional Medicare Tax was paid, you may be able to recover the Additional Medicare Tax paid on the amount. Www myfreetaxes com To recover Additional Medicare Tax on the repaid wages or compensation, you must file Form 1040X, Amended U. Www myfreetaxes com S. Www myfreetaxes com Individual Income Tax Return, for the prior year in which the wages or compensation were originally received. Www myfreetaxes com See the Instructions for Form 1040X. Www myfreetaxes com Royalties Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income. Www myfreetaxes com In most cases you report royalties in Part I of Schedule E (Form 1040). Www myfreetaxes com However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc. Www myfreetaxes com , report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). Www myfreetaxes com Copyrights and patents. Www myfreetaxes com   Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions, are amounts paid to you for the right to use your work over a specified period of time. Www myfreetaxes com Royalties generally are based on the number of units sold, such as the number of books, tickets to a performance, or machines sold. Www myfreetaxes com Oil, gas, and minerals. Www myfreetaxes com   Royalty income from oil, gas, and mineral properties is the amount you receive when natural resources are extracted from your property. Www myfreetaxes com The royalties are based on units, such as barrels, tons, etc. Www myfreetaxes com , and are paid to you by a person or company who leases the property from you. Www myfreetaxes com Depletion. Www myfreetaxes com   If you are the owner of an economic interest in mineral deposits or oil and gas wells, you can recover your investment through the depletion allowance. Www myfreetaxes com For information on this subject, see chapter 9 of Publication 535. Www myfreetaxes com Coal and iron ore. Www myfreetaxes com   Under certain circumstances, you can treat amounts you receive from the disposal of coal and iron ore as payments from the sale of a capital asset, rather than as royalty income. Www myfreetaxes com For information about gain or loss from the sale of coal and iron ore, see Publication 544. Www myfreetaxes com Sale of property interest. Www myfreetaxes com   If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of property used in a trade or business under section 1231, not royalty income. Www myfreetaxes com Under certain circumstances, the sale is subject to capital gain or loss treatment as explained in the Instructions for Schedule D (Form 1040). Www myfreetaxes com For more information on selling section 1231 property, see chapter 3 of Publication 544. Www myfreetaxes com   If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the property, you have made a lease or a sublease, and any cash you receive for the assignment of other interests in the property is ordinary income subject to a depletion allowance. Www myfreetaxes com Part of future production sold. Www myfreetaxes com   If you own mineral property but sell part of the future production, in most cases you treat the money you receive from the buyer at the time of the sale as a loan from the buyer. Www myfreetaxes com Do not include it in your income or take depletion based on it. Www myfreetaxes com   When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct depletion from that amount to arrive at your taxable income from the property. Www myfreetaxes com Unemployment Benefits The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits. Www myfreetaxes com Unemployment compensation. Www myfreetaxes com   You must include in income all unemployment compensation you receive. Www myfreetaxes com You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you. Www myfreetaxes com In most cases, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. Www myfreetaxes com Types of unemployment compensation. Www myfreetaxes com   Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. Www myfreetaxes com It includes the following benefits. Www myfreetaxes com Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund. Www myfreetaxes com State unemployment insurance benefits. Www myfreetaxes com Railroad unemployment compensation benefits. Www myfreetaxes com Disability payments from a government program paid as a substitute for unemployment compensation. Www myfreetaxes com (Amounts received as workers' compensation for injuries or illness are not unemployment compensation. Www myfreetaxes com See chapter 5 for more information. Www myfreetaxes com ) Trade readjustment allowances under the Trade Act of 1974. Www myfreetaxes com Unemployment assistance under the Disaster Relief and Emergency Assistance Act. Www myfreetaxes com Unemployment assistance under the Airline Deregulation Act of 1974 Program. Www myfreetaxes com Governmental program. Www myfreetaxes com   If you contribute to a governmental unemployment compensation program and your contributions are not deductible, amounts you receive under the program are not included as unemployment compensation until you recover your contributions. Www myfreetaxes com If you deducted all of your contributions to the program, the entire amount you receive under the program is included in your income. Www