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taxmap/pubs/p525-000.htm#en_us_publink1000229057
Publication 525

Taxable and  
Nontaxable  
Income


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What's New for 2009(p1)


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taxmap/pubs/p525-000.htm#en_us_publink1000229059

Economic recovery payment.(p1)

Any economic recovery payment you received is not taxable for federal income tax purposes. See the discussion under Other Income.
taxmap/pubs/p525-000.htm#en_us_publink1000229060

Differential wage payments.(p1)

Payments made by an employer to an individual for any period during which the individual is an active duty member of the uniformed services are treated as wages. See the discussion under Miscellaneous Compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229062

Bicycle commuters.(p2)

The qualified employer transportation fringe benefit is expanded to include any qualified bicycle commuting reimbursement. See Transportation under Fringe Benefits.
taxmap/pubs/p525-000.htm#en_us_publink1000229063

Transportation fringe benefits increased.(p2)

Beginning January 1, 2009, the exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than a total of $120 per month. Beginning March 1, 2009, the amount of the exclusion increased to $230 a month. See Transportation under Fringe Benefits.
taxmap/pubs/p525-000.htm#en_us_publink1000229064

Nonqualified deferred compensation plans of nonqualified entities.(p2)

Generally, for services performed after 2008, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. For this purpose, a nonqualified entity is:
  1. A foreign corporation unless substantially all of its income is:
    1. Effectively connected with the conduct of a trade or business in the United States, or
    2. Subject to a comprehensive foreign income tax.
  2. A partnership unless substantially all of its income is allocated to persons other than:
    1. Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and
    2. Tax-exempt organizations.
taxmap/pubs/p525-000.htm#en_us_publink1000229065

Cash for clunkers.(p2)

If you received a voucher to be applied toward the purchase of a qualified new vehicle in exchange for the trade in of an eligible used vehicle, the amount of the voucher is not taxable for federal income tax purposes. See the discussion under Other Income.
taxmap/pubs/p525-000.htm#en_us_publink1000229066

Unemployment compensation.(p2)

For 2009, you do not have to pay tax on the first $2,400 of unemployment compensation per recipient. See Unemployment Benefits.
taxmap/pubs/p525-000.htm#en_us_publink1000229067

Home Affordable Modification Program (HAMP).(p2)

If you benefit from Pay-for-Performance Success Payments under HAMP, the payments are not taxable.

What's New for 2010(p2)


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taxmap/pubs/p525-000.htm#en_us_publink1000173448

Roth IRAs.(p2)

Half of any income that results from a rollover or conversion to a Roth IRA from another retirement plan in 2010 is included in income in 2011, and the other half in 2012, unless you elect to include all of it in 2010.
taxmap/pubs/p525-000.htm#en_us_publink1000173449

Exclusions from income.(p2)

The following exclusions from income are scheduled to expire and will not be available in 2010:

Reminders(p2)


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taxmap/pubs/p525-000.htm#en_us_publink1000229070

Terrorist attacks.(p2)

You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action. For more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.
taxmap/pubs/p525-000.htm#en_us_publink1000229071

Astronauts.(p2)

You also can exclude death payments for astronauts dying in the line of duty after 2002.
taxmap/pubs/p525-000.htm#en_us_publink1000229072

Qualified settlement income.(p2)

If you are a qualified taxpayer, you can contribute all or part of your qualified settlement income, up to $100,000, to an eligible retirement plan, including an IRA. Contributions to eligible retirement plans other than a Roth IRA or a designated Roth contribution, reduce the qualified settlement income that you must include in income. See Exxon Valdez settlement income under Other Income.
taxmap/pubs/p525-000.htm#en_us_publink1000229073

Foreign income.(p2)

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/pubs/p525-000.htm#en_us_publink1000229074

Disaster mitigation payments.(p2)

You can exclude from income grants you use to mitigate (reduce the severity of) potential damage from future natural disasters that are paid to you through state and local governments. For more information, see Disaster mitigation payments under Welfare and Other Public Assistance Benefits.
taxmap/pubs/p525-000.htm#en_us_publink1000229075

Nonqualified deferred compensation plans.(p2)

Generally, all amounts deferred under a nonqualified deferred compensation plan for all tax years are included in gross income for the current year, unless certain requirements are met. See Nonqualified deferred compensation plans under Employee Compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229076

Health Savings Account (HSA).(p2)

You can fund your HSA with a one-time direct transfer from your individual retirement plan, health reimbursement account, or health flexible spending account and exclude the amount of the transfer from income. However, you must include the amount transferred in your income, as well as pay a 10% additional tax, if you do not remain an eligible individual for at least 12 months after the month of the transfer. See Accident or Health Plan under Fringe Benefits.
taxmap/pubs/p525-000.htm#en_us_publink1000229077

Qualified joint venture.(p2)

A qualified joint venture conducted by you and your spouse may not be treated as a partnership if you file a joint return for the tax year. See Partnership Income.
taxmap/pubs/p525-000.htm#en_us_publink1000229078

Photographs of missing children.(p2)

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

taxmap/pubs/p525-000.htm#TXMP4c40a536Introduction

You can receive income in the form of money, property, or services. This publication discusses many kinds of income and explains whether they are taxable or nontaxable. It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties. It also includes information on disability pensions, life insurance proceeds, and welfare and other public assistance benefits. Check the index for the location of a specific subject.
Generally, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not taxable.
taxmap/pubs/p525-000.htm#en_us_publink1000229079

Constructively received income.(p2)


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You are generally taxed on income that is available to you, regardless of whether it is actually in your possession.
A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next year. For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that tax year. If the check was mailed so that it could not possibly reach you until after the end of the tax year, and you otherwise could not get the funds before the end of the year, you include the amount in your income for the next tax year.
taxmap/pubs/p525-000.htm#en_us_publink1000229080

Assignment of income.(p2)
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Income received by an agent for you is income you constructively received in the year the agent received it. If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the third party receives it.
taxmap/pubs/p525-000.htm#en_us_publink1000229081

