12. Other Income
Table of Contents
* What's New
* Introduction
* Useful Items - You may want to see:
* Bartering
* Canceled Debts
o Interest included in canceled debt.
o Exceptions
* Host or Hostess
* Life Insurance Proceeds
o Surviving spouse.
o More information.
o Endowment Contract Proceeds
o Accelerated Death Benefits
o Public Safety Officer Killed in the Line of Duty
* Partnership Income
* S Corporation Income
* Recoveries
o Itemized Deduction Recoveries
* Rents from Personal Property
* Repayments
o Method 1.
o Method 2.
* Royalties
o Depletion.
o Coal and iron ore.
o Sale of property interest.
o Part of future production sold.
* Unemployment Benefits
o Types of unemployment compensation.
o Governmental program.
o Repayment of unemployment compensation.
o Tax withholding.
o Supplemental unemployment benefits.
o Repayment of benefits.
* Welfare and Other Public Assistance Benefits
o Alternative trade adjustment assistance (ATAA) payments.
* Other Income
o Emotional distress.
o Deduction for costs involved in unlawful discrimination suits.
o Energy conservation measure.
o Dwelling unit.
o Current income required to be distributed.
o Current income not required to be distributed.
o How to report.
o Losses.
o Grantor trust.
o Nonemployee compensation.
o Corporate director.
o Personal representatives.
o Notary public.
o Election precinct official.
o Difficulty-of-care payments.
o Maintaining space in home.
o Reporting taxable payments.
o Lotteries and raffles.
o Form W-2G.
o Inherited pension or IRA.
o Employee awards or bonuses.
o Pulitzer, Nobel, and similar prizes.
o Payment for services.
o VA payments.
o Prizes.
o Strike and lockout benefits.
What's New
Disaster mitigation payments. You can exclude from income grants you use to
mitigate (reduce the severity of) potential damage from future natural
disasters that is paid to you through state and local governments. If you
reported income from qualified disaster mitigation payments in previous
years, you may be able to file a claim for refund. For more information,
see Disaster mitigation payments under Welfare and Other Public Assistance
Benefits.
Katrina Emergency Tax Relief Act of 2005. This Act provides tax relief for
persons affected by Hurricane Katrina. Under this Act, you may be able to
exclude from income canceled nonbusiness debt. See Publication 4492.
Introduction
You must include on your return all income you receive in the form of
money, property, and services unless the tax law states that you do not
include them. Some items, however, are only partly excluded from income.
This chapter discusses many kinds of income and explains whether they are
taxable or nontaxable.
*
Income that is taxable must be reported on your tax return and is
subject to tax.
*
Income that is nontaxable may have to be shown on your tax return but
is not taxable.
This chapter begins with discussions of the following income items.
*
Bartering.
*
Canceled debts.
*
Host or Hostess.
*
Life insurance proceeds.
*
Partnership income.
*
S Corporation income.
*
Recoveries (including state income tax refunds).
*
Rents from personal property.
*
Repayments.
*
Royalties.
*
Unemployment benefits.
*
Welfare and other public assistance benefits.
These discussions are followed by brief discussions of other income items
arranged in alphabetical order.
Useful Items - You may want to see:
Publication
*
525 Taxable and Nontaxable Income
*
544 Sales and Other Dispositions of Assets
*
550 Investment Income and Expenses
Bartering
Bartering is an exchange of property or services. You must include in your
income, at the time received, the fair market value of property or services
you receive in bartering. If you exchange services with another person and
you both have agreed ahead of time as to the value of the services, that
value will be accepted as fair market value unless the value can be shown
to be otherwise.
Generally, you report this income on Schedule C, Profit or Loss From
Business, or Schedule C-EZ, Net Profit From Business (Form 1040). 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.
Example 1.
You are a self-employed attorney who performs legal services for a client,
a small corporation. The corporation gives you shares of its stock as
payment for your services. You must include the fair market value of the
shares in your income on Schedule C or Schedule C-EZ (Form 1040) in the
year you receive them.
Example 2.
You are self-employed and a member of a barter club. The club uses “credit
units” as a means of exchange. 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. The club
subtracts credit units from your account when you receive goods or services
from other members. 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.
Example 3.
You own a small apartment building. In return for 6 months rent-free use of
an apartment, an artist gives you a work of art she created. You must
report as rental income on Schedule E, Supplemental Income and Loss (Form
1040), the fair market value of the artwork, and the artist must report as
income on Schedule C or Schedule C-EZ (Form 1040) the fair rental value of
the apartment.
Form 1099-B from barter exchange. 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 January 31, 2006. It should show the value of
cash, property, services, credits, or scrip you received from exchanges
during 2005. The IRS will also receive a copy of Form 1099-B.
Canceled Debts
Generally, 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. You have
no income from the canceled debt if it is intended as a gift to you. A debt
includes any indebtedness for which you are liable or which attaches to
property you hold.
If the debt is a nonbusiness debt, report the canceled amount on Form 1040,
line 21. If it is a business debt, report the amount on Schedule C or
Schedule C-EZ (Form 1040) (or on Schedule F, Profit or Loss From Farming
(Form 1040), if the debt is farm debt and you are a farmer).
Form 1099-C. 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. The amount of the canceled
debt is shown in box 2.