myfreetaxes com Repayment of unemployment compensation. Www myfreetaxes com   If you repaid in 2013 unemployment compensation you received in 2013, subtract the amount you repaid from the total amount you received and enter the difference on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. Www myfreetaxes com On the dotted line next to your entry enter “Repaid” and the amount you repaid. Www myfreetaxes com If you repaid unemployment compensation in 2013 that you included in income in an earlier year, you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. Www myfreetaxes com If the amount is more than $3,000, see Repayments , earlier. Www myfreetaxes com Tax withholding. Www myfreetaxes com   You can choose to have federal income tax withheld from your unemployment compensation. Www myfreetaxes com To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Www myfreetaxes com Tax will be withheld at 10% of your payment. Www myfreetaxes com    If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. Www myfreetaxes com If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. Www myfreetaxes com For more information on estimated tax, see chapter 4. Www myfreetaxes com Supplemental unemployment benefits. Www myfreetaxes com   Benefits received from an employer-financed fund (to which the employees did not contribute) are not unemployment compensation. Www myfreetaxes com They are taxable as wages and are subject to withholding for income tax. Www myfreetaxes com They may be subject to social security and Medicare taxes. Www myfreetaxes com For more information, see Supplemental Unemployment Benefits in section 5 of Publication 15-A, Employer's Supplemental Tax Guide. Www myfreetaxes com Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Www myfreetaxes com Repayment of benefits. Www myfreetaxes com   You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. Www myfreetaxes com If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. Www myfreetaxes com If you repay the benefits in a later year, you must include the full amount of the benefits received in your income for the year you received them. Www myfreetaxes com   Deduct the repayment in the later year as an adjustment to gross income on Form 1040. Www myfreetaxes com (You cannot use Form 1040A or Form 1040EZ. Www myfreetaxes com ) Include the repayment on Form 1040, line 36, and enter “Sub-Pay TRA” and the amount on the dotted line next to line 36. Www myfreetaxes com If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. Www myfreetaxes com For more information on this, see Repayments , earlier. Www myfreetaxes com Private unemployment fund. Www myfreetaxes com   Unemployment benefit payments from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. Www myfreetaxes com Report the taxable amount on Form 1040, line 21. Www myfreetaxes com Payments by a union. Www myfreetaxes com   Benefits paid to you as an unemployed member of a union from regular union dues are included in your income on Form 1040, line 21. Www myfreetaxes com However, if you contribute to a special union fund and your payments to the fund are not deductible, the unemployment benefits you receive from the fund are includible in your income only to the extent they are more than your contributions. Www myfreetaxes com Guaranteed annual wage. Www myfreetaxes com   Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are taxable as wages. Www myfreetaxes com Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Www myfreetaxes com State employees. Www myfreetaxes com   Payments similar to a state's unemployment compensation may be made by the state to its employees who are not covered by the state's unemployment compensation law. Www myfreetaxes com Although the payments are fully taxable, do not report them as unemployment compensation. Www myfreetaxes com Report these payments on Form 1040, line 21. Www myfreetaxes com Welfare and Other Public Assistance Benefits Do not include in your income governmental benefit payments from a public welfare fund based upon need, such as payments to blind individuals under a state public assistance law. Www myfreetaxes com Payments from a state fund for the victims of crime should not be included in the victims' incomes if they are in the nature of welfare payments. Www myfreetaxes com Do not deduct medical expenses that are reimbursed by such a fund. Www myfreetaxes com You must include in your income any welfare payments that are compensation for services or that are obtained fraudulently. Www myfreetaxes com Reemployment Trade Adjustment Assistance (RTAA) payments. Www myfreetaxes com   RTAA payments received from a state must be included in your income. Www myfreetaxes com The state must send you Form 1099-G to advise you of the amount you should include in income. Www myfreetaxes com The amount should be reported on Form 1040, line 21. Www myfreetaxes com Persons with disabilities. Www myfreetaxes com   If you have a disability, you must include in income compensation you receive for services you perform unless the compensation is otherwise excluded. Www myfreetaxes com However, you do not include in income the value of goods, services, and cash that you receive, not in return for