Disaster relief provision.(p44)
The Heartland Disaster Tax Relief Act of 2008 provides tax relief to persons affected by the severe storms, tornadoes, and flooding occurring in the Midwestern disaster areas. For details, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.taxmap/pub17/p17-025.htm#en_us_publink100032436
If you are a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).
If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.taxmap/pub17/p17-025.htm#TXMP6c1f8a2f
This chapter discusses compensation received for services as an employee, such as wages, salaries, and fringe benefits. The following topics are included.
- Bonuses and awards.
- Special rules for certain employees.
- Sickness and injury benefits.
The chapter explains what income is included in the employee's gross income and what is not included.taxmap/pub17/p17-025.htm#TXMP56c59208
You may want to see:
Publication 463 Travel, Entertainment, Gift, and Car Expenses 503 Child and Dependent Care Expenses 505 Tax Withholding and Estimated Tax 525 Taxable and Nontaxable Incometaxmap/pub17/p17-025.htm#en_us_publink100032437
This section discusses various types of employee compensation including fringe benefits, retirement plan contributions, stock options, and restricted property.taxmap/pub17/p17-025.htm#en_us_publink100032438
If you are an employee, you should receive Form W-2 from your employer showing the pay you received for your services. Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you do not receive a Form W-2.
If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. These wages must be included on line 7 of Form 1040. See Form 8919 for more information. taxmap/pub17/p17-025.htm#en_us_publink100032439
If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.taxmap/pub17/p17-025.htm#en_us_publink100032440
If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.taxmap/pub17/p17-025.htm#en_us_publink100032441
This section discusses different types of employee compensation.taxmap/pub17/p17-025.htm#en_us_publink100032442
If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them.
If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments
in chapter 12.
If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463. If you are reimbursed for moving expenses, see Publication 521, Moving Expenses.taxmap/pub17/p17-025.htm#en_us_publink100032444
Include in income amounts you are awarded in a settlement or judgment for back pay. These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W-2.taxmap/pub17/p17-025.htm#en_us_publink100032445
Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you.taxmap/pub17/p17-025.htm#en_us_publink100032446
If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Your employer can tell you whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay.
However, the exclusion does not apply to the following awards.
- A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.
- A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.
Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 – $1,600) in his income. taxmap/pub17/p17-025.htm#en_us_publink100032448
Cost-of-living allowances generally are included in your income. However, they are not included in your income if you are a federal civilian employee or a federal court employee who is stationed in Alaska, Hawaii, or outside the United States.
Allowances and differentials that increase your basic pay as an incentive for taking a less desirable post of duty are part of your compensation and must be included in income. For example, your compensation includes Foreign Post, Foreign Service, and Overseas Tropical differentials. For more information, see Publication 516, U.S. Government Civilian Employees Stationed Abroad.taxmap/pub17/p17-025.htm#en_us_publink100032449
Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. This amount is shown on Form W-2, box 12, using code Y. This amount is not included in your income.
However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. This amount is included in your wages shown on Form W-2, box 1. It also is shown on Form W-2, box 12, using code Z.
For information on the requirements and the amount to include in income, see Internal Revenue Code section 409A and Notice 2005-1. The notice is on page 274 of Internal Revenue Bulletin 2005-2 available at www.irs.gov/irb/2005-02_IRB/ar13.html
For tax years beginning after 2008, portions of Notice 2005-1 are obsolete and replaced by final regulations issued under section 409A. For information on the applicability of the regulations, see the preamble to Treasury Decision 9321, 2007-19 I.R.B. 1123 available at www.irs.gov/irb/2007-19_IRB/ar07.html
If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Do not include that part again in your income. Include the rest of the payment in your income in the year of payment.
If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them.taxmap/pub17/p17-025.htm#en_us_publink100032452
You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract.taxmap/pub17/p17-025.htm#en_us_publink100032453
If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2.