Example.(p2)

You and your employer agree that part of your salary is to be paid directly to your former spouse. You must include that amount in your income when your former spouse receives it.
taxmap/pubs/p525-000.htm#en_us_publink1000229082

Prepaid income.(p2)


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Prepaid income, such as compensation for future services, generally is included in your income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case, you include the payment in your income as you earn it by performing the services.
taxmap/pubs/p525-000.htm#en_us_publink1000229083

Comments and suggestions.(p3)


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We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:

 
Internal Revenue Service 
Individual Forms and Publications Branch 
SE:W:CAR:MP:T:I 
1111 Constitution Ave. NW, IR-6526 
Washington, DC 20224


We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.
You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.
taxmap/pubs/p525-000.htm#en_us_publink1000229084

Ordering forms and publications.(p3)
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Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

 
Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613


taxmap/pubs/p525-000.htm#en_us_publink1000229085

Tax questions.(p3)
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If you have a tax question, check the information available on www.irs.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

taxmap/pubs/p525-000.htm#TXMP353d2fe6

Useful items

You may want to see:


Publication
 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)
 523 Selling Your Home
 527 Residential Rental Property (Including Rental of Vacation Homes)
 541 Partnerships
 544 Sales and Other Dispositions of Assets
 550 Investment Income and Expenses (Including Capital Gains and Losses)
 559 Survivors, Executors, and Administrators
 564 Mutual Fund Distributions
 575 Pension and Annuity Income
 915 Social Security and Equivalent Railroad Retirement Benefits
 970 Tax Benefits for Education
 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments
See How To Get Tax Help, near the end of this publication, for information about getting these publications.
taxmap/pubs/p525-000.htm#en_us_publink1000229086

Employee Compensation(p3)


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previous topic occurrence Employee Compensation next topic occurrence

Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.
You should receive a Form W-2, Wage and Tax Statement, 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/pubs/p525-000.htm#en_us_publink1000229087

Childcare providers.(p3)


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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/pubs/p525-000.htm#en_us_publink1000229088

Babysitting.(p3)
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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/pubs/p525-000.htm#en_us_publink1000229089

Bankruptcy.(p3)


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If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. Your W-2 will show your total wages and withheld income tax for the year. On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. If you receive other information returns (such as Form 1099-DIV or 1099-INT) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income.
The only exception is for purposes of figuring your self-employment tax, if you are self-employed. For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case.
You must file a statement with your income tax return stating that you filed a Chapter 11 bankruptcy case. The statement must show the allocation and describe the method used to make the allocation. For a sample of this statement and other information, see Notice 2006-83, 2006-40 I.R.B. 596, available at www.irs.gov/irb/2006-40_IRB/ar12.html.
taxmap/pubs/p525-000.htm#en_us_publink1000229090

Miscellaneous Compensation(p3)


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This section discusses many types of employee compensation. The subjects are arranged in alphabetical order.
taxmap/pubs/p525-000.htm#en_us_publink1000229091

Advance commissions and other earnings.(p3)


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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, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229092

Allowances and reimbursements.(p3)


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If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. If you are reimbursed for moving expenses, see Publication 521, Moving Expenses.
taxmap/pubs/p525-000.htm#en_us_publink1000229093

Back pay awards.(p3)


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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/pubs/p525-000.htm#en_us_publink1000229094

Bonuses and awards.(p3)


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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/pubs/p525-000.htm#en_us_publink1000229095

Employee achievement award.(p3)
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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.
taxmap/pubs/p525-000.htm#en_us_publink1000229096

Example.(p4)

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/pubs/p525-000.htm#en_us_publink1000229097

Differential wage payments.(p4)


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This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. The payments are reported as wages on Form W-2.
taxmap/pubs/p525-000.htm#en_us_publink1000173689

Government cost-of-living allowances.(p4)


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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. Beginning January 1, 2010, these federal employees will be transitioned from a nontaxable cost-of-living adjustment to a taxable locality-based comparability payment.
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/pubs/p525-000.htm#en_us_publink1000229098

Nonqualified deferred compensation plans.(p4)


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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 is also shown on Form W-2, box 12, using code Z.
taxmap/pubs/p525-000.htm#en_us_publink1000229100

Note received for services.(p4)


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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/pubs/p525-000.htm#en_us_publink1000229101

Severance pay.(p4)


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You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract.
taxmap/pubs/p525-000.htm#en_us_publink1000229102

Accrued leave payment.(p4)
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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 your return and the wages on your Forms W-2.
taxmap/pubs/p525-000.htm#en_us_publink1000229103

Outplacement services.(p4)
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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/pubs/p525-000.htm#en_us_publink1000229104

Sick pay.(p4)


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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. 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 Other Sickness and Injury Benefits under Sickness and Injury Benefits, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229105

Social security and Medicare taxes paid by employer.(p4)


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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 is also 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/pubs/p525-000.htm#en_us_publink1000229106

Stock appreciation rights.(p4)


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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 income in the year you use the right.
taxmap/pubs/p525-000.htm#en_us_publink1000229107

Fringe Benefits(p4)


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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.
See Valuation of Fringe Benefits, later in this discussion, for information on how to determine the amount to include in income.
taxmap/pubs/p525-000.htm#en_us_publink1000229108

Recipient of fringe benefit.(p4)


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You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You are considered to be the recipient even if it is given to another person, such as a member of your family. An example is a car your employer gives to your spouse for services you perform. The car is considered to have been provided to you and not to your spouse.
You do not have to be an employee of the provider to be a recipient of a fringe benefit. If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit.
taxmap/pubs/p525-000.htm#en_us_publink1000229109

Provider of benefit.(p4)


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Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. The provider can be a client or customer of an independent contractor.
taxmap/pubs/p525-000.htm#en_us_publink1000229110

Accounting period.(p4)


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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. 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/pubs/p525-000.htm#en_us_publink1000229111

Form W-2.(p5)