your services, but for your training and rehabilitation because you have a disability. Www myfreetaxes com Excludable amounts include payments for transportation and attendant care, such as interpreter services for the deaf, reader services for the blind, and services to help individuals with an intellectual disability do their work. Www myfreetaxes com Disaster relief grants. Www myfreetaxes com    Do not include post-disaster grants received under the Robert T. Www myfreetaxes com Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, child care, or funeral expenses. Www myfreetaxes com Do not deduct casualty losses or medical expenses that are specifically reimbursed by these disaster relief grants. Www myfreetaxes com If you have deducted a casualty loss for the loss of your personal residence and you later receive a disaster relief grant for the loss of the same residence, you may have to include part or all of the grant in your taxable income. Www myfreetaxes com See Recoveries , earlier. Www myfreetaxes com Unemployment assistance payments under the Act are taxable unemployment compensation. Www myfreetaxes com See Unemployment compensation under Unemployment Benefits, earlier. Www myfreetaxes com Disaster relief payments. Www myfreetaxes com   You can exclude from income any amount you receive that is a qualified disaster relief payment. Www myfreetaxes com A qualified disaster relief payment is an amount paid to you: To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster; To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it is due to a qualified disaster; By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries incurred as a result of a qualified disaster; or By a federal, state, or local government, or agency, or instrumentality in connection with a qualified disaster in order to promote the general welfare. Www myfreetaxes com You can exclude this amount only to the extent any expense it pays for is not paid for by insurance or otherwise. Www myfreetaxes com The exclusion does not apply if you were a participant or conspirator in a terrorist action or a representative of one. Www myfreetaxes com   A qualified disaster is: A disaster which results from a terrorist or military action; A federally declared disaster; or A disaster which results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic by the Secretary of the Treasury or his or her delegate. Www myfreetaxes com   For amounts paid under item (4), a disaster is qualified if it is determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality. Www myfreetaxes com Disaster mitigation payments. Www myfreetaxes com   You also can exclude from income any amount you receive that is a qualified disaster mitigation payment. Www myfreetaxes com Qualified disaster mitigation payments are also most commonly paid to you in the period immediately following damage to property as a result of a natural disaster. Www myfreetaxes com However, disaster mitigation payments are used to mitigate (reduce the severity of) potential damage from future natural disasters. Www myfreetaxes com They are paid to you through state and local governments based on the provisions of the Robert T. Www myfreetaxes com Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act. Www myfreetaxes com   You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments. Www myfreetaxes com Home Affordable Modification Program (HAMP). Www myfreetaxes com   If you benefit from Pay-for-Performance Success Payments under HAMP, the payments are not taxable. Www myfreetaxes com Mortgage assistance payments under section 235 of the National Housing Act. Www myfreetaxes com   Payments made under section 235 of the National Housing Act for mortgage assistance are not included in the homeowner's income. Www myfreetaxes com Interest paid for the homeowner under the mortgage assistance program cannot be deducted. Www myfreetaxes com Medicare. Www myfreetaxes com   Medicare benefits received under title XVIII of the Social Security Act are not includible in the gross income of the individuals for whom they are paid. Www myfreetaxes com This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary (part B (Supplementary Medical Insurance Benefits for the Aged)). Www myfreetaxes com Old-age, survivors, and disability insurance benefits (OASDI). Www myfreetaxes com   Generally, OASDI payments under section 202 of title II of the Social Security Act are not includible in the gross income of the individuals to whom they are paid. Www myfreetaxes com This applies to old-age insurance benefits, and insurance benefits for wives, husbands, children, widows, widowers, mothers and fathers, and parents, as well as the lump-sum death payment. Www myfreetaxes com Nutrition Program for the Elderly. Www myfreetaxes com    Food benefits you receive under the Nutrition Program for the Elderly are not taxable. Www myfreetaxes com If you prepare and serve free meals for the program, include in your income as wages the cash pay you receive, even if you are also eligible for food benefits. Www myfreetaxes com Payments to reduce cost of winter energy. Www myfreetaxes com   Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable. Www myfreetaxes com