Interest included in canceled debt. If any interest is forgiven and
included in the amount of canceled debt in box 2, the amount of interest
will also be shown in box 3. Whether or not you must include the interest
portion of the canceled debt in your income depends on whether the interest
would be deductible if you paid it. See Deductible debt, under Exceptions,
later.
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. 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).
Discounted mortgage loan. If your financial institution offers a discount
for the early payment of your mortgage loan, the amount of the discount is
canceled debt. You must include the canceled amount in your income.
Mortgage relief upon sale or other disposition. 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. 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. Report any income from discharge of indebtedness on nonbusiness debt
that does not qualify for exclusion as other income on Form 1040, line 21.
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 or repossession), that relief is included in the amount
you realize. You may have a taxable gain if the amount you realize exceeds
your adjusted basis in the property. Report any gain on nonbusiness
property as a capital gain.
See Foreclosures and Repossessions in Publication 544 for more information.
Stockholder debt. 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. For
more information, see Publication 542, Corporations.
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. 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.
Repayment of canceled debt. 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. You can file a claim on
Form 1040X if the statute of limitations for filing a claim is still open.
The statute of limitations generally does not end until 3 years after the
due date of your original return.
Exceptions
There are several exceptions to the inclusion of canceled debt in income.
These are explained next.
Student loans. 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.
You do not have income if your student loan is canceled after you agreed
to this provision and then performed the services required. To qualify, the
loan must have been made by:
1.
The Federal Government, a state or local government, or an
instrumentality, agency, or subdivision thereof,
2.
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
3.
An educational institution:
1.
Under an agreement with an entity described in (1) or (2) that
provided the funds to the institution to make the loan, or
2.
As part of a program of the institution designed to encourage
students to serve in occupations or areas with unmet needs and under which
the services provided are for or under the direction of a governmental unit
or a tax-exempt section 501(c)(3) organization.
Section 501(c)(3) organizations are defined in Publication 525.
A loan to refinance a qualified student loan will also qualify if it was
made by an educational institution or a tax-exempt 501(a) organization
under its program designed as described in (3)(b) above.
Deductible debt. You do not have income from the cancellation of a debt
if your payment of the debt would be deductible. This exception applies
only if you use the cash method of accounting. For more information, see
chapter 5 of Publication 334, Tax Guide for Small Business.
Education loan repayment assistance. Education loan repayments made to
you by the National Health Service Corps Loan Repayment Program (NHSC Loan
Repayment Program) or a state education loan repayment program eligible for
funds under the Public Health Service Act are not taxable if you agree to
provide primary health services in health professional shortage areas. For
more information, see Publication 970, Tax Benefits for Education.
Price reduced after purchase. Generally, if the seller reduces the amount
of debt you owe for property you purchased, you do not have income from the
reduction. The reduction of the debt is treated as a purchase price
adjustment and reduces your basis in the property.
Excluded debt. Do not include a canceled debt in your gross income in the
following situations.
*
The debt is canceled in a bankruptcy case under title 11 of the U.S.
Code. See Publication 908, Bankruptcy Tax Guide.
*
The debt is canceled when you are insolvent. However, you cannot
exclude any amount of canceled debt that is more than the amount by which
you are insolvent. See Publication 908.
*
The debt is qualified farm debt and is canceled by a qualified
person. See chapter 3 of Publication 225, Farmer's Tax Guide.
*
The debt is qualified real property business debt. See chapter 5 of
Publication 334.
*
The cancellation is intended as a gift.
Host or Hostess
If you host a party at which sales are made, any gift you receive for
giving the party is a payment for helping a direct seller make sales. You
must report it as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and
entertainment expenses. 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.
For more information about the 50% limit for meal and entertainment
expenses, see 50% Limit in chapter 26.
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. This is true even if the proceeds were paid under an accident or
health insurance policy or an endowment contract.
Proceeds not received in installments. 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. 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.
Proceeds received in installments. If you receive life insurance proceeds
in installments, you can exclude part of each installment from your income.
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. Include anything over
this excluded part in your income as interest.
Surviving spouse. 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. If you remarry, you can continue to
take the exclusion.
More information. For more information, see Life Insurance Proceeds in
Publication 525.
Surrender of policy for cash. 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. In general, 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.
You should receive a Form 1099-R showing the total proceeds and the
taxable part. Report these amounts on lines 16a and 16b of Form 1040 or
lines 12a and 12b of Form 1040A.
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. 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. 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. Include the part of the lump sum payment that is more than your
cost in your income.
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.
Viatical settlement. This is the sale or assignment of any part of the
death benefit under a life insurance contract to a viatical settlement
provider. 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.
Exclusion for terminal illness. Accelerated death benefits are fully
excludable if the insured is a terminally ill individual. 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.
Exclusion for chronic illness. 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. Accelerated death benefits paid on a per diem or other periodic
basis are excludable up to a limit. This limit applies to the total of the
accelerated death benefits and any periodic payments received from
long-term care insurance contracts. 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 chapter 5.
Exception. 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.
Form 8853. 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. You do not have to
file Form 8853 to exclude accelerated death benefits paid on the basis of
actual expenses incurred.
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.
For this purpose, the term public safety officer includes law enforcement
officers, firefighters, chaplains, and rescue squad and ambulance crew
members. For more information, see Publication 559, Survivors, Executors,
and Administrators.
Partnership Income
A partnership generally is not a taxable entity. 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.