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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/pubs/p525-000.htm#en_us_publink1000229112

Accident or Health Plan(p5)


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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/pubs/p525-000.htm#en_us_publink1000229113

Long-term care coverage.(p5)


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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.
taxmap/pubs/p525-000.htm#en_us_publink1000229114

Archer MSA contributions.(p5)


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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.
taxmap/pubs/p525-000.htm#en_us_publink1000229115

Health flexible spending arrangement (health FSA).(p5)


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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/pubs/p525-000.htm#en_us_publink1000229116

Qualified HSA distribution.(p5)
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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/pubs/p525-000.htm#en_us_publink1000229117

Health reimbursement arrangement (HRA).(p5)


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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/pubs/p525-000.htm#en_us_publink1000229118

Qualified HSA distribution.(p5)
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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/pubs/p525-000.htm#en_us_publink1000229119

Health savings accounts (HSA).(p5)


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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. See Publication 969 for the requirements of an HSA.
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/pubs/p525-000.htm#en_us_publink1000229120

Qualified HSA funding distribution.(p5)
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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, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229121

Failure to maintain eligibility.(p5)
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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/pubs/p525-000.htm#en_us_publink1000229122

Adoption Assistance(p5)


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previous topic occurrence Adoption Assistance next topic occurrence

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 Instructions for Form 8839, Qualified Adoption Expenses, 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. File the form with your return.
taxmap/pubs/p525-000.htm#en_us_publink1000229123

Athletic Facilities(p5)


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previous topic occurrence Athletic Facilities next topic occurrence

If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. The gym must be used primarily by employees, their spouses, and their dependent children.
If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229124

De Minimis (Minimal) Benefits(p5)


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previous topic occurrence De Minimis (Minimal) Benefits next topic occurrence

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. Also see Employee Discounts, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229125

Holiday gifts.(p5)


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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 easily can exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.
taxmap/pubs/p525-000.htm#en_us_publink1000229126

Dependent Care Benefits(p5)


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previous topic occurrence Dependent Care Benefits next topic occurrence

If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Dependent care benefits include:
The amount you can exclude is limited to the lesser of:
Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2.
To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. See the instructions for Form 2441 for more information.
taxmap/pubs/p525-000.htm#en_us_publink1000229127

Educational Assistance(p5)


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You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. For more information, see Publication 970.
taxmap/pubs/p525-000.htm#en_us_publink1000229128

Employee Discounts(p6)


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previous topic occurrence Employee Discounts next topic occurrence

If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds).
The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage.
taxmap/pubs/p525-000.htm#en_us_publink1000229129

Financial Counseling Fees(p6)


rule
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Financial Counseling Fees

Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit).
Qualified retirement planning services paid for you by your employer may be excluded from your income. For more information, see Retirement Planning Services, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229130

Group-Term Life Insurance(p6)


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previous topic occurrence Group-term Life Insurance next topic occurrence

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.
For exceptions to this rule, see Entire cost excluded, and Entire cost taxed, later.
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/pubs/p525-000.htm#en_us_publink1000229131

Group-term life insurance.(p6)


rule
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This insurance is term life insurance protection (insurance for a fixed period of time) that:
taxmap/pubs/p525-000.htm#en_us_publink1000229132

Permanent benefits.(p6)
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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/pubs/p525-000.htm#en_us_publink1000229133

Accidental death benefits.(p6)
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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/pubs/p525-000.htm#en_us_publink1000229134

Former employer.(p6)


rule
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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 60, Form 1040, and enter "UT" and the amount of the taxes on the dotted line next to line 60.
taxmap/pubs/p525-000.htm#en_us_publink1000229135

Two or more employers.(p6)


rule
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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/pubs/p525-000.htm#en_us_publink1000229136

Figuring the taxable cost.(p6)


rule
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Use the following worksheet to figure the amount to include in your income.
If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. However, you cannot reduce the amount to include in your income by: taxmap/pubs/p525-000.htm#en_us_publink1000229137
Pencil

Worksheet 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 coverage2. 50,000
3.Subtract line 2 from line 13.             
4.Divide line 3 by $1,000. Figure to the nearest tenth4.             
5.Go to Table 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 group5.             
6.Multiply line 4 by line 56.
            
7.Enter the number of full months of coverage at this cost7.             
8.Multiply line 6 by line 78.             
9.Enter the premiums you paid per month9.                
10.Enter the number of months you paid the premiums10.                
11.Multiply line 9 by line 10.11.             
12.Subtract line 11 from line 8. Include this amount in your income as wages 12.             

Table 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 691.27 
 70 and older2.06 
taxmap/pubs/p525-000.htm#en_us_publink1000229140

Example.(p7)

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/pubs/p525-000.htm#en_us_publink1000229141
Pencil

Worksheet 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 coverage2. 50,000
3.Subtract line 2 from line 13. 30,000
4.Divide line 3 by $1,000. Figure to the nearest tenth4. 30.0
5.Go to Table 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 group5. .23
6.Multiply line 4 by line 56. 6.90
7.Enter the number of full months of coverage at this cost.7. 12
8.Multiply line 6 by line 78. 82.80
9.Enter the premiums you paid per month9. 4.15   
10.Enter the number of months you paid the premiums10. 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
The total amount to include in income for the cost of excess group-term life insurance is $33. Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. You must add it to the wages shown on your Forms W-2 and include the total on your return.
taxmap/pubs/p525-000.htm#en_us_publink1000229143

Entire cost excluded.(p7)


rule
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You are not taxed on the cost of group-term life insurance if any of the following circumstances apply.
  1. You are permanently and totally disabled and have ended your employment.
  2. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.
  3. A charitable organization 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.)
  4. The plan existed on January 1, 1984, and:
    1. You retired before January 2, 1984, and were covered by the plan when you retired, or
    2. You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.
taxmap/pubs/p525-000.htm#en_us_publink1000229144

Entire cost taxed.(p7)


rule
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You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply.
taxmap/pubs/p525-000.htm#en_us_publink1000229145