If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on the return and the wages on your Forms W-2. taxmap/pub17/p17-025.htm#en_us_publink100032454
If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income.
However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040).taxmap/pub17/p17-025.htm#en_us_publink100032455
Pay you receive from your employer while you are sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from any of the following payers.
- A welfare fund.
- A state sickness or disability fund.
- An association of employers or employees.
- An insurance company, if your employer paid for the plan.
However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. For more information, see Publication 525.
If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. The payment also is treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker.taxmap/pub17/p17-025.htm#en_us_publink100032457
Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. You include the cash payment in your income in the year you use the right.taxmap/pub17/p17-025.htm#en_us_publink100032458
Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules.taxmap/pub17/p17-025.htm#en_us_publink100032459
You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report taxable noncash fringe benefits by using either of the following rules.
- The general rule: benefits are reported for a full calendar year (January 1–December 31).
- The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year.
Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit.
You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). taxmap/pub17/p17-025.htm#en_us_publink100032460
Your employer reports your taxable fringe benefits in box 1 (Wages, tips, other compensation) of Form W-2. The total value of your fringe benefits also may be noted in box 14. The value of your fringe benefits may be added to your other compensation on one Form W-2, or you may receive a separate Form W-2 showing just the value of your fringe benefits in box 1 with a notation in box 14. taxmap/pub17/p17-025.htm#en_us_publink100032461
Generally, the value of accident or health plan coverage provided to you by your employer is not included in your income. Benefits you receive from the plan may be taxable, as explained later under Sickness and Injury Benefits.
For information on the items covered in this section, other than Long-term care coverage, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.taxmap/pub17/p17-025.htm#en_us_publink100032462
Contributions by your employer to provide coverage for long-term care services generally are not included in your income. However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. This amount will be reported as wages in box 1 of your Form W-2.
Contributions you make to the plan are discussed in Publication 502, Medical and Dental Expenses.taxmap/pub17/p17-025.htm#en_us_publink100032463
Contributions by your employer to your Archer MSA generally are not included in your income. Their total will be reported in box 12 of Form W-2 with code R. You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File the form with your return.
If your employer does not make contributions to your MSA, you can make your own contributions to your MSA. These contributions are discussed in Publication 969. Also, see Form 8853.taxmap/pub17/p17-025.htm#en_us_publink100032464
If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses and those of your spouse and dependents, generally are not included in your income.taxmap/pub17/p17-025.htm#en_us_publink100032465
A health FSA can make a qualified HSA distribution. This distribution is a direct transfer to your HSA trustee by your employer. Generally, the distribution is not included in your income and is not deductible. See Publication 969 for the requirements for these qualified HSA distributions. taxmap/pub17/p17-025.htm#en_us_publink100032466
If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses and those of your spouse and dependents generally are not included in your income.taxmap/pub17/p17-025.htm#en_us_publink100032467
An HRA can make a qualified HSA distribution. This distribution is a direct transfer to your HSA trustee by your employer. Generally, the distribution is not included in your income and is not deductible. See Publication 969 for the requirements for these qualified HSA distributions. taxmap/pub17/p17-025.htm#en_us_publink100032468
If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Contributions made by your employer are not included in your income. Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Distributions not used for qualified medical expenses are included in your income.
Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.
Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.taxmap/pub17/p17-025.htm#en_us_publink100032469
You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. See Publication 590 for the requirements for these qualified HSA funding distributions. taxmap/pub17/p17-025.htm#en_us_publink100032470
If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. This income is also subject to an additional 10% tax. taxmap/pub17/p17-025.htm#en_us_publink100032471
You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. See the Instructions for Form 8839 for more information.
Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. They also are included as social security and Medicare wages in boxes 3 and 5. However, they are not included as wages in box 1. To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839, Qualified Adoption Expenses. File the form with your return.taxmap/pub17/p17-025.htm#en_us_publink100032472
If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Generally, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income.taxmap/pub17/p17-025.htm#en_us_publink100032473
If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.taxmap/pub17/p17-025.htm#en_us_publink100032474
You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. For more information, see Publication 970, Tax Benefits for Education.taxmap/pub17/p17-025.htm#en_us_publink100032475
If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit.