Schedule K-1 (Form 1065). Although a partnership generally pays no tax,
it must file an information return on Form 1065, U.S. Return of Partnership
Income, and send Schedule K-1 (Form 1065) to each partner. 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.
Records you should keep
Keep Schedule K-1 (Form 1065) for your records. Do not attach it to your
Form 1040.
For more information on partnerships, see Publication 541, Partnerships.
S Corporation Income
In general, an S corporation does not pay tax on its income. Instead, the
income, losses, deductions, and credits of the corporation are passed
through to the shareholders based on each shareholder's pro rata share.
Schedule K-1 (Form 1120S). An S corporation must file a return on Form
1120S, U.S. Income Tax Return for an S Corporation, and send Schedule K-1
(Form 1120S) to each shareholder. 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.
Records you should keep
Keep Schedule K-1 (Form 1120S) for your records. Do not attach it to your
Form 1040.
For more information on S corporations and their shareholders, see
Instructions for Form 1120S.
Recoveries
A recovery is a return of an amount you deducted or took a credit for in an
earlier year. The most common recoveries are refunds, reimbursements, and
rebates of deductions itemized on Schedule A (Form 1040). 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.
Tax benefit rule. 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. 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. For more information, see Publication 525.
Federal income tax refund. Refunds of federal income taxes are not
included in your income because they are never allowed as a deduction from
income.
State tax refund. If you received a state or local income tax refund (or
credit or offset) in 2005, you generally must include it in income if you
deducted the tax in an earlier year. The payer should send Form 1099-G,
Certain Government Payments, to you by January 31, 2006. The IRS also will
receive a copy of the Form 1099-G. Use the State and Local Income Tax
Refund worksheet in the 2005 Form 1040 instructions for line 10 to figure
the amount (if any) to include in your income.
For 2004 you could choose to deduct:
*
State and local income taxes, or
*
State and local general sales taxes.
For 2005, the refund that you must include in income is limited to the
excess of the tax you chose to deduct over the tax you did not choose to
deduct. For examples, see Publication 525.
Mortgage interest refund. If you received a refund or credit in 2005 of
mortgage interest paid in an earlier year, the amount should be shown in
box 3 of your Form 1098, Mortgage Interest Statement. Do not subtract the
refund amount from the interest you paid in 2005. You may have to include
it in your income under the rules explained in the following discussions.
Interest on recovery. Interest on any of the amounts you recover must be
reported as interest income in the year received. For example, report any
interest you received on state or local income tax refunds on Form 1040,
line 8a.
Recovery and expense in same year. 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.
Recovery for 2 or more years. 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. 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. For
information on how to compute the allocation, see Recoveries in Publication
525.
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.
Where to report. 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. You cannot use Form 1040A or Form 1040EZ.
Standard deduction limit. You generally are allowed to claim the standard
deduction if you do not itemize your deductions. 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). 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.
Example.
For 2004, you filed a joint return. Your taxable income was $60,000 and you
were not entitled to any tax credits. Your standard deduction was $9,700,
and you had itemized deductions of $11,000. In 2005, you received the
following recoveries for amounts deducted on your 2004 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 2004. The
difference between the state and local income tax you deducted and your
local general sales tax was more than $400.
Your total recoveries are less than the amount by which your itemized
deductions exceeded the standard deduction ($11,000 - 9,700 = $1,300), so
you must include your total recoveries in your income for 2005. 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.
Standard deduction for earlier years. To determine if amounts recovered
in 2005 must be included in your income, you must know the standard
deduction for your filing status for the year the deduction was claimed.
Standard deduction amounts for 2004, 2003, and 2002 are in Publication 525.
Example.
You filed a joint return for 2004 with taxable income of $45,000. Your
itemized deductions were $10,350. The standard deduction that you could
have claimed was $9,700. In 2005 you recovered $2,100 of your 2004 itemized
deductions. None of the recoveries were more than the actual deductions for
2004. Include $650 of the recoveries in your 2005 income. This is the
smaller of your recoveries ($2,100) or the amount by which your itemized
deductions were more than the standard deduction ($10,350 - 9,700 = $650).
Recovery limited to deduction. You do not include in your income any
amount of your recovery that is more than the amount you deducted in the
earlier year. 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.
Example.
During 2004 you paid $1,700 for medical expenses. From this amount you
subtracted $1,500, which was 7.5% of your adjusted gross income. Your
actual medical expense deduction was $200. In 2005, you received a $500
reimbursement from your medical insurance for your 2004 expenses. The only
amount of the $500 reimbursement that must be included in your income for
2005 is $200—the amount actually deducted.
Other recoveries. 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.
Rents from Personal Property
If you rent out personal property, such as equipment or vehicles, how you
report your income and expenses is generally determined by:
*
Whether or not the rental activity is a business, and
*
Whether or not the rental activity is conducted for profit.
Generally, 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. See Publication 535, Business Expenses, for details on
deducting expenses for both business and not-for-profit activities.
Reporting business income and expenses. If you are in the business of
renting personal property, report your income and expenses on Schedule C or
Schedule C-EZ (Form 1040). The form instructions have information on how to
complete them.
Reporting nonbusiness income. If you are not in the business of renting
personal property, report your rental income on Form 1040, line 21. List
the type and amount of the income on the dotted line next to line 21.
Reporting nonbusiness expenses. If you rent personal property for profit,
include your rental expenses in the total amount you enter on Form 1040,
line 36. Also enter the amount and “PPR” on the dotted line next to line 36.