Meals and Lodging(p7)


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You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met.
  1. The meals are:
    1. Furnished on the business premises of your employer, and
    2. Furnished for the convenience of your employer.
  2. The lodging is:
    1. Furnished on the business premises of your employer,
    2. Furnished for the convenience of your employer, and
    3. A condition of your employment. (You must accept it in order to be able to properly perform your duties.)
You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. See De Minimis (Minimal) Benefits, earlier.
taxmap/pubs/p525-000.htm#en_us_publink1000229146

Lodging for employees affected by Midwestern disaster.(p7)


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If your employer provides in-kind lodging to you (or your spouse or dependents), you may be able to exclude from income part or all of the value of this lodging. The exclusion is equal to the value of lodging furnished from November 2008 through April 2009, up to a maximum of $600 per month.
You can exclude the value only if you had your main home in a Midwestern disaster area on the applicable disaster date and you perform substantially all your work in a Midwestern disaster area for the employer furnishing the lodging. You cannot be a dependent of, or related to, your employer. For more information, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
taxmap/pubs/p525-000.htm#en_us_publink1000229147

Faculty lodging.(p7)


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If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions above, you still may not have to include the value of the lodging in income. However, the lodging must be qualified campus lodging, and you must pay an adequate rent.
taxmap/pubs/p525-000.htm#en_us_publink1000229148

Academic health center.(p7)
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This is an organization that meets the following conditions.
taxmap/pubs/p525-000.htm#en_us_publink1000229149

Qualified campus lodging.(p7)
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Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. The lodging must be located on or near a campus of the educational institution or academic health center.
taxmap/pubs/p525-000.htm#en_us_publink1000229150

Adequate rent.(p7)
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The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: If the amount you pay is less than the lesser of these amounts, you must include the difference in your income.
The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis.
taxmap/pubs/p525-000.htm#en_us_publink1000229151

Example.(p7)

Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. The house is appraised at $200,000. The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. Carl pays an annual rent of $11,000. Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000).
taxmap/pubs/p525-000.htm#en_us_publink1000229152

Moving Expense Reimbursements(p7)


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Generally, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. See Publication 521, for more information.
taxmap/pubs/p525-000.htm#en_us_publink1000229153

No-Additional-Cost Services(p7)


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previous topic occurrence No-additional-cost Services next topic occurrence

The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer:
Generally, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services.
taxmap/pubs/p525-000.htm#en_us_publink1000229154

Example.(p8)

You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. The value of the personal flight is not included in your income. However, the value of the hotel room is included in your income because you do not work in the hotel business.
taxmap/pubs/p525-000.htm#en_us_publink1000229155

Retirement Planning Services(p8)


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previous topic occurrence Retirement Planning Services next topic occurrence

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. Also, see Financial Counseling Fees, earlier.
taxmap/pubs/p525-000.htm#en_us_publink1000229156

Transportation(p8)


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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: Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also 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.
taxmap/pubs/p525-000.htm#en_us_publink1000229157

Exclusion limit.(p8)


rule
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The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than a total of $120 a month. However, beginning March 1, 2009, the amount of the exclusion was increased to $230 a month.
The exclusion for the qualified parking fringe benefit cannot be more than $230 a month.
The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year.
If the benefits have a value that is more than these limits, the excess must be included in your income. You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement.
taxmap/pubs/p525-000.htm#en_us_publink1000229158

Commuter highway vehicle.(p8)


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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:
taxmap/pubs/p525-000.htm#en_us_publink1000229159

Transit pass.(p8)


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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/pubs/p525-000.htm#en_us_publink1000229161

Qualified parking.(p8)


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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/pubs/p525-000.htm#en_us_publink1000173483

Qualified bicycle commuting.(p8)


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This is reimbursement based on the number of qualified bicycle commuting months for the year. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage.
taxmap/pubs/p525-000.htm#en_us_publink1000229162

Tuition Reduction(p8)


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You can exclude a qualified tuition reduction from your income. This is the amount of a reduction in tuition: For more information, see Publication 970.
taxmap/pubs/p525-000.htm#en_us_publink1000229163

Working Condition Benefits(p8)


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If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income.
taxmap/pubs/p525-000.htm#en_us_publink1000229164

Example.(p8)

You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself.
taxmap/pubs/p525-000.htm#en_us_publink1000229165

Valuation of Fringe Benefits(p8)


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If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. For an exception, see Group-Term Life Insurance, earlier.
taxmap/pubs/p525-000.htm#en_us_publink1000229166

General valuation rule.(p8)


rule
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You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of:
  1. The amount, if any, you paid for the benefit, plus
  2. The amount, if any, specifically excluded from your income by law.
If you pay fair market value for a fringe benefit, no amount is included in your income.
taxmap/pubs/p525-000.htm#en_us_publink1000229167

Fair market value.(p8)
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The fair market value of a fringe benefit is determined by all the facts and circumstances. It is the amount you would have to pay a third party to buy or lease the benefit. This is determined without regard to:
taxmap/pubs/p525-000.htm#en_us_publink1000229168

Employer-provided vehicles.(p8)
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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.
Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis.
taxmap/pubs/p525-000.htm#en_us_publink1000229169

Flights on employer-provided aircraft.(p8)
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Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party.
If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. The division must be based on all the facts, including which employee or employees control the use of the aircraft.
taxmap/pubs/p525-000.htm#en_us_publink1000229170

Special valuation rules.(p8)


rule
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You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule.
If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of:
  1. Any amount you repaid your employer, plus
  2. Any amount specifically excluded from income by law.
The special valuation rules are the following.
For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits.
For information on the non-commercial flight and commercial flight valuation rules, see sections 1.61-21(g) and 1.61-21(h) of the regulations.
taxmap/pubs/p525-000.htm#en_us_publink1000229171

Retirement Plan Contributions(p9)


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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.
Deposit
For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits, if you are a federal employee or retiree).
taxmap/pubs/p525-000.htm#en_us_publink1000229173