Other Income The following brief discussions are arranged in alphabetical order. Www myfreetaxes com Other income items briefly discussed below are referenced to publications which provide more topical information. Www myfreetaxes com Activity not for profit. Www myfreetaxes com   You must include on your return income from an activity from which you do not expect to make a profit. Www myfreetaxes com An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. Www myfreetaxes com Enter this income on Form 1040, line 21. Www myfreetaxes com Deductions for expenses related to the activity are limited. Www myfreetaxes com They cannot total more than the income you report and can be taken only if you itemize deductions on Schedule A (Form 1040). Www myfreetaxes com See Not-for-Profit Activities in chapter 1 of Publication 535 for information on whether an activity is considered carried on for a profit. Www myfreetaxes com Alaska Permanent Fund dividend. Www myfreetaxes com   If you received a payment from Alaska's mineral income fund (Alaska Permanent Fund dividend), report it as income on line 21 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. Www myfreetaxes com The state of Alaska sends each recipient a document that shows the amount of the payment with the check. Www myfreetaxes com The amount also is reported to IRS. Www myfreetaxes com Alimony. Www myfreetaxes com   Include in your income on Form 1040, line 11, any alimony payments you receive. Www myfreetaxes com Amounts you receive for child support are not income to you. Www myfreetaxes com Alimony and child support payments are discussed in chapter 18. Www myfreetaxes com Bribes. Www myfreetaxes com   If you receive a bribe, include it in your income. Www myfreetaxes com Campaign contributions. Www myfreetaxes com   These contributions are not income to a candidate unless they are diverted to his or her personal use. Www myfreetaxes com To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. Www myfreetaxes com However, interest earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities are taxable and must be reported on Form 1120-POL, U. Www myfreetaxes com S. Www myfreetaxes com Income Tax Return for Certain Political Organizations. Www myfreetaxes com Excess campaign funds transferred to an office account must be included in the officeholder's income on Form 1040, line 21, in the year transferred. Www myfreetaxes com Car pools. Www myfreetaxes com   Do not include in your income amounts you receive from the passengers for driving a car in a car pool to and from work. Www myfreetaxes com These amounts are considered reimbursement for your expenses. Www myfreetaxes com However, this rule does not apply if you have developed car pool arrangements into a profit-making business of transporting workers for hire. Www myfreetaxes com Cash rebates. Www myfreetaxes com   A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate. Www myfreetaxes com Example. Www myfreetaxes com You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. Www myfreetaxes com The $2,000 is not income to you. Www myfreetaxes com Your basis in the car is $22,000. Www myfreetaxes com This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business. Www myfreetaxes com Casualty insurance and other reimbursements. Www myfreetaxes com   You generally should not report these reimbursements on your return unless you are figuring gain or loss from the casualty or theft. Www myfreetaxes com See chapter 25 for more information. Www myfreetaxes com Child support payments. Www myfreetaxes com   You should not report these payments on your return. Www myfreetaxes com See chapter 18 for more information. Www myfreetaxes com Court awards and damages. Www myfreetaxes com   To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. Www myfreetaxes com The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Www myfreetaxes com Include the following as ordinary income. Www myfreetaxes com Interest on any award. Www myfreetaxes com Compensation for lost wages or lost profits in most cases. Www myfreetaxes com Punitive damages, in most cases. Www myfreetaxes com It does not matter if they relate to a physical injury or physical sickness. Www myfreetaxes com Amounts received in settlement of pension rights (if you did not contribute to the plan). Www myfreetaxes com Damages for: Patent or copyright infringement, Breach of contract, or Interference with business operations. Www myfreetaxes com Back pay and damages for emotional distress received to satisfy a claim under title VII of the Civil Rights Act of 1964. Www myfreetaxes com Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income. Www myfreetaxes com   Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments). Www myfreetaxes com Emotional distress. Www myfreetaxes com   Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Www myfreetaxes com Do not include them in your income. Www myfreetaxes com   If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Www myfreetaxes com Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders. Www myfreetaxes com Deduction for costs involved in unlawful discrimination suits. Www myfreetaxes com   You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in