If you do not rent personal property for profit, your deductions are
limited and you cannot report a loss to offset other income. See Activity
not for profit, under Other Income, later.
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. 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. 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.
Type of deduction. The type of deduction you are allowed in the year of
repayment depends on the type of income you included in the earlier year.
You generally deduct the repayment on the same form or schedule on which
you previously reported it as income. 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). If you reported it as
a capital gain, deduct it as a capital loss on Schedule D (Form 1040). If
you reported it as wages, unemployment compensation, or other nonbusiness
income, deduct it as a miscellaneous itemized deduction on Schedule A (Form
1040).
Repayment of $3,000 or less. If the amount you repaid was $3,000 or less,
deduct it from your income in the year you repaid it. If you must deduct it
as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040),
line 22.
Repayment over $3,000. If the amount you repaid was more than $3,000, you
can deduct the repayment (as explained under Type of deduction, earlier).
However, you can instead choose to take a tax credit for the year of
repayment if you included the income under a claim of right. This means
that at the time you included the income, it appeared that you had an
unrestricted right to it. If you qualify for this choice, figure your tax
under both methods and compare the results. Use the method (deduction or
credit) that results in less tax.
Method 1. Figure your tax for 2005 claiming a deduction for the repaid
amount. If you must deduct it as a miscellaneous itemized deduction, enter
it on Schedule A (Form 1040), line 27.
Method 2. Figure your tax for 2005 claiming a credit for the repaid
amount. Follow these steps.
1.
Figure your tax for 2005 without deducting the repaid amount.
2.
Refigure your tax from the earlier year without including in income
the amount you repaid in 2005.
3.
Subtract the tax in (2) from the tax shown on your return for the
earlier year. This is the credit.
4.
Subtract the answer in (3) from the tax for 2005 figured without the
deduction (Step 1).
If method 1 results in less tax, deduct the amount repaid. If method 2
results in less tax, claim the credit figured in (3) above on Form 1040,
line 70, and enter “I.R.C. 1341” next to line 70.
An example of this computation can be found in Publication 525.
Repaid social security benefits. If you repaid social security benefits,
see Repayment of benefits in chapter 11.
Royalties
Royalties from copyrights, patents, and oil, gas, and mineral properties
are taxable as ordinary income.
You generally report royalties in Part I of Schedule E (Form 1040).
However, if you hold an operating oil, gas, or mineral interest or are in
business as a self-employed writer, inventor, artist, etc., report your
income and expenses on Schedule C or Schedule C-EZ (Form 1040).
Copyrights and patents. 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. Royalties generally are based on the number of units sold, such as
the number of books, tickets to a performance, or machines sold.
Oil, gas, and minerals. Royalty income from oil, gas, and mineral
properties is the amount you receive when natural resources are extracted
from your property. The royalties are based on units, such as barrels,
tons, etc., and are paid to you by a person or company who leases the
property from you.
Depletion. 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. For information on this subject, see chapter 10 of
Publication 535.
Coal and iron ore. 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. For information about gain
or loss from the sale of coal and iron ore, see Publication 544.
Sale of property interest. If you sell your complete interest in oil,
gas, or mineral rights, the amount you receive is considered payment for
the sale of section 1231 property, not royalty income. Under certain
circumstances, the sale is subject to capital gain or loss treatment on
Schedule D (Form 1040). For more information on selling section 1231
property, see chapter 3 of Publication 544.
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.
Part of future production sold. If you own mineral property but sell part
of the future production, you generally treat the money you receive from
the buyer at the time of the sale as a loan from the buyer. Do not include
it in your income or take depletion based on it.
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.
Unemployment Benefits
The tax treatment of unemployment benefits you receive depends on the type
of program paying the benefits.
Unemployment compensation. You must include in your income all
unemployment compensation you receive. You should receive a Form 1099-G,
Certain Government Payments, showing the amount paid to you. Generally, you
enter unemployment compensation on line 19 of Form 1040, line 13 of Form
1040A, or line 3 of Form 1040EZ.
Types of unemployment compensation. Unemployment compensation generally
includes any amount received under an unemployment compensation law of the
United States or of a state. It includes the following benefits.
*
Benefits paid by a state or the District of Columbia from the Federal
Unemployment Trust Fund.
*
State unemployment insurance benefits.
*
Railroad unemployment compensation benefits.
*
Disability payments from a government program paid as a substitute
for unemployment compensation. (Amounts received as workers' compensation
for injuries or illness are not unemployment compensation. See chapter 5
for more information.)
*
Trade readjustment allowances under the Trade Act of 1974.
*
Unemployment assistance under the Disaster Relief and Emergency
Assistance Act.
Governmental program. 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.
Repayment of unemployment compensation. If you repaid in 2005
unemployment compensation you received in 2005, 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. On the
dotted line next to your entry enter “Repaid” and the amount you repaid. If
you repaid unemployment compensation in 2005 that you included in income in
an earlier year, you can deduct the amount repaid on Schedule A (Form
1040), line 22, if you itemize deductions. If the amount is more than
$3,000, see Repayments, earlier.
Tax withholding. You can choose to have federal income tax withheld from
your unemployment compensation. To make this choice, complete Form W-4V,
Voluntary Withholding Request, and give it to the paying office. Tax will
be withheld at 10% of your payment.