Elective Deferrals(p9)


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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.
  1. Cash or deferred arrangements (section 401(k) plans).
  2. The Thrift Savings Plan for federal employees.
  3. Salary reduction simplified employee pension plans (SARSEP).
  4. Savings incentive match plans for employees (SIMPLE plans).
  5. Tax-sheltered annuity plans (403(b) plans).
  6. Section 501(c)(18)(D) plans. (But see Reporting by employer, later.)
  7. Section 457 plans.
taxmap/pubs/p525-000.htm#en_us_publink1000229174

Qualified automatic contribution arrangements.(p9)


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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/pubs/p525-000.htm#en_us_publink1000229175

Overall limit on deferrals.(p9)


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For 2009, you generally should not have deferred more than a total of $16,500 of contributions to the plans listed in (1) through (3) above. The specific plan limits for the plans listed in (4) through (7) above are discussed later.
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.
taxmap/pubs/p525-000.htm#en_us_publink1000229176

Catch-up contributions.(p9)


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You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans (403(b) Plans).
For more information about additional elective deferrals to:
taxmap/pubs/p525-000.htm#en_us_publink1000229177

Limit for deferrals under SIMPLE plans.(p9)


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If you are a participant in a SIMPLE plan, you generally should not have deferred more than $11,500 in 2009. Amounts you defer under a SIMPLE plan count toward the overall limit ($16,500 for 2009) and may affect the amount you can defer under other elective deferral plans.
taxmap/pubs/p525-000.htm#en_us_publink1000229178

Limit for tax-sheltered annuities.(p9)


rule
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If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2009 generally is $16,500. However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts.
  1. $3,000,
  2. $15,000, reduced by the sum of:
    1. The additional pre-tax elective deferrals made in earlier years because of this rule, plus
    2. The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or
  3. $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.
If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $19,500 for 2009.
For more information, see Publication 571.
taxmap/pubs/p525-000.htm#en_us_publink1000229179

Limit for deferral under section 501(c)(18) plans.(p9)


rule
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If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229180

Limit for deferrals under section 457 plans.(p9)


rule
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If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $16,500. However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. See Increased limit, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229181

Includible compensation.(p9)
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This is the pay you received for the year from the employer who maintained the section 457 plan. It generally includes all the following payments.
  1. Wages and salaries.
  2. Fees for professional services.
  3. The value of any employer-provided qualified transportation fringe benefit (defined under Transportation, earlier) that is not included in your income.
  4. Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items.
    1. Commissions and tips.
    2. Fringe benefits.
    3. Bonuses.
  5. Employer contributions (elective deferrals) to:
    1. The section 457 plan.
    2. Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income.
    3. A salary reduction simplified employee pension (SARSEP).
    4. A tax-sheltered annuity (section 403(b) plan).
    5. A savings incentive match plan for employees (SIMPLE plan).
    6. A section 125 cafeteria plan.
Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts.
taxmap/pubs/p525-000.htm#en_us_publink1000229182

Increased limit.(p10)
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During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of:
  1. Twice the annual limit ($33,000 for 2009), or
  2. The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions).
taxmap/pubs/p525-000.htm#en_us_publink1000229183

Catch-up contributions.(p10)
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You generally can have additional elective deferrals made to your governmental section 457 plan if: If you qualify, your limit can be the lesser of your includible compensation or $16,500, plus $5,500. However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher.
taxmap/pubs/p525-000.htm#en_us_publink1000229184

Designated Roth contributions.(p10)


rule
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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. Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions.
Qualified distributions from a Roth plan are not included in income. Generally, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution.
taxmap/pubs/p525-000.htm#en_us_publink1000229185

Reporting by employer.(p10)


rule
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Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12.
taxmap/pubs/p525-000.htm#en_us_publink1000229186

Section 501(c)(18)(D) contributions.(p10)
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Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. The amount you contributed should be identified with code "H" in box 12. You may deduct the amount deferred subject to the limits that apply. Include your deduction in the total on Form 1040, line 36. Enter the amount and "501(c)(18)(D)" on the dotted line next to line 36.
taxmap/pubs/p525-000.htm#en_us_publink1000229187

Designated Roth contributions.(p10)
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These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12.
taxmap/pubs/p525-000.htm#en_us_publink1000229188

Excess deferrals.(p10)


rule
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If your deferrals exceed the limit, you must notify your plan by the date required by the plan. If the plan permits, the excess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year.
You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. File Form 1040 to add the excess deferral amount to your wages on line 7. Do not use Form 1040A or Form 1040EZ to report excess deferral amounts.
taxmap/pubs/p525-000.htm#en_us_publink1000229189

Excess not distributed.(p10)
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If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution.
taxmap/pubs/p525-000.htm#en_us_publink1000229190

Excess distributed to you.(p10)
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If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Any income on the excess deferral taken out is taxable in the tax year in which you take it out. If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income.
You should receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year in which the excess deferral is distributed to you. Use the following rules to report a corrective distribution shown on Form 1099-R for 2009. Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Form 1040, line 21 and identify it as "Loss on Excess Deferral Distribution."
Deposit
Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229192

Excess Contributions(p10)


rule
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previous topic occurrence Excess Contributions next topic occurrence

If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees.
If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. You must include the excess contributions in your income as wages on Form 1040, line 7. You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts.
If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. You should receive a Form 1099-R for the year the excess contributions are distributed to you. Add the distribution to your wages for that year.
Deposit
Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229196

Excess Annual Additions(p11)


rule
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previous topic occurrence Excess Annual Addition next topic occurrence

The amount contributed in 2009 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $49,000. Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions.
A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. A corrective payment consisting of your after-tax contributions is not taxable.
If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code "E" in box 7. Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A.
Deposit
Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229198

Stock Options(p11)


rule
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previous topic occurrence Stock Options next topic occurrence

If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), 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 or property acquired through exercise of the option. The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Your employer can tell you which kind of option you hold.
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Nonstatutory Stock Options(p11)


rule
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Nonstatutory Stock Options