Internal Revenue Code section 62(e), a claim against the United States government, or a claim under section 1862(b)(3)(A) of the Social Security Act. Www myfreetaxes com For more information, see Publication 525. Www myfreetaxes com Credit card insurance. Www myfreetaxes com   In most cases, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. Www myfreetaxes com These plans make the minimum monthly payment on your credit card account if you cannot make the payment due to injury, illness, disability, or unemployment. Www myfreetaxes com Report on Form 1040, line 21, the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year. Www myfreetaxes com Down payment assistance. Www myfreetaxes com   If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance is not included in your income. Www myfreetaxes com If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. Www myfreetaxes com If the corporation does not qualify, the assistance is treated as a rebate or reduction of the purchase price and is not included in your basis. Www myfreetaxes com Employment agency fees. Www myfreetaxes com   If you get a job through an employment agency, and the fee is paid by your employer, the fee is not includible in your income if you are not liable for it. Www myfreetaxes com However, if you pay it and your employer reimburses you for it, it is includible in your income. Www myfreetaxes com Energy conservation subsidies. Www myfreetaxes com   You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit. Www myfreetaxes com Energy conservation measure. Www myfreetaxes com   This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand. Www myfreetaxes com Dwelling unit. Www myfreetaxes com   This includes a house, apartment, condominium, mobile home, boat, or similar property. Www myfreetaxes com If a building or structure contains both dwelling and other units, any subsidy must be properly allocated. Www myfreetaxes com Estate and trust income. Www myfreetaxes com    An estate or trust, unlike a partnership, may have to pay federal income tax. Www myfreetaxes com If you are a beneficiary of an estate or trust, you may be taxed on your share of its income distributed or required to be distributed to you. Www myfreetaxes com However, there is never a double tax. Www myfreetaxes com Estates and trusts file their returns on Form 1041, U. Www myfreetaxes com S. Www myfreetaxes com Income Tax Return for Estates and Trusts, and your share of the income is reported to you on Schedule K-1 (Form 1041). Www myfreetaxes com Current income required to be distributed. Www myfreetaxes com   If you are the beneficiary of an estate or trust that must distribute all of its current income, you must report your share of the distributable net income, whether or not you actually received it. Www myfreetaxes com Current income not required to be distributed. Www myfreetaxes com    If you are the beneficiary of an estate or trust and the fiduciary has the choice of whether to distribute all or part of the current income, you must report: All income that is required to be distributed to you, whether or not it is actually distributed, plus All other amounts actually paid or credited to you, up to the amount of your share of distributable net income. Www myfreetaxes com How to report. Www myfreetaxes com   Treat each item of income the same way that the estate or trust would treat it. Www myfreetaxes com For example, if a trust's dividend income is distributed to you, you report the distribution as dividend income on your return. Www myfreetaxes com The same rule applies to distributions of tax-exempt interest and capital gains. Www myfreetaxes com   The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you are allowed on your individual income tax return. Www myfreetaxes com Losses. Www myfreetaxes com   Losses of estates and trusts generally are not deductible by the beneficiaries. Www myfreetaxes com Grantor trust. Www myfreetaxes com   Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. Www myfreetaxes com (The grantor is the one who transferred property to the trust. Www myfreetaxes com ) This rule applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor's spouse. Www myfreetaxes com   Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of the transferred property. Www myfreetaxes com Expenses paid by another. Www myfreetaxes com   If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. Www myfreetaxes com But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment is not includible in your income. Www myfreetaxes com Fees for services. Www myfreetaxes com   Include all fees for your services in your income. Www myfreetaxes com Examples of these fees are amounts you receive for services you perform as: A corporate director, An executor, administrator, or personal representative of an estate, A manager of a trade or business you operated before declaring Chapter 11 bankruptcy, A notary public, or An election precinct official. Www myfreetaxes com Nonemployee compensation. Www myfreetaxes com   If you are not an employee and the fees for your services from the same payer total $600 or more for the year, you may receive a Form 1099-MISC. Www myfreetaxes com You may need