Caution
If you do not choose to have tax withheld from your unemployment
compensation, you may be liable for estimated tax. For more information on
estimated tax, see chapter 4.
Supplemental unemployment benefits. Benefits received from an
employer-financed fund (to which the employees did not contribute) are not
unemployment compensation. They are taxable as wages and are subject to
withholding for income tax. They may be subject to social security and
Medicare taxes. For more information, see Supplemental Unemployment
Benefits in section 5 of Publication 15-A, Employer's Supplemental Tax
Guide. Report these payments on line 7 of Form 1040 or Form 1040A or on
line 1 of Form 1040EZ.
Repayment of benefits. You may have to repay some of your supplemental
unemployment benefits to qualify for trade readjustment allowances under
the Trade Act of 1974. If you repay supplemental unemployment benefits in
the same year you receive them, reduce the total benefits by the amount you
repay. 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.
Deduct the repayment in the later year as an adjustment to gross income
on Form 1040. (You cannot use Form 1040A or Form 1040EZ.) Include the
repayment on Form 1040, line 36, and enter “Sub-Pay TRA” and the amount on
the dotted line next to line 36. 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. For more information on
this, see Repayments, earlier.
Private unemployment fund. 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. Report
the taxable amount on Form 1040, line 21.
Payments by a union. 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. However, if the unemployment benefits are paid from a special fund
to which you contributed, your payments to the fund are not deductible, and
the benefit payments are includible in your income only to the extent they
are more than your contributions.
Guaranteed annual wage. 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. Include them on line 7 of Form
1040 or Form 1040A or on line 1 of Form 1040EZ.
State employees. 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. Although the payments are fully
taxable, do not report them as unemployment compensation. Report these
payments on Form 1040, line 21.
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 due to blindness. 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. Do not
deduct medical expenses that are reimbursed by such a fund. You must
include in your income any welfare payments that are compensation for
services or that are obtained fraudulently.
Alternative trade adjustment assistance (ATAA) payments. Payments you
receive from a state agency under the Demonstration Project for Alternative
Trade Adjustment Assistance for Older Workers (ATAA) must be included in
your income. The state must send you Form 1099-G to advise you of the
amount you should include in income. The amount should be reported on Form
1040, line 21.
Persons with disabilities. If you have a disability, you must include in
income compensation you receive for services you perform unless the
compensation is otherwise excluded. 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. 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 mentally retarded persons do their work.
Disaster relief grants. Do not include post-disaster grants received
under the 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, or
funeral expenses. Do not deduct casualty losses or medical expenses that
are specifically reimbursed by these disaster relief grants. Unemployment
assistance payments under the Act are taxable unemployment compensation.
See Unemployment compensation under Unemployment Benefits, earlier.
Disaster relief payments. You can exclude from income any amount you
receive that is a qualified disaster relief payment. A qualified disaster
relief payment is an amount paid to you:
1.
To reimburse or pay reasonable and necessary personal, family,
living, or funeral expenses that result from a qualified disaster,
2.
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,
3.
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
4.
By a federal, state, or local government, or agency, or
instrumentality in connection with a qualified disaster in order to promote
the general welfare.
You can only exclude this amount to the extent any expense it pays for is
not paid for by insurance or otherwise. The exclusion does not apply if you
were a participant or conspirator in a terrorist action or his or her
representative.
A qualified disaster is:
*
A disaster which results from a terrorist or military action,
*
A Presidentially 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.
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.
Disaster mitigation payments. You can also exclude from income any amount
you receive that is a qualified disaster mitigation payment. Like qualified
disaster relief payments, 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. However, disaster mitigation
payments are grants you use to mitigate (reduce the severity of) potential
damage from future natural disasters. They are paid to you through state
and local governments based on the provisions of the Robert T. Stafford
Disaster Relief and Emergency Assistance Act or the National Flood
Insurance Act.
You cannot increase the basis or adjusted basis of your property for
improvements made with nontaxable disaster mitigation payments.
If in a previous year you filed a tax return reporting disaster
mitigation payments as taxable income, you should file Form 1040X to claim
a refund. You must file an amended return for tax years that are not closed
by the statute of limitations. The statute of limitations generally does
not end until 3 years after the due date of your original return.
Mortgage assistance payments. Payments made under section 235 of the
National Housing Act for mortgage assistance are not included in the
homeowner's income. Interest paid for the homeowner under the mortgage
assistance program cannot be deducted.
Medicare. 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. This includes basic (part A (Hospital Insurance
Benefits for the Aged)) and supplementary (part B (Supplementary Medical
Insurance Benefits for the Aged)).
Old-age, survivors, and disability insurance benefits (OASDI). OASDI
payments under section 202 of title II of the Social Security Act are not
includible in the gross income of the individuals for whom they are paid.
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.
Nutrition Program for the Elderly. Food benefits you receive under the
Nutrition Program for the Elderly are not taxable. 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.
Payments to reduce cost of winter energy. Payments made by a state to
qualified people to reduce their cost of winter energy use are not taxable.
Other Income
The following brief discussions are arranged in alphabetical order. Income
items that are discussed in greater detail in another publication include a
reference to that publication.