Your employer must determine the actual value of this fringe benefit to include in your income. For more information, see Publication 525.
Certain employer-provided transportation can be excluded from gross income. See the discussion on Transportation
Generally, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance.
If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Also, it is shown separately in box 12 with code C.taxmap/pub17/p17-025.htm#en_us_publink100032478
This insurance is term life insurance protection (insurance for a fixed period of time) that:
- Provides a general death benefit,
- Is provided to a group of employees,
- Is provided under a policy carried by the employer, and
- Provides an amount of insurance to each employee based on a formula that prevents individual selection.
If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Your employer should be able to tell you the amount to include in your income. taxmap/pub17/p17-025.htm#en_us_publink100032480
Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance.taxmap/pub17/p17-025.htm#en_us_publink100032481
If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Also, it is shown separately in box 12 with code C. Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them in your total tax on line 61, Form 1040, and enter "UT" and the amount of the taxes on the dotted line next to line 61.taxmap/pub17/p17-025.htm#en_us_publink100032482
Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. You must figure how much to include in your income. Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. taxmap/pub17/p17-025.htm#en_us_publink100032483
Use the following worksheet to figure the amount to include in your income.
Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance To Include in Income
|1.||Enter the total amount of your insurance coverage from your employer(s)||1.|| |
|2.||Limit on exclusion for employer-provided group-term life insurance coverage||2.||50,000|
|3.||Subtract line 2 from line 1||3.|| |
|4.||Divide line 3 by $1,000. Figure to the nearest tenth||4.|| |
|5.||Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group ||5.|| |
|6.||Multiply line 4 by line 5||6.|| |
|7.||Enter the number of full months of coverage at this cost.||7.|| |
|8.||Multiply line 6 by line 7||8.|| |
|9.||Enter the premiums you paid per month||9.|| || || |
|10.||Enter the number of months you paid the premiums||10.|| || || |
|11.||Multiply line 9 by line 10.||11.|| |
|12.||Subtract line 11 from line 8. Include this amount in your income as wages||12.|| |
You are 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the amount to include in your income as follows. taxmap/pub17/p17-025.htm#w15047d02
Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated
|1.||Enter the total amount of your insurance coverage from your employer(s)||1.||80,000|
|2.||Limit on exclusion for employer-provided group-term life insurance coverage||2.||50,000|
|3.||Subtract line 2 from line 1||3.||30,000|
|4.||Divide line 3 by $1,000. Figure to the nearest tenth||4.||30.0|
|5.||Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group ||5.||.23|
|6.||Multiply line 4 by line 5||6.||6.90|
|7.||Enter the number of full months of coverage at this cost.||7.||12|
|8.||Multiply line 6 by line 7||8.||82.80|
|9.||Enter the premiums you paid per month||9.||4.15|| || |
|10.||Enter the number of months you paid the premiums||10.||12|| || |
|11.||Multiply line 9 by line 10.||11.||49.80|
|12.||Subtract line 11 from line 8. Include this amount in your income as wages||12.||33.00| taxmap/pub17/p17-025.htm#en_us_publink100032485
Table 5-1. Cost of $1,000 of Group-Term Life Insurance for One Month
| Age ||Cost |
| Under 25||$ .05 |
| 25 through 29|| .06 |
| 30 through 34||.08 |
| 35 through 39||.09 |
| 40 through 44||.10 |
| 45 through 49||.15 |
| 50 through 54||.23 |
| 55 through 59||.43 |
| 60 through 64||.66 |
| 65 through 69||1.27 |
| 70 and older||2.06 |taxmap/pub17/p17-025.htm#en_us_publink100032486
You are not taxed on the cost of group-term life insurance if any of the following circumstances apply.
- You are permanently and totally disabled and have ended your employment.
- Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.
- A charitable organization (defined in chapter 24) to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.)
- The plan existed on January 1, 1984, and
- You retired before January 2, 1984, and were covered by the plan when you retired, or
- You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.
You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply.
- The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan.
- You are a key employee and your employer's plan discriminates in favor of key employees.
If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. taxmap/pub17/p17-025.htm#en_us_publink100032488
If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. A qualified transportation fringe benefit is:
- Transportation in a commuter highway vehicle (such as a van) between your home and work place,
- A transit pass, or
- Qualified parking.
Cash reimbursement by your employer for these expenses under a bona fide
reimbursement arrangement also is excludable. However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you.
The exclusion for commuter highway vehicle transportation and transit pass fringe benefits cannot be more than a total of $115 a month.
The exclusion for the qualified parking fringe benefit cannot be more than $220 a month.
If the benefits have a value that is more than these limits, the excess must be included in your income.taxmap/pub17/p17-025.htm#en_us_publink100091165
This is a highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle's mileage must reasonably be expected to be:
- For transporting employees between their homes and work place, and
- On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver).
This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. taxmap/pub17/p17-025.htm#en_us_publink100091167
This is parking provided to an employee at or near the employer's place of business. It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. It does not include parking at or near the employee's home. taxmap/pub17/p17-025.htm#en_us_publink100032493
Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See Group-Term Life Insurance,
earlier, under Fringe Benefits.
If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture.
For information on distributions from retirement plans, see Publication 575, Pension and Annuity Income (or Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits, if you are a federal employee or retiree).
If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to social security and Medicare taxes.
Elective deferrals include elective contributions to the following retirement plans.
- Cash or deferred arrangements (section 401(k) plans).
- The Thrift Savings Plan for federal employees.
- Salary reduction simplified employee pension plans (SARSEP).
- Savings incentive match plans for employees (SIMPLE plans).
- Tax-sheltered annuity plans (403(b) plans).
- Section 501(c)(18)(D) plans.
- Section 457 plans.
Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. Before each plan year, your employer must give you a written notice of your rights under the arrangement. You can elect to change the amount of the contributions or elect out of the arrangement. taxmap/pub17/p17-025.htm#en_us_publink100032496
For 2008, you generally should not have deferred more than a total of $15,500 of contributions to the plans listed in (1) through (3) and (5) above. The limit for SIMPLE plans is $10,500. The limit for section 501(c)(18)(D) plans is the lesser of $7,000 or 25% of your compensation. The limit for section 457 plans is the lesser of your includible compensation or $15,500.taxmap/pub17/p17-025.htm#en_us_publink100032497
Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Designated Roth contributions are treated as elective deferrals, except that they are included in income.taxmap/pub17/p17-025.htm#en_us_publink100032498
Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit.
If you set aside more than the limit, the excess generally must be included in your income for that year, unless you have an excess deferral of a designated Roth contribution. See Publication 525 for a discussion of the tax treatment of excess deferrals.taxmap/pub17/p17-025.htm#en_us_publink100032499
You may be allowed catch-up contributions (additional elective deferral) if you are age 50 or older by the end of your tax year.taxmap/pub17/p17-025.htm#en_us_publink100032500
If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option. However, if your option is a statutory stock option, you will not have any income until you sell or exchange your stock. Your employer can tell you which kind of option you hold. For more information, see Publication 525. taxmap/pub17/p17-025.htm#en_us_publink100032501
Generally, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. However, if you receive stock or other property that has certain restrictions that affect its value, you do not include the value of the property in your income until it has substantially vested. (You can choose to include the value of the property in your income in the year it is transferred to you.) For more information, see Restricted Property in Publication 525. taxmap/pub17/p17-025.htm#en_us_publink100091168
Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on your Form W-2. taxmap/pub17/p17-025.htm#en_us_publink100032503
Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends. Report them on your return as dividends. For a discussion of dividends, see chapter 8
For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Publication 525.