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Grant of option.(p11)


rule
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If you are granted a nonstatutory stock option, you may have income when you receive the option. The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. The fair market value of an option can be readily determined if it is actively traded on an established market.
The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option.
EIC
If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. For more information on the excise tax, see Internal Revenue Code section 4985.
taxmap/pubs/p525-000.htm#en_us_publink1000229202

Option with readily determinable value.(p11)
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If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. See Restricted Property, later, for rules on how much income to include and when to include it. However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option.
taxmap/pubs/p525-000.htm#en_us_publink1000229203

Option without readily determinable value.(p11)
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If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option.
taxmap/pubs/p525-000.htm#en_us_publink1000229204

Exercise or transfer of option.(p11)


rule
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When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value.
taxmap/pubs/p525-000.htm#en_us_publink1000229205

Option with readily determinable value.(p11)
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When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income.
taxmap/pubs/p525-000.htm#en_us_publink1000229206

Option without readily determinable value.(p11)
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When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted property rules apply to the property received. The amount to include in your income is the difference between the amount you pay for the property and its fair market value when it becomes substantially vested. If it is not substantially vested at the time you exercise this nonstatutory stock option (so that you may have to give the stock back), you do not have to include any amount in income. You include the difference in income when the option becomes substantially vested. For more information on restricted property, see Restricted Property, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229207

Transfer in arm's-length transaction.(p11)
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If you transfer a nonstatutory stock option without a readily determinable value in an arm's-length transaction to an unrelated person, you must include in your income the money or other property you received for the transfer, as if you had exercised the option.
taxmap/pubs/p525-000.htm#en_us_publink1000229208

Transfer in non-arm's-length transaction.(p11)
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If you transfer a nonstatutory stock option without a readily determinable value in a non-arm's-length transaction (for example, a gift), the option is not treated as exercised or closed at that time. You must include in your income, as compensation, any money or property received. When the transferee exercises the option, you must include in your income, as compensation, the excess of the fair market value of the stock acquired by the transferee over the sum of the exercise price paid and any amount you included in income at the time you transferred the option. At the time of the exercise, the transferee recognizes no income and has a basis in the stock acquired equal to the fair market value of the stock.
Any transfer of this kind of option to a related person is treated as a non-arm's-length transaction. See Regulations section 1.83-7 for the definition of a related person.
taxmap/pubs/p525-000.htm#en_us_publink1000229209

Recourse note in satisfaction of the exercise price of an option.(p11)
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If you are an employee, and you issue a recourse note to your employer in satisfaction of the exercise price of an option to acquire your employer's stock, and your employer and you subsequently agree to reduce the stated principal amount of the note, you generally recognize compensation income at the time and in the amount of the reduction.
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Tax form.(p11)


rule
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If you receive compensation from employer-provided nonstatutory stock options, it is reported in box 1 of Form W-2. It also is reported in box 12 using code "V."
If you are a nonemployee spouse and you exercise nonstatutory stock options you received incident to a divorce, the income is reported to you on Form 1099-MISC, Miscellaneous Income, in box 3.
taxmap/pubs/p525-000.htm#en_us_publink1000229211

Sale of the stock.(p11)


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There are no special income rules for the sale of stock acquired through the exercise of a nonstatutory stock option. Report the sale on Schedule D (Form 1040), Capital Gains and Losses, for the year of the sale. You may receive a Form 1099-B, Proceeds from Broker and Barter Sale Transactions, reporting the sales proceeds.
Your basis in the property you acquire under the option is the amount you pay for it plus any amount you included in income upon grant or exercise of the option.
Your holding period begins as of the date you acquired the option, if it had a readily determinable value, or as of the date you exercised or transferred the option, if it had no readily determinable value.
taxmap/pubs/p525-000.htm#en_us_publink1000229212

Statutory Stock Options(p11)


rule
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Statutory Stock Options

There are two kinds of statutory stock options.
For either kind of option, you must be an employee of the company granting the option, or a related company, at all times during the period beginning on the date the option is granted and ending 3 months before the date you exercise the option (for an incentive stock option, 1 year before if you are disabled). Also, the option must be nontransferable except at death.
If you do not meet the employment requirements, or you receive a transferable option, your option is a nonstatutory stock option.
taxmap/pubs/p525-000.htm#en_us_publink1000229213

Grant of option.(p12)


rule
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If you receive a statutory stock option, do not include any amount in your income when the option is granted.
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Exercise of option.(p12)


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If you exercise a statutory stock option, do not include any amount in income when you exercise the option.
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Alternative minimum tax (AMT).(p12)
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For the AMT, you must treat stock acquired through the exercise of an ISO as if no special treatment applied. This means that, when your rights in the stock are transferable or no longer subject to a substantial risk of forfeiture, you must include as an adjustment in figuring alternative minimum taxable income the amount by which the fair market value of the stock exceeds the option price. Enter this adjustment on line 15 of Form 6251, Alternative Minimum Tax—Individuals. Increase your AMT basis in any stock you acquire by exercising the ISO by the amount of the adjustment. However, no adjustment is required if you dispose of the stock in the same year you exercise the option.
See Restricted Property, later, for more information.
Where Refund
Your AMT basis in stock acquired through an ISO is likely to differ from your regular tax basis. Therefore, keep adequate records for both the AMT and regular tax so that you can figure your adjusted gain or loss.
taxmap/pubs/p525-000.htm#en_us_publink1000229217

Example.(p12)

Your employer, M Company, granted you an incentive stock option on April 6, 2007, to buy 100 shares of M Company at $9 a share, its fair market value at the time. You exercised the option on January 9, 2008, when the stock was selling on the open market for $14 a share. On January 26, 2009, when the stock was selling on the open market for $16 a share, your rights to the stock first became transferable. You include $700 ($1,600 value when your rights first became transferable minus $900 option price) as an adjustment on Form 6251, line 15.
taxmap/pubs/p525-000.htm#en_us_publink1000229218

Sale of the stock.(p12)


rule
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You have taxable income or a deductible loss when you sell the stock that you bought by exercising the option. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss and report it on Schedule D (Form 1040) for the year of the sale.
However, you may have ordinary income for the year that you sell or otherwise dispose of the stock in either of the following situations. Report your ordinary income as wages on Form 1040, line 7, for the year of the sale.
taxmap/pubs/p525-000.htm#en_us_publink1000229219

Holding period requirement.(p12)
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You satisfy the holding period requirement if you do not sell the stock until the end of the later of the 1-year period after the stock was transferred to you or the 2-year period after the option was granted. However, you are considered to satisfy the holding period requirement if you sold the stock to comply with conflict-of-interest requirements.
taxmap/pubs/p525-000.htm#en_us_publink1000229220

Incentive stock options (ISOs).(p12)


rule
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If you sell stock acquired by exercising an ISO, you need to determine if you satisfied the holding period requirement.
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Holding period requirement satisfied.(p12)
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If you sell stock acquired by exercising an ISO and satisfy the holding period requirement, your gain or loss from the sale is capital gain or loss. Report the sale on Schedule D (Form 1040). The basis of your stock is the amount you paid for the stock.
taxmap/pubs/p525-000.htm#en_us_publink1000229222

Holding period requirement not satisfied.(p12)
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If you sell stock acquired by exercising an ISO, do not satisfy the holding period requirement, and have a gain from the sale, the gain is ordinary income up to the amount by which the stock's fair market value when you exercised the option exceeded the option price. Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss and you do not have any ordinary income.
Report the ordinary income as wages on line 7, Form 1040. Report the capital gain or loss on Schedule D (Form 1040). In determining capital gain or loss, your basis is the amount you paid when you exercised the option plus the amount reported as wages.
taxmap/pubs/p525-000.htm#en_us_publink1000229223

Example.(p12)

Your employer, X Corporation, granted you an ISO on March 12, 2007, to buy 100 shares of X Corporation stock at $10 a share, its fair market value at the time. You exercised the option on January 4, 2008, when the stock was selling on the open market for $12 a share. On January 26, 2009, you sold the stock for $15 a share. Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the option. In 2009, you must report the difference between the option price ($10) and the value of the stock when you exercised the option ($12) as wages. The rest of your gain is capital gain, figured as follows:
Selling price ($15 × 100 shares)$ 1,500
Purchase price ($10 × 100 shares) −1,000
Gain$ 500
Amount reported as wages
[($12 × 100 shares) − $1,000]
− 200
Amount reported as capital gain $ 300
taxmap/pubs/p525-000.htm#en_us_publink1000229225

Employee stock purchase plan.(p12)


rule
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If you sold stock acquired by exercising an option granted under an employee stock purchase plan, you need to determine if you satisfied the holding period requirement.
taxmap/pubs/p525-000.htm#en_us_publink1000229226

Holding period requirement satisfied.(p12)
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If you sold stock acquired by exercising an option granted under an employee stock purchase plan, and you satisfy the holding period requirement, determine your ordinary income as follows.
Your basis is equal to the option price at the time you exercised your option and acquired the stock. The timing and amount of pay period deductions do not affect your basis.
Your holding period for the property you acquire when you exercise an option begins on the day after you exercise the option.
taxmap/pubs/p525-000.htm#en_us_publink1000229227

Example.(p12)

XYZ Company has an employee stock purchase plan. The option price is the lower of the stock price at the time the option is granted or at the time the option is exercised. The value of the stock when the option was granted was $25. XYZ deducts $5 from A's pay every week for 48 weeks (total = $240 ($5 × 48)). The value of the stock when the option is exercised is $20. A receives 12 shares of XYZ stock ($240 ÷ $20). A's holding period for all 12 shares begins the day after the option is exercised, even though the money used to purchase the shares was deducted from A's pay on 48 separate days. A's basis in each share is $20.
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Option granted at a discount.(p12)
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If, at the time the option was granted, the option price per share was less than 100% (but not less than 85%) of the fair market value of the share, and you dispose of the share after meeting the holding period requirement, or you die while owning the share, you must include in your income as compensation, the lesser of: For this purpose, if the option price was not fixed or determinable at the time the option was granted, the option price is figured as if the option had been exercised at the time it was granted.
Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss, and you do not have any ordinary income.
taxmap/pubs/p525-000.htm#en_us_publink1000229229

Example.(p12)

Your employer, Y Corporation, granted you an option under its employee stock purchase plan to buy 100 shares of stock of Y Corporation for $20 a share at a time when the stock had a value of $22 a share. Eighteen months later, when the value of the stock was $23 a share, you exercised the option, and 14 months after that you sold your stock for $30 a share. In the year of sale, you must report as wages the difference between the option price ($20) and the value at the time the option was granted ($22). The rest of your gain ($8 per share) is capital gain, figured as follows:  
 
 
 
 
Selling price ($30 × 100 shares)$ 3,000
Purchase price (option price)
($20 × 100 shares)
−2,000
Gain$ 1,000
Amount reported as wages
[($22 × 100 shares) − $2,000]
− 200
Amount reported as capital gain $ 800
taxmap/pubs/p525-000.htm#en_us_publink1000229231

Holding period requirement not satisfied.(p13)
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If you do not satisfy the holding period requirement, your ordinary income is the amount by which the stock's fair market value when you exercised the option exceeded the option price. This ordinary income is not limited to your gain from the sale of the stock. Increase your basis in the stock by the amount of this ordinary income. The difference between your increased basis and the selling price of the stock is a capital gain or loss.
taxmap/pubs/p525-000.htm#en_us_publink1000229232

Example.(p13)