Activity not for profit. You must include on your return income from an
activity from which you do not expect to make a profit. An example of this
type of activity is a hobby or a farm you operate mostly for recreation and
pleasure. Enter this income on Form 1040, line 21. Deductions for expenses
related to the activity are limited. They cannot total more than the income
you report and can be taken only if you itemize deductions on Schedule A
(Form 1040). See Not-for-Profit Activities in chapter 1 of Publication 535
for information on whether an activity is considered carried on for a profit.
Alaska Permanent Fund dividend. 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.
The state of Alaska sends each recipient a document that shows the amount
of the payment with the check. The amount is also reported to IRS.
Alimony. Include in your income on Form 1040, line 11, any alimony
payments you receive. Amounts you receive for child support are not income
to you. Alimony and child support payments are discussed in chapter 18.
Bribes. If you receive a bribe, include it in your income.
Campaign contributions. These contributions are not income to a candidate
unless they are diverted to his or her personal use. To be exempt from tax,
the contributions must be spent for campaign purposes or kept in a fund for
use in future campaigns. 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.S. Income Tax Return for Certain Political Organizations.
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.
Cash rebates. 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.
Example.
You buy a new car for $9,000 cash and receive a $400 rebate check from the
manufacturer. The $400 is not income to you. Your basis in the car is
$8,600. This is your basis on which you figure gain or loss if you sell the
car, and depreciation if you use it for business.
Casualty insurance and other reimbursements. You generally should not
report these reimbursements on your return, unless you are figuring gain or
loss from the casualty or theft. See Publication 547, Casualties,
Disasters, and Thefts, for more information.
Child support payments. You should not report these payments on your
return. See Publication 504, Divorced or Separated Individuals, for more
information.
Court awards and damages. 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. Include the following as
ordinary income.
1.
Interest on any award.
2.
Compensation for lost wages or lost profits in most cases.
3.
Punitive damages. It does not matter if they relate to a physical
injury or physical sickness.
4.
Amounts received in settlement of pension rights (if you did not
contribute to the plan).
5.
Damages for:
1.
Patent or copyright infringement,
2.
Breach of contract, or
3.
Interference with business operations.
6.
Back pay and damages for emotional distress received to satisfy a
claim under Title VII of the Civil Rights Act of 1964.
7.
Attorney fees and costs (including contingent fees) where the
underlying recovery is included in gross income.
Do not include in your income compensatory damages for personal physical
injury or physical sickness (whether received in a lump sum or installments).
Emotional distress. 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. Do not include them in your income.
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. Emotional distress includes physical symptoms that result from
emotional distress, such as headaches, insomnia, and stomach disorders.
Deduction for costs involved in unlawful discrimination suits. You may be
able to deduct attorney fees and court costs paid to recover a judgement 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. For more information, see
Publication 525.
Credit card insurance. Generally, if you receive benefits under a credit
card disability or unemployment insurance plan, the benefits are taxable to
you. 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. 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.
Employment agency fees. 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. However, if you pay it and your
employer reimburses you for it, it is includible in your income.
Energy conservation subsidies. 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.
Energy conservation measure. This includes installations or modifications
that are primarily designed to reduce consumption of electricity or natural
gas, or improve the management of energy demand.
Dwelling unit. This includes a house, apartment, condominium, mobile
home, boat, or similar property. If a building or structure contains both
dwelling and other units, any subsidy must be properly allocated.
Estate and trust income. An estate or trust, unlike a partnership, may
have to pay federal income tax. 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. However, there is never a double tax. Estates and
trusts file their returns on Form 1041, U.S. Income Tax Return for Estates
and Trusts, and your share of the income is reported to you on Schedule K-1
(Form 1041).
Current income required to be distributed. 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.
Current income not required to be distributed. 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.
How to report. Treat each item of income the same way that the estate or
trust would treat it. For example, if a trust's dividend income is
distributed to you, you report the distribution as dividend income on your
return. The same rule applies to distributions of tax-exempt interest and
capital gains.
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.
Losses. Losses of estates and trusts generally are not deductible by the
beneficiaries.
Grantor trust. Income earned by a grantor trust is taxable to the
grantor, not the beneficiary, if the grantor keeps certain control over the
trust. (The grantor is the one who transferred property to the trust.) 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.
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.
Expenses paid by another. 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. 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.
Fees for services. Include all fees for your services in your income.
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 notary public, or
*
An election precinct official.
Nonemployee compensation. 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. You may need to report your fees as
self-employment income. See Self-Employed Persons, in chapter 1, for a
discussion of when you are considered self-employed.
Corporate director. Corporate director fees are self-employment income.
Report these payments on Schedule C or Schedule C-EZ (Form 1040).
Personal representatives. All personal representatives must include in
their gross income fees paid to them from an estate. 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. 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).
The fee is not includible in income if it is waived.
Notary public. Report payments for these services on Schedule C or
Schedule C-EZ (Form 1040). These payments are not subject to
self-employment tax. (See the separate instructions for Schedule SE (Form
1040) for details.)
Election precinct official. You should receive a Form W-2 showing
payments for services performed as an election official or election worker.
Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of
Form 1040EZ.
Foster-care providers. 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. 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.
A qualified foster individual is a person who:
1.
Is living in a foster family home, and
2.
Was placed there by:
1.
An agency of a state or one of its political subdivisions, or
2.
A qualified foster care placement agency.
Difficulty-of-care payments. 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. 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.
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.
Maintaining space in home. If you are paid to maintain space in your home
for emergency foster care, you must include the payment in your income.