to report your fees as self-employment income. Www myfreetaxes com See Self-Employed Persons , in chapter 1, for a discussion of when you are considered self-employed. Www myfreetaxes com Corporate director. Www myfreetaxes com   Corporate director fees are self-employment income. Www myfreetaxes com Report these payments on Schedule C or Schedule C-EZ (Form 1040). Www myfreetaxes com Personal representatives. Www myfreetaxes com   All personal representatives must include in their gross income fees paid to them from an estate. Www myfreetaxes com If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on Form 1040, line 21. Www myfreetaxes com If you are in the trade or business of being an executor, report these fees as self-employment income on Schedule C or Schedule C-EZ (Form 1040). Www myfreetaxes com The fee is not includible in income if it is waived. Www myfreetaxes com Manager of trade or business for bankruptcy estate. Www myfreetaxes com   Include in your income all payments received from your bankruptcy estate for managing or operating a trade or business that you operated before you filed for bankruptcy. Www myfreetaxes com Report this income on Form 1040, line 21. Www myfreetaxes com Notary public. Www myfreetaxes com    Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). Www myfreetaxes com These payments are not subject to self-employment tax. Www myfreetaxes com See the separate instructions for Schedule SE (Form 1040) for details. Www myfreetaxes com Election precinct official. Www myfreetaxes com    You should receive a Form W-2 showing payments for services performed as an election official or election worker. Www myfreetaxes com Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Www myfreetaxes com Foster care providers. Www myfreetaxes com   Payments you receive from a state, political subdivision, or a qualified foster care placement agency for providing care to qualified foster individuals in your home generally are not included in your income. Www myfreetaxes com However, you must include in your income payments received for the care of more than 5 individuals age 19 or older and certain difficulty-of-care payments. Www myfreetaxes com   A qualified foster individual is a person who: Is living in a foster family home, and Was placed there by: An agency of a state or one of its political subdivisions, or A qualified foster care placement agency. Www myfreetaxes com Difficulty-of-care payments. Www myfreetaxes com   These are additional payments that are designated by the payer as compensation for providing the additional care that is required for physically, mentally, or emotionally handicapped qualified foster individuals. Www myfreetaxes com A state must determine that the additional compensation is needed, and the care for which the payments are made must be provided in your home. Www myfreetaxes com   You must include in your income difficulty-of-care payments received for more than: 10 qualified foster individuals under age 19, or 5 qualified foster individuals age 19 or older. Www myfreetaxes com Maintaining space in home. Www myfreetaxes com   If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income. Www myfreetaxes com Reporting taxable payments. Www myfreetaxes com    If you receive payments that you must include in your income, you are in business as a foster care provider and you are self-employed. Www myfreetaxes com Report the payments on Schedule C or Schedule C-EZ (Form 1040). Www myfreetaxes com See Publication 587, Business Use of Your Home, to help you determine the amount you can deduct for the use of your home. Www myfreetaxes com Found property. Www myfreetaxes com   If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession. Www myfreetaxes com Free tour. Www myfreetaxes com   If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. Www myfreetaxes com Report the fair market value of the tour on Form 1040, line 21, if you are not in the trade or business of organizing tours. Www myfreetaxes com You cannot deduct your expenses in serving as the voluntary leader of the group at the group's request. Www myfreetaxes com If you organize tours as a trade or business, report the tour's value on Schedule C or Schedule C-EZ (Form 1040). Www myfreetaxes com Gambling winnings. Www myfreetaxes com   You must include your gambling winnings in income on Form 1040, line 21. Www myfreetaxes com If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings. Www myfreetaxes com Lotteries and raffles. Www myfreetaxes com   Winnings from lotteries and raffles are gambling winnings. Www myfreetaxes com In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes. Www myfreetaxes com    If you win a state lottery prize payable in installments, see Publication 525 for more information. Www myfreetaxes com Form W-2G. Www myfreetaxes com   You may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any tax taken out of them. Www myfreetaxes com Include the amount from box 1 on Form 1040, line 21. Www myfreetaxes com Include the amount shown in box 4 on Form 1040, line 62, as federal income tax withheld. Www myfreetaxes com Reporting winnings and recordkeeping. Www myfreetaxes com   For more information on reporting gam