The facts are the same as in the previous example, except that you sold the stock only 6 months after you exercised the option. You did not satisfy the holding period requirement, so you must report $300 as wages and $700 as capital gain, figured as follows:
Selling price ($30 × 100 shares)$3,000
Purchase price (option price)
($20 × 100 shares)
−2,000
Gain$1,000
Amount reported as wages
[($23 × 100 shares) − $2,000]
− 300
Amount reported as capital gain
[$3,000 – ($2,000 + $300)]
$700
taxmap/pubs/p525-000.htm#en_us_publink1000229234

Restricted Property(p13)


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previous topic occurrence Restricted Property next topic occurrence

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 been substantially vested. (You can choose to include the value of the property in your income in the year it is transferred to you, as discussed later, rather than the year it is substantially vested.)
Until the property becomes substantially vested, it is owned by the person who makes the transfer to you, usually your employer. However, any income from the property, or the right to use the property, is included in your income as additional compensation in the year you receive the income or have the right to use the property.
When the property becomes substantially vested, you must include its fair market value, minus any amount you paid for it, in your income for that year. Your holding period for this property begins when the property becomes substantially vested.
taxmap/pubs/p525-000.htm#en_us_publink1000229235

Example.(p13)

Your employer, the RST Corporation, sells you 100 shares of its stock at $10 a share. At the time of the sale the fair market value of the stock is $100 a share. Under the terms of the sale, the stock is under a substantial risk of forfeiture (you have a good chance of losing it) for a 5-year period. Your stock is not substantially vested when it is transferred, so you do not include any amount in your income in the year you buy it. At the end of the 5-year period, the fair market value of the stock is $200 a share. You must include $19,000 in your income [100 shares × ($200 fair market value − $10 you paid)]. Dividends paid by the RST Corporation on your 100 shares of stock are taxable to you as additional compensation during the period the stock can be forfeited.
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Substantially vested.(p13)


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Property is substantially vested when:
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Transferable property.(p13)
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Property is transferable if you can sell, assign, or pledge your interest in the property to any person (other than the transferor), and if the person receiving your interest in the property is not required to give up the property, or its value, if the substantial risk of forfeiture occurs.
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Substantial risk of forfeiture.(p13)
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A substantial risk of forfeiture exists if the rights in the property transferred depend on performing (or not performing) substantial services, or on a condition related to the transfer, and the possibility of forfeiture is substantial if the condition is not satisfied.
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Example.(p13)

The Spin Corporation transfers to you as compensation for services 100 shares of its corporate stock for $100 a share. Under the terms of the transfer, you must resell the stock to the corporation at $100 a share if you leave your job for any reason within 3 years from the date of transfer. You must perform substantial services over a period of time and you must resell the stock to the corporation at $100 a share (regardless of its value) if you do not perform the services, so your rights to the stock are subject to a substantial risk of forfeiture.
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Choosing to include in income for year of transfer.(p13)


rule
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You can choose to include the value of restricted property at the time of transfer (minus any amount you paid for the property) in your income for the year it is transferred. If you make this choice, the substantial vesting rules do not apply and, generally, any later appreciation in value is not included in your compensation when the property becomes substantially vested. Your basis for figuring gain or loss when you sell the property is the amount you paid for it plus the amount you included in income as compensation.
EIC
If you make this choice, you cannot revoke it without the consent of the Internal Revenue Service. Consent will be given only if you were under a mistake of fact as to the underlying transaction.
If you forfeit the property after you have included its value in income, your loss is the amount you paid for the property minus any amount you realized on the forfeiture.
EIC
You cannot make this choice for a nonstatutory stock option.
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How to make the choice.(p13)
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You make the choice by filing a written statement with the Internal Revenue Service Center where you file your return. You must file this statement no later than 30 days after the date the property was transferred. A copy of the statement must be attached to your tax return for the year the property was transferred. You also must give a copy of this statement to the person for whom you performed the services and, if someone other than you received the property, to that person.
You must sign the statement and indicate on it that you are making the choice under section 83(b) of the Internal Revenue Code. The statement must contain all of the following information.
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Dividends received on restricted stock.(p13)


rule
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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. If they also are reported on a Form 1099-DIV, Dividends and Distributions, you should list them on Schedule B (Form 1040A or 1040) with a statement that you have included them as wages. Do not include them in the total dividends received.
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Stock you chose to include in your income.(p13)
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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. You should receive a Form 1099-DIV showing these dividends. Do not include the dividends in your wages on your return. Report them as dividends.
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Sale of property not substantially vested.(p13)


rule
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These rules apply to the sale or other disposition of property that you did not choose to include in your income in the year transferred and that is not substantially vested.
If you sell or otherwise dispose of the property in an arm's-length transaction, include in your income as compensation for the year of sale the amount realized minus the amount you paid for the property. If you exchange the property in an arm's-length transaction for other property that is not substantially vested, treat the new property as if it were substituted for the exchanged property.
The sale or other disposition of a nonstatutory stock option to a related person is not considered an arm's-length transaction. See Regulations section 1.83-7 for the definition of a related person.
If you sell the property in a transaction that is not at arm's length, include in your income as compensation for the year of sale the total of any money you received and the fair market value of any substantially vested property you received on the sale. In addition, you will have to report income when the original property becomes substantially vested, as if you still held it. Report as compensation its fair market value minus the total of the amount you paid for the property and the amount included in your income from the earlier sale.
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Example.(p14)

In 2006, you paid your employer $50 for a share of stock that had a fair market value of $100 and was subject to forfeiture until 2009. In 2008, you sold the stock to your spouse for $10 in a transaction not at arm's length. You had compensation of $10 from this transaction. In 2009, when the stock had a fair market value of $120, it became substantially vested. For 2009, you must report additional compensation of $60, figured as follows:
Fair market value of stock at time of substantial vesting $120
Minus: Amount paid for stock$50 
Minus: Compensation previously included in income from sale to spouse 10 −60
Additional income   $60
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Inherited property not substantially vested.(p14)


rule
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If you inherit property not substantially vested at the time of the decedent's death, any income you receive from the property is considered income in respect of a decedent and is taxed according to the rules for restricted property received for services. For information about income in respect of a decedent, see Publication 559.