Reporting taxable payments. 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. Report the payments on Schedule C or Schedule C-EZ
(Form 1040). See Publication 587, Business Use of Your Home (Including Use
by Daycare Providers), to help you determine the amount you can deduct for
the use of your home.
Found property. 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.
Free tour. If you received a free tour from a travel agency for
organizing a group of tourists, you must include its value in your income.
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. You cannot deduct your
expenses in serving as the voluntary leader of the group at the group's
request. If you organize tours as a trade or business, report the tour's
value on Schedule C or Schedule C-EZ (Form 1040).
Gambling winnings. You must include your gambling winnings in income on
Form 1040, line 21. 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. See chapter 28 for information on
recordkeeping.
Lotteries and raffles. Winnings from lotteries and raffles are gambling
winnings. In addition to cash winnings, you must include in your income the
fair market value of bonds, cars, houses, and other noncash prizes.
Tip
If you win a state lottery prize payable in installments, see Publication
525 for more information.
Form W-2G. 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.
Include the amount from box 1 on Form 1040, line 21. Include the amount
shown in box 2 on Form 1040, line 64, as federal income tax withheld.
Gifts and inheritances. Generally, property you receive as a gift,
bequest, or inheritance is not included in your income. However, if
property you receive this way later produces income such as interest,
dividends, or rents, that income is taxable to you. If property is given to
a trust and the income from it is paid, credited, or distributed to you,
that income is also taxable to you. If the gift, bequest, or inheritance is
the income from the property, that income is taxable to you.
Inherited pension or IRA. If you inherited a pension or an individual
retirement arrangement (IRA), you may have to include part of the inherited
amount in your income. See chapter 10 if you inherited a pension. See
chapter 17 if you inherited an IRA.
Hobby losses. Losses from a hobby are not deductible from other income. A
hobby is an activity from which you do not expect to make a profit. See
Activity not for profit, earlier.
Caution
If you collect stamps, coins, or other items as a hobby for recreation and
pleasure, and you sell any of the items, your gain is taxable as a capital
gain. (See chapter 16.) However, if you sell items from your collection at
a loss, you cannot deduct the loss.
Holocaust victims restitution. Restitution payments you receive as a
Holocaust victim (or the heir of a Holocaust victim) and interest earned on
the payments, including interest earned on amounts held in certain escrow
accounts or funds, are not taxable. You also do not include them in any
computations in which you would ordinarily add excludable income to your
adjusted gross income, such as the computation to determine the taxable
part of social security benefits. If the payments are made in property,
your basis in the property is its fair market value when you receive it.
Excludable restitution payments are payments or distributions made by any
country or any other entity because of persecution of an individual on the
basis of race, religion, physical or mental disability, or sexual
orientation by Nazi Germany, any other Axis regime, or any other
Nazi-controlled or Nazi-allied country, whether the payments are made under
a law or as a result of a legal action. They include compensation or
reparation for property losses resulting from Nazi persecution, including
proceeds under insurance policies issued before and during World War II by
European insurance companies.
Illegal income. Illegal income, such as money from dealing illegal drugs,
must be included in your income on Form 1040, line 21, or on Schedule C or
Schedule C-EZ (Form 1040) if from your self-employment activity.
Indian fishing rights. If you are a member of a qualified Indian tribe
that has fishing rights secured by treaty, executive order, or an Act of
Congress as of March 17, 1988, do not include in your income amounts you
receive from activities related to those fishing rights. The income is not
subject to income tax, self-employment tax, or employment taxes.
Interest on frozen deposits. In general, you exclude from your income the
amount of interest earned on a frozen deposit. See Interest income on
frozen deposits in chapter 7.
Interest on qualified savings bonds. You may be able to exclude from
income the interest from qualified U.S. savings bonds you redeem if you pay
qualified higher educational expenses in the same year. For more
information on this exclusion, see Education Savings Bond Program under
U.S. Savings Bonds in chapter 7.
Job interview expenses. If a prospective employer asks you to appear for
an interview and either pays you an allowance or reimburses you for your
transportation and other travel expenses, the amount you receive is
generally not taxable. You include in income only the amount you receive
that is more than your actual expenses.
Jury duty. Jury duty pay you receive must be included in your income on
Form 1040, line 21. If you must give the pay to your employer because your
employer continues to pay your salary while you serve on the jury, you can
deduct the amount turned over to your employer as an adjustment to your
income. Include the amount you repay your employer on Form 1040, line 36.
Enter “Jury Pay” and the amount on the dotted line next to line 36.
Kickbacks. You must include kickbacks, side commissions, push money, or
similar payments you receive in your income on Form 1040, line 21, or on
Schedule C or Schedule C-EZ (Form 1040), if from your self-employment activity.
Example.
You sell cars and help arrange car insurance for buyers. Insurance brokers
pay back part of their commissions to you for referring customers to them.
You must include the kickbacks in your income.
Medical savings accounts (MSAs). You generally do not include in income
amounts you withdraw from your Archer MSA or Medicare Advantage MSA if you
use the money to pay for qualified medical expenses. Generally, qualified
medical expenses are those you can deduct on Schedule A (Form 1040),
Itemized Deductions. For more information about qualified medical expenses,
see chapter 21. For more information about Archer MSAs or Medicare
Advantage MSAs, see Publication 969, Health Savings Accounts and Other
Tax-Favored Health Plans.
Prizes and awards. If you win a prize in a lucky number drawing,
television or radio quiz program, beauty contest, or other event, you must
include it in your income. For example, if you win a $50 prize in a
photography contest, you must report this income on Form 1040, line 21. If
you refuse to accept a prize, do not include its value in your income.
Prizes and awards in goods or services must be included in your income at
their fair market value.
Employee awards or bonuses. Cash awards or bonuses given to you by your
employer for good work or suggestions generally must be included in your
income as wages. However, certain noncash employee achievement awards can
be excluded from income. See Bonuses and awards in chapter 5.
Pulitzer, Nobel, and similar prizes. If you were awarded a prize in
recognition of accomplishments in religious, charitable, scientific,
artistic, educational, literary, or civic fields, you generally must
include the value of the prize in your income. However, you do not include
this prize in your income if you meet all of the following requirements.
*
You were selected without any action on your part to enter the
contest or proceeding.
*
You are not required to perform substantial future services as a
condition to receiving the prize or award.
*
The prize or award is transferred by the payer directly to a
governmental unit or tax-exempt charitable organization as designated by you.
See Publication 525 for more information about the conditions that apply to
the transfer.
Qualified tuition programs (QTPs). A qualified tuition program (also
known as a 529 program) is a program set up to allow you to either prepay,
or contribute to an account established for paying, a student's qualified
higher education expenses at an eligible educational institution. A program
can be established and maintained by a state, an agency or instrumentality
of a state, or an eligible educational institution.
The part of a distribution representing the amount paid or contributed to
a QTP is not included in income. This is a return of the investment in the
program.
The beneficiary generally does not include in income any earnings
distributed from a QTP if the total distribution is less than or equal to
adjusted qualified higher education expenses. See Publication 970 for more
information.
Railroad retirement annuities. The following types of payments are
treated as pension or annuity income and are taxable under the rules
explained in chapter 11.
*
Tier 1 railroad retirement benefits that are more than the social
security equivalent benefit.
*
Tier 2 benefits.
*
Vested dual benefits.
Rewards. If you receive a reward for providing information, include it in
your income.
Sale of home. You may be able to exclude from income all or part of any
gain from the sale or exchange of a personal residence. See chapter 15.
Sale of personal items. If you sold an item you owned for personal use,
such as a car, refrigerator, furniture, stereo, jewelry, or silverware,
your gain is taxable as a capital gain. Report it on Schedule D (Form
1040). You cannot deduct a loss.
However, if you sold an item you held for investment, such as gold or
silver bullion, coins, or gems, any gain is taxable as a capital gain and
any loss is deductible as a capital loss.
Example.
You sold a painting on an online auction website for $100. You bought the
painting for $20 at a garage sale years ago. Report your gain as a capital
gain on Schedule D (Form 1040).
Scholarships and fellowships. A candidate for a degree can exclude
amounts received as a qualified scholarship or fellowship. A qualified
scholarship or fellowship is any amount you receive that is for:
*
Tuition and fees to enroll at or attend an educational institution, or
*
Fees, books, supplies, and equipment required for courses at the
educational institution.
Amounts used for room and board do not qualify for the exclusion. See
Publication 970 for more information on qualified scholarships and
fellowship grants.
Payment for services. Generally, you must include in income the part of
any scholarship or fellowship that represents payment for past, present, or
future teaching, research, or other services. This applies even if all
candidates for a degree must perform the services to receive the degree.
For information about the rules that apply to a tax-free qualified
tuition reduction provided to employees and their families by an
educational institution, see Publication 970.
VA payments. Allowances paid by the Department of Veterans Affairs are
not included in your income. These allowances are not considered
scholarship or fellowship grants.
Prizes. Scholarship prizes won in a contest are not scholarships or
fellowships if you do not have to use the prizes for educational purposes.
You must include these amounts in your income on Form 1040, line 21,
whether or not you use the amounts for educational purposes.
Stolen property. If you steal property, you must report its fair market
value in your income in the year you steal it unless in the same year, you
return it to its rightful owner.
Transporting school children. Do not include in your income a school
board mileage allowance for taking children to and from school if you are
not in the business of taking children to school. You cannot deduct
expenses for providing this transportation.
Union benefits and dues. Amounts deducted from your pay for union dues,
assessments, contributions, or other payments to a union cannot be excluded
from your income.
You may be able to deduct some of these payments as a miscellaneous
deduction subject to the 2% of AGI limit if they are related to your job
and if you itemize deductions on Schedule A (Form 1040). For more
information, see Union Dues and Expenses in chapter 28.
Strike and lockout benefits. Benefits paid to you by a union as strike or
lockout benefits, including both cash and the fair market value of other
property, are usually included in your income as compensation. You can
exclude these benefits from your income only when the facts clearly show
that the union intended them as gifts to you.
Utility rebates. If you are a customer of an electric utility company
and you participate in the utility's energy conservation program, you may
receive on your monthly electric bill either:
*
A reduction in the purchase price of electricity furnished to you
(rate reduction), or
*
A nonrefundable credit against the purchase price of the electricity.
The amount of the rate reduction or nonrefundable credit is not included in
your income.
|
' |
about irs efile - about us - terms of use - privacy - contact us - irs tax code - state tax links - Tax Glossary
© 2010 RETURN-TAX.COM All Rights